Lactalis Jindi Pty Ltd v Jindi Cheese Pty Ltd (No 2)

Case •

[2013] VSC 699

•

13 December 2013
IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. SCI 03345 of 2013

LACTALIS JINDI PTY LTD (ACN 161 273 856) First Plaintiff
and
LEMNOS FOODS PTY LTD (ACN 147 490 480) Second Plaintiff
v
JINDI CHEESE PTY LTD (ACN 056 498 107) First Defendant
and
ACN 116 389 229 PTY LTD (formerly Jindi Enterprises Pty Ltd) in its capacity as trustee of the Jindi Enterprises Unit Trust Second Defendant
and
MICHAEL TRUMBLE Third Defendant

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JUDGE:

ALMOND J

WHERE HELD:

Melbourne

DATE OF HEARING:

17 September 2013

DATE OF JUDGMENT:

13 December 2013

CASE MAY BE CITED AS:

Lactalis Jindi Pty Ltd & anor v Jindi Cheese Pty Ltd & ors (No 2)

MEDIUM NEUTRAL CITATION:

[2013] VSC 699

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CONTRACT – General Contractual Principles – Construction and interpretation of commercial deed – Conditions precedent to independent third party releasing part of purchase price held in escrow to vendors – Determination of date where date is defined as ‘being 6 months after Completion Date‘ – Meaning of ‘after’ – Corresponding date rule – Whether bona fide claim was required to specify facts and circumstances of each claim or an amount claimed – Whether legal opinion was required to address causation and loss – Whether joint direction required ­– Independent third party to retain moneys.

APPEARANCES:

 Counsel Solicitors
For the Plaintiffs Mr S H Parmenter Minter Ellison
For the First and Second Defendants Mr P Collinson SC with
Mr R Pintos-Lopez 		HWL Ebsworth Lawyers

HIS HONOUR:

  1. In November 2012, the first and second defendants (the ‘Vendors’) entered into an agreement with the second plaintiff (the ‘Purchaser’) for the sale of their Australian specialty cheese manufacturing business (’Business Sale Agreement’).  Under the terms of the Business Sale Agreement, part of the purchase price (an amount in excess of $2.3 million described as the ‘Deferred Amount’), would be held by an independent third party (the third defendant, Mr Trumble) for a period of time in the event that the Purchaser made a claim against the Vendors.

  1. At the same time as entering into the Business Sale Agreement, the Vendors, the second plaintiff, and Mr Trumble entered into the Deferred Amount Deed (‘Deed’).  Under the Deed, the parties agreed that on completion of the sale of the business, the Deferred Amount would be paid to Mr Trumble to be held in escrow in accordance with the terms of the Deed.  In December 2012, the second plaintiff nominated the first plaintiff (‘Lactalis’) to be substituted as Purchaser of the business,[1] the sale of the business to Lactalis was completed, and the Deferred Amount was paid to Mr Trumble.[2]

    [1]For convenience, the term Purchaser will be used to refer to either the first or second plaintiff at the relevant time. 

    [2]Affidavit of Scott Chesterman, sworn 25 July 2013 (‘Chesterman Affidavit 25 July 2013’), [4]–[5], [7].

  1. Clause 4 of the Business Sale Agreement sets out a regime for dealing with the Deferred Amount, including the circumstances in which Mr Trumble is required to retain the Deferred Amount and the circumstances in which he is required to release it.  Clause 3 of the Deed is  substantially the same as clause 4 of the Business Sale Agreement.

  1. Clause 3 of the Deed provides:

3.1     Release of Deferred Amount when Bona Fide Claim

If, before the Deferred Amount Expiry Date, the Purchaser makes a Bona Fide Claim against a Vendor for breach of a Sale Document (including for a breach of Warranty) and:

(a)the parties or a court have agreed or determined the relevant amount (if any) payable in relation to that Bona Fide Claim; or

(b)where the parties or a court have not agreed or determined the relevant amount (if any) payable in relation to that Bona Fide Claim and the Purchaser has issued proceedings within 30 days after making the Bona Fide Claim (either before or after the Deferred Amount Expiry Date),

then:

(i)the amount (if any) equal to the Deferred Amount plus the Deferred Amount Accrued Interest, less the amount subject of a Bona Fide Claim by the Purchaser, will be released to the Vendors on the Deferred Amount Expiry Date; and

(ii)the balance will be retained by the Deferred Amount Holder until the amount (if any) of the Claim is agreed or determined, at which time the amount of the Claim so agreed or determined or the Deferred Amount plus the Deferred Amount Accrued Interest (whichever is less) will be paid to the Purchaser and any balance (including any remaining Deferred Amount Accrued Interest) will be paid to the Vendors.

3.2     Direction

The Purchaser and Vendors shall give the Deferred Amount Holder all written directions necessary to give effect to clause 3.1 (Direction).

3.3     Reliance by Deferred Amount Holder

Subject to clause 3.4, the Deferred Amount Holder shall be entitled to rely on and shall only be obliged to act in accordance with a written Direction signed by the Vendors and the Purchaser.

3.4     Release of the Deferred Amount

Subject to a Direction being provided under clause 3.2, on the Deferred Amount Expiry Date, the Deferred Amount Holder must pay to the Vendors the Deferred Amount and any Deferred Amount Accrued Interest, without set off or deduction, in Immediately Available Funds. 

  1. Clause 1.1 of the Deed provides that the terms defined in the Business Sale Agreement have the same meaning in the Deed.  Relevant terms defined in clause 1.1 of the Business Sale Agreement include the following:

Bona Fide Claim means a Claim or Claims by the Purchaser against a Vendor for breach of a Sale Document (including breach of Warranty), for which it has obtained a legal opinion from senior counsel with not less than 10 years’ experience at the Bar that the Purchaser has reasonable prospects of success of that Claim in a court of relevant jurisdiction.

Deferred Amount Expiry Date means the date being six months after the Completion Date.

  1. On 3 June 2013, the Purchaser purported to give notice to the Vendors of a Bona Fide Claim (‘the 3 June Notice’).[3]  On the same day, the Purchaser sent a letter to Mr Trumble which attached a copy of the 3 June Notice and requested confirmation that he would continue to hold the Deferred Amount until otherwise directed by the parties.[4] 

    [3]Chesterman Affidavit 25 July 2013, [13], Exhibit SCC–6.

    [4]Affidavit of Scott Chesterman, sworn 23 August 2013 (‘Chesterman Affidavit 23 August 2013’), Exhibit ‘SCC-Exhibit Book 1’, 4–9.

  1. On 28 June 2013, the plaintiffs commenced this proceeding.  They allege breach of warranties and make claims in respect of indemnities under the Business Sale Agreement.[5]

    [5]The writ was issued with a general indorsement of claim dated 28 June 2013 (‘Indorsement of Claim’). Subsequently the claims were elaborated upon in a Statement of Claim dated 1 August 2013 (‘SOC’) and further elaborated upon in an Amended Statement of Claim dated 13 September 2013 (‘Amended SOC’). Indorsement of Claim, [32]–[36], Amended SOC, [63]–[86].

  1. The proceeding relates to listeria contamination at the manufacturing plant (which was sold as part of the business) and in cheese produced at the plant.

  1. The plaintiffs plead that they obtained a legal opinion from Senior Counsel with not less than 10 years’ experience at the Bar that Lactalis has reasonable prospects of successfully prosecuting a claim for the breaches alleged.[6]

    [6]Indorsement of Claim, [37] , Amended SOC, [87].

  1. By summons filed 30 July 2013, the Vendors seek orders that the Deferred Amount and Deferred Amount Accrued Interest (together referred to as the Deferred Amount) be paid to them in accordance with the Business Sale Agreement and Deed.[7]

    [7]Summons of First and Second Defendants filed 30 July 2013, [2].

  1. The Vendors submit that:

(a)the 3 June Notice was not given to the Vendors before the Deferred Amount Expiry Date as required by clause 3.1 of the Deed;

(b)the 3 June Notice did not set out an amount claimed (or a disputed amount in relation to each claim);

(c)the 3 June Notice did not set out the relevant facts and circumstances said to give rise to each of the claims;

(d)the Purchaser did not have a valid Bona Fide Claim because the legal opinion obtained by the Purchaser did not address the ‘reasonable prospects of success of [each] Claim’ within the meaning of Bona Fide Claim in the Business Sale Agreement;

(e)there was no Direction given to the Deferred Amount Holder by the Purchaser and the Vendors prior to the Deferred Amount Expiry Date, or thereafter as required by clause 3.4 of the Deed.

  1. For these reasons, the Vendors submit that the Purchaser has not made a valid Bona Fide Claim and accordingly the Deferred Amount should be paid to them forthwith.  The plaintiffs submit that they have complied with the requirements of the Business Sale Agreement and Deed with respect to the Deferred Amount, such that Mr Trumble should continue to retain the Deferred Amount until the claim is agreed or determined. 

  1. On 12 September 2013, I ordered that the following questions be heard as preliminary questions pursuant to Rule 47.04 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) and, subject to any appeal, determine the issues raised by paragraphs 87 to 98 of the pleadings.[8]

    [8]Amended SOC and defence to Amended SOC dated 27 September 2013.

Preliminary questions

1.1What was the Deferred Amount Expiry Date?

1.2What was the last date on which a Bona Fide Claim could be validly made under clause 3.1 of the Deferred Amount Deed and/or clause 4.2 of the Business Sale Agreement?

1.3Did the 3 June Notice comply with the time requirements in clause 3.1 of the Deferred Amount Deed and/or clause 4.2 of the Business Sale Agreement?

2. Was the 3 June Notice required to specify an amount claimed in order to constitute a Bona Fide Claim?

3.Was the legal opinion required to address causation and loss in order to constitute a ’legal opinion … that the Purchaser has reasonable prospects of success’ of the claims within the meaning of the definition of ‘Bona Fide Claim’?

4. Was the 3 June Notice required to describe the facts and circumstances of each Claim in order to constitute a Bona Fide Claim, and if so required, did it do so?

5.Should the Deferred Amount Holder have paid the Deferred Amount to the Vendors on the Deferred Amount Expiry Date under clause 3.4 of the Deed because a written Direction signed by both the Vendors and the Purchaser was not provided to the Deferred Amount Holder before that date?

Relevant Principles of Construction

  1. The relevant principles of construction are well-established.  The meaning of commercial documents is determined objectively. The court must decide what a reasonable person in the position of the parties would have understood the parties to mean.  This includes consideration of the surrounding circumstances and the commercial purpose of the contract.  The contract is to be construed so as to give it a  commercially sensible construction.[9]

    [9]           Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451, [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, [40]; Codelfa Construction Pty Limited v State Rail Authority of NSW (1982) 149 CLR 337, 350 per Mason J (Stephens J and Wilson J agreed); Upper Hunter Country District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429, 437; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, [22]; IATA v Ansett Australia Holdings Ltd (2008) 234 CLR 151, 160 [8].

  1. Courts should have regard to the contract as a whole and take into account all the words used ‘so as to render them all harmonious’ and give the various components of an agreement a consistent or congruent operation.[10]  

    [10]ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109; see also, Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at [16].

  1. Where the language in a contract is reasonably open to two constructions, courts will prefer a construction which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious or the most grammatically accurate’.[11]

    [11]         ABC v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109, citing with approval Locke v Dunlop (1888) 39 Ch D 387, 393.

  1. A party responsible for fulfilling precedent conditions, must do the acts required that strictly match those described in the contract.[12] As Samuels JA stated in Tri-Continental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at 705:

it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed, or it has not. If it has, performance enlivens the obligation to which the stipulation is a condition precedent. If it has not, the obligation does not arise.

[12]Tri-Continental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689, 704-705.

Question 1.1:  What was the Deferred Amount Expiry Date?

  1. It is common ground that the Completion Date as defined under the Business Sale Agreement is Monday, 3 December 2012 and that the 3 June Notice was served on the Vendors’ solicitors on Monday, 3 June 2013 at approximately 3:00pm.

  1. The plaintiffs submit that Deferred Amount Expiry Date is Tuesday, 4 June 2013.[13] Under clause 3.1 of the Deed, a Bone Fide Claim must be made before the Deferred Amount Expiry Date.  Accordingly, the plaintiffs submit that the 3 June Notice was served before the Deferred Amount Expiry Date and therefore the claim was made within time.  The plaintiffs contend that the six month period should be calculated from 4 December 2012 as a result of:

(a)the operation of clause 1.2(s) of the Business Sale Agreement, which provides that if a period of time is specified and dates from a day or the day of an act, event or circumstance, that period is to be determined exclusive of that day; and/or

(b)the use of the word ‘after’ in the definition of a Deferred Amount Expiry Date which suggests that the Completion Date should be excluded from calculation.[14]

[13]Amended SOC, [40](b) and [88A]; cf SOC, [40](b) and [89](b).

[14]Plaintiffs’ Outline of Submissions in Opposition to the First and Second Defendant’s Application for Immediate Release of the Deferred Amount, 5 September 2013, (‘Plaintiffs’ Submissions’) [88].

  1. The Vendors agree that the Completion Date should be excluded from the calculation but contend nevertheless that the Deferred Amount Expiry Date is Monday, 3 June 2013.[15] 

    [15]First and Second Defendants’ Outline of Submissions Regarding the Deferred Amount, 3 September 2013, (‘Vendors’ Submissions’), [51].

  1. Senior Counsel for the Vendors relied upon Dodds v Walker [1981] 1 WLR 1027, which concerned the interpretation of s 29(3) of the Landlord and Tenant Act 1954 that relevantly required an application for a new tenancy to be made ‘not less than two nor more than four months after the giving of the landlord’s notice’.  The landlord’s notice was given on 30 September 1978. The tenant had applied for a new tenancy on 31 January 1979.  The sole question to be determined was whether the tenant had made the application within time.  The House of Lords unanimously held that the ‘corresponding date rule’ applied and that the application was out of time.

  1. Lord Diplock describes the ‘corresponding date rule’ as follows:

It is also clear under a rule that has been consistently applied by the courts since Lester v Garland (1808) 15 Ves.Jun. 248, that in calculating the period that has elapsed after the occurrence of the specified event such as the giving of a notice, the day on which the event occurs is excluded from the reckoning.  It is equally well established…that when the relevant period is a month or specified number of months after the giving of a notice, the general rule is that the period ends upon the corresponding date in the appropriate subsequent month, i.e. the day of that month that bears the same number as the day of the earlier month on which the notice was given.[16]

[16]Dodds v Walker [1981] 1 WLR 1027, 1029.

  1. In Macpherson v Lawless (1960) VR 363, the court considered s 155 of the Justice Act 1958, which required a party aggrieved by a decision of the Court of Petty Sessions to make an application for an order nisi to review the decision ‘within one month’ from the making of the order in question.  In that case, the order was made on 5 November 1959.  In computing the period, the court held that the day upon which the order was made was excluded and the time expired at the last moment of 5 December 1959.[17]

    [17]Macpherson v Lawless (1960) VR 363, 365, 367; Watson v Issell (1890) 16 VLR 607.

  1. To the same effect, the Vendors also relied upon Jansen v Frexbury Pty Ltd [2007] QSC 387, which concerned a clause that brought an agreement to an end if registration of a separate sub-lease had not been effected within 36 months from the date of the agreement.[18]  McMeekin J states:

Whilst it is accurate to say that as a general rule one excludes the initial day, that means that time is computed from midnight on that initial date – in this case the day of execution of the agreement, 17th August 2004 – and the 36 month period therefore expired at midnight on the 17th August 2007.  See Morton v Hampson [1962] VR 364; Associated Beauty Aids Pty Ltd v FCT (1965) 113 CLR 662 at 667-668. In Associated Beauty Aids Barwick CJ, in dealing with the general rule of computing time “from” a date, said ”the period will commence at the end of the day of that date”. No different result is required here.  Thus the notice of termination was timely.[19] 

[18]Transcript 30:26–30.  The Vendors also relied upon Associated Beauty Aids v Federal Commissioner of Taxation (1965) 113 CLR 662 and Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 654.

[19]Jansen v Frexbury Pty Ltd [2007] QSC 387.

  1. Counsel for the plaintiffs did not take issue with the corresponding date rule as set out in Dodds v Walker but distinguished that case and other cases relied on by the Vendors on the basis that the definition of the Deferred Amount Expiry Date in this case requires the fixing of a specific date.  In addition, most of the cases relied upon (Dodds v Walker being the exception) use the words ‘from’ or ‘within’, as opposed to ‘after’.[20]

    [20]Transcript 67:27–68:26.

  1. Despite the distinguishing features of the other cases, counsel for the plaintiffs submitted that the corresponding date rule enunciated in Dodds v Walker is consistent with the plaintiffs’ case.

  1. In this regard, counsel for the plaintiffs relied upon the dicta of Lord Russell of Killowen in Dodds v Walker in support of the contention that the Deferred Amount Expiry Date is 4 June 2013.  His Lordship states:

My Lords, it is common ground that in this case the period of four months did not begin to run until the end of the date of the relevant service on September 30-i.e. at midnight September 30/October 1.  It is also common ground that ordinarily the calculation of a period of a calendar month or calendar months ends upon what has been conveniently referred to as the corresponding date.  For example, in a four month period, when service of the relevant notice was on September 28, time would begin to run at midnight September 28/29 and would end at midnight January 28/29, a period embracing four calendar months.[21] 

[21]Dodds v Walker [1981] 1 WLR 1027, 1030.

  1. Applied to this case, counsel for the plaintiffs contended that the time period would begin to run at the end of the Completion Date (in this case, at midnight on 3 December 2012) until the end of the day six months later (in this case, at midnight on 3 June 2013).  As the Deferred Amount Expiry Date is defined as ‘the date being six months after the Completion Date’, it would have to be a date after midnight on 3 June 2013 (in this case, 4 June 2014).  If it were otherwise, the plaintiffs would have less than the full six month period after the Completion Date.[22]

    [22]Transcript: 69:13–70:04.

  1. In my view, the construction contended for by the plaintiffs is compelling.  The words used in the definition should be given their plain and ordinary meaning.[23]

    [23]Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 347 (Mason J) (Stephen and Wilson JJ agreeing).

  1. The Concise Oxford Dictionary has several definitions of the word ’after’ and examples of its usage.[24]  The definition emphasised by the plaintiff was:

    [24]J.B. Sykes (ed), The Concise Oxford Dictionary of Current English, (Oxford, 7th ed, 1988), 17.  

following in time, later than

The example of usage relied upon was:

[after] six months, when six months have or had elapsed.[25]

[25]Ibid.

  1. This meaning is consistent with the notion that the six month period must be completed.  In this case, ‘the date being six months after the Completion Date’ is the date following which the period of six months has elapsed.  Under the corresponding date rule, and pursuant to the principle in Dodds v Walker, the last moment of the last day of the relevant period is included in the calculation of the period.  Thus, six months after the Completion Date will not have elapsed until the last moment of the last day of the relevant period.  On the present facts, the period of six months after the Completion Date elapsed at the last moment of 3 June 2013.  The first possible date which is a full six months after the Completion Date is the next day’s date.  In my view, the irresistible conclusion for present purposes is that the Expiry Date must be the date immediately following 3 June 2013, namely 4 June 2013.  Until then, the six month period after the Completion Date had not elapsed.  Accordingly, the answer to Question 1.1 is 4 June 2013.

Question 1.2:  What was the last date on which a Bona Fide Claim could be validly made under clause 3.1 of the Deferred Amount Deed and/or clause 4.2 of the Business Sale Agreement?

  1. Clause 3.1 requires that a Bona Fide Claim is made before the Deferred Amount Expiry Date.  It follows that the last date upon which a Bona Fide Claim could be validly made is the date before the Deferred Amount Expiry Date, which, in this case, is 3 June 2013.  

  1. The parties made extensive submissions on this question in case I found that the Deferred Amount Expiry Date was Monday 3 June 2013 and the date before was a non-business day.  As I have found that the Deferred Amount Expiry Date is Tuesday 4 June 2013, it is unnecessary to address these submissions.  The answer to Question 1.2 is 3 June 2013.

Question 1.3:  Did the 3 June Notice comply with the time requirements in clause 3.1 of the Deferred Amount Deed and/or clause 4.2 of the Business Sale Agreement?

  1. It is common ground that the plaintiffs served their Bona Fide Claim notice on 3 June 2013 and issued proceedings on 28 June 2013 (which is within 30 days after making the Bona Fide Claim).[26]  Given my previous findings, the plaintiffs have complied with the time requirements in clause 3.1 of the deed and in clause 4.2 of the Business Sale Agreement.  The answer to Question 1.3 is Yes. 

Question 2:   Was the 3 June Notice required to specify an amount claimed in order to constitute a ‘Bona Fide Claim’?

[26]Deed, clause 3.1(b).

  1. Clause 3.1(b) contemplates the current situation, that is, ‘where the parties or a court have not agreed or determined the relevant amount (if any) payable in relation to that Bona Fide Claim and the Purchaser has issued proceedings within 30 days after making the claim’.  In this situation, clause 3.1(b)(i) comes into effect, and provides that ‘the amount (if any) equal to the Deferred Amount…less the amount subject of a Bona Fide Claim by the Purchaser, will be released to the Vendors on the Deferred Amount Expiry Date’.

  1. It is common ground that the 3 June Notice did not specify an amount claimed.  The Vendors contend (and the plaintiffs dispute) that the failure to do so renders the Bona Fide Claim invalid.

  1. The plaintiffs’ key submission is that there is no requirement to specify an amount in clause 3 of the Deed, nor in the definition of ‘Bona Fide Claim’ in the Business Sale Agreement.  The plaintiffs’ also submit that the repeated references to ‘(if any)’ in each subparagraph in clause 3.1 contemplate that an unquantified Bona Fide Claim could be validly made.  Further, they say the clause makes a number of references to what is required, but there is no reference to a requirement to specify an amount.[27]

    [27]Plaintiffs’ Submissions, [101-103].

  1. The Vendors’ primary submission is that the proper conclusion to draw from the use of the words ‘less the amount subject of a Bona Fide Claim’ is that it was necessary for the 3 June Notice to have stated an amount.[28]  Senior Counsel for the Vendors submitted that for the plaintiffs’ interpretation to be correct, the words ‘(if any)’ that appear in clause 3.1(b)(i) of the Deed should have appeared after the second use of the word ‘amount’ in that subparagraph, and that the fact those words are not there supports the Vendors’ interpretation.[29]

    [28]Transcript, 49.22–25.

    [29]Transcript, 48.28–49.21.

  1. The Vendors also submit that under a purposive construction, the Deed was intended to provide the parties with a mechanism by which claims for a specific dollar amount can be first put to the Vendors, considered and resolved.  The Vendors say that clause 3.1 contemplates that a process of negotiation occur between the parties to determine the relevant amount, and that sufficient time be given between the making of the Bona Fide Claim and the payment of the Deferred Amount.[30]  In particular, the ability of the Vendors to respond is affected where the amount claimed is not stated.[31]  Further, the Vendors submit that other clauses, notably clause 13.5 in the Business Sale Agreement which requires the Vendors to indemnify the Purchaser against loss suffered for breach of warranties, is consistent with the notion that the Bona Fide Claim should state an amount.  The Vendors submit that if the Purchaser claims a breach of warranty it will be necessary to have determined causation and whether there is a loss.[32]

    [30]Vendors’ Submissions [59–60].

    [31]Transcript, 49.26–50.6.

    [32]Transcript, 50.7–51.24.

  1. In my view, it is not necessary for the 3 June Notice to specify the amount of the claim in order to constitute a valid Bona Fide Claim.

  1. This becomes evident when the definitions of Bona Fide Claim and Claims in the Business Sale Agreement are considered: 

Bona Fide Claim means a Claim or Claims by the Purchaser against the vendor for breach of a sale document (including breach of Warranty) for which it has obtained a legal opinion from senior counsel with not less than 10 years’ experience at the Bar that the Purchaser has reasonable prospects of success of that Claim in a court of relevant jurisdiction.

…

Claims means any claim, cost, damages, debt, expense, goods and services (value added) or similar Tax, Duty Liability, Loss, allegation, suit, action, Demand, cause of action or proceeding and whether present or future, fixed or unascertained, actual or contingent, whether at Law, in equity, under statute or otherwise arising from a breach of Warranty or under an indemnity in this agreement.

  1. It is plain from these definitions that the parties contemplated a very wide range of claims provided they arose from a breach of warranty or under an indemnity in the Business Sale Agreement.  Significantly, Claims is defined to include any claim, damages, cause of action or proceeding and whether present or future, fixed or unascertained, actual or contingent.  The mere nature of such claims suggest that it may be impractical to specify an amount.  In my view, it is unlikely that the parties objectively intended to confine the operation of clause 3 to liquidated claims or claims for specific amounts given that the Business Sale Agreement contemplates such a wide variety of claims.

  1. I am unpersuaded that the expression of ‘(if any)’, where it appears in clause 3, is indicative of one position or another.  In my view, the arguments about the positioning of ‘(if any)’ are, in the overall context, too nuanced to be convincing.  A very clear expression of intention would be necessary to displace or restrict the very wide language of the definition of Bona Fide Claim.

  1. The Vendors’ argument (based on a purposive construction of the Deed to the effect that the clause was intended to provide the parties with a mechanism by which claims can be put to the Vendors, considered and resolved) is not left at nought.  The clause still provides a mechanism where a process of negotiation can occur between the parties to determine a relevant amount, however, the starting point in some instances might be an unascertained claim for damages rather than a claim for a specific amount.

  1. I find that the answer to Question 2 is No.

Question 3:  Was the legal opinion required to address causation and loss in order to constitute a ’legal opinion … that the Purchaser has reasonable prospects of success’ of the claims within the meaning of the definition of ‘Bona Fide Claim’?

  1. It is common ground that the legal opinion was provided by Senior Counsel with not less than 10 years’ experience at the Bar.

  1. The Vendors emphasise that the plaintiffs briefed Senior Counsel to provide the legal opinion very close to the Deferred Amount Expiry Date, and that it was prepared in a short amount of time.  Senior Counsel for the Vendors expressly stated that no criticism of the plaintiffs’ Senior Counsel was intended.  Nevertheless, the Vendors submit that the plaintiffs did not have a valid Bona Fide Claim because the legal opinion did not address the question of causation and damages but was limited to opining upon (some) aspects of liability.[33]

    [33]Vendors’ Submissions, [64].

  1. The Vendors sought to rely on the drafting of various clauses in the Business Sale Agreement for their submission that the legal opinion must consider liability, causation and loss for each cause of action (for breach of contract) in order to conclude that the Purchaser has ‘reasonable prospects of success’.[34] 

    [34]Vendors’ Submissions, [67];  Transcript, 56.28–59:02.  Senior Counsel for the Vendors referred to Clause 13.5 (obligation to indemnify  and pay an amount); Clause 14.1 (no liability if claims exceed $26 million); Clause 14.2 (no liability unless each claim has loss exceeding $40,000) and Clause 14.6 (provision against double recovery).

  1. The plaintiffs submit that the legal opinion is not required to address the issue of quantum since loss is not an element of a cause of action for breach of contract, and the definition of ‘Bona Fide Claim’ would have been drafted to refer to the issue of quantum or other issues if they were required.[35]  Further, the plaintiffs submit that relief for contractual claims may come in the form of non-monetary orders.[36]

    [35]Transcript, 90.01–91:02.

    [36]Plaintiffs’ Submissions, [112].

  1. I consider that the legal opinion need only advise that the claim has ‘reasonable prospects of success’.  That is all that is explicitly required by the definition of Bona Fide Claim.  It may be presumed that the objective intention of the parties was to safeguard the Vendors from non-genuine claims by ensuring that the opinion obtained by the Purchaser was given by senior counsel with not less than 10 years’ experience as a barrister.  The definition does not require the Purchaser to particularise the content of the opinion or require the opinion to disclose a path of reasoning.  Theoretically, an oral opinion given in counsel’s chambers by a barrister of the requisite standing, that the Purchaser had reasonable prospects of success of  the relevant claim, without more, would suffice for the purposes of the definition.

  1. In this case, it is asserted that the legal opinion did not fully address liability because it omitted consideration of clause 14.5(a) of the Business Sale Agreement, which states that the Vendors are not liable to the Purchaser for a breach of warranty to the extent that the claim is based on matters in Disclosure Materials or the Disclosure Letter.  In my view, this analysis misconceives the requirements of the definition which says nothing about the adequacy of the opinion.  The Purchaser does not have to demonstrate that the legal opinion was comprehensive, that it dealt properly with all issues or that senior counsel had any particular expertise.  The only safeguard agreed upon by the parties was that the opinion be given by senior counsel of not less than 10 years’ experience.  It is not appropriate for the Court to re-write the bargain made by the parties by introducing additional elements.  In my view, the answer to Question 3 is No.

Question 4:  Was the 3 June Notice required to describe the facts and circumstances of each Claim in order to constitute a Bona Fide Claim, and if so required, did it do so?

  1. In the same vein as Question 2, the Vendors submit that the failure to set out any relevant facts and circumstances giving rise to the breach of warranty claims resulted in the 3 June Notice being defective and accordingly, the Bona Fide Claim being invalid.[37]

    [37]Vendors’ Submissions, [77].

  1. The Vendors submit that clause 3.1 of the Deed provides that the Vendors agree or disagree as to the relevant amount payable in relation to each Claim.  On this construction, the Vendors contend that the Purchaser must notify the Vendors of the facts and circumstances giving rise to the alleged claim (prior to the Deferred Amount Expiry Date) in order for the Vendors to be in a position to agree or disagree as to the amount claimed.[38]  It is not suggested that a notice of a Bona Fide Claim must obtain the level of particularity of a pleading, however, the Vendors say it must do more than merely paraphrase the contractual provisions.[39]

    [38]Vendors’ Submissions, [76]; [41]; Transcript 60.12–17.

    [39]Vendors’ Submissions, [75].

  1. The plaintiffs submit that there is no reference in the Deed to any requirement to set out the relevant facts and circumstances in a notice of a Bona Fide Claim.  They say that if it had been a necessary condition, one would expect it to have been set out expressly in the Deed.[40]  Further, the plaintiffs submit that because a proceeding is required to be commenced within 30 days of making the Claim, any material facts to be relied upon would be set out during that process.[41]

    [40]Plaintiffs’ Submissions [116]–[117]; Transcript 91.3–13.

    [41]Transcript 91.13–18

  1. The plaintiffs also submit that the Vendors were already aware of the facts and circumstances at the time they received the 3 June Notice given the plaintiffs’ prior correspondence regarding the Listeria issue.[42] The Vendors contend that if their submissions are accepted, then the previous correspondence does not avail the Purchaser of the requirement to include facts and circumstances in a notice of a Bona Fide Claim.[43]

    [42]Plaintiffs’ Submissions, [120]

    [43]Transcript, 60.12–15.

  1. A Bona Fide Claim must be a claim for breach of ‘a sale document (including for a breach of warranty)’.[44]  The 3 June Notice:

(a)notifies the Deferred Amount Holder of a claim with respect to a breach of a clause of the Business Sale Agreement (clause 13.2);

(b)identifies the basis relied upon, i.e. ‘that the statements in paragraphs 3.1, 3.2, 3.3, 6.2 and 11.1 of Schedule 1 were not true, accurate and/or were misleading as at the Completion Date’;[45]

(c)identifies in general terms that stock was defective and that the Vendors had breached or failed to comply with relevant laws, referencing in each case the relevant paragraph reference to Schedule 1 of the Business Sale Agreement.

[44]Clause 3.1 Deed.

[45]Exhibit SCC–6 to Chesterman Affidavit 25 July 2013, [2.2].

  1. In my view, this was sufficient.  There is no further requirement specified either in the definition of Bona Fide Claim or in the Deed generally to set out relevant facts and circumstances said to give rise to a claim.  I accept the plaintiffs’ submission that had it been a necessary condition it would have been set out expressly in the Deed.  Clause 3.1(b) (which applies where the parties have not agreed on the relevant amount payable in relation to the Bona Fide Claim) requires the Purchaser to issue proceedings within 30 days after making the Bona Fide Claim.  At that point, the Purchaser would be required to disclose relevant facts.  In my view, it is not necessary for the notice of a Bona Fide Claim to contain the relevant facts and circumstances relied upon. 

  1. I find that the answer to Question 4 is No.

Question 5:  Should the Deferred Amount Holder have paid the Deferred Amount to the Vendors on the Deferred Amount Expiry Date under clause 3.4 of the Deed because a written Direction signed by both the Vendors and the Purchaser was not provided to the Deferred Amount Holder before that date?

  1. Before addressing the respective submissions on this question, I will briefly outline the sequence of correspondence exchanged between the Purchaser, the Vendors and the Deferred Amount Holder in relation to the release of the Deferred Amount. 

  1. At approximately 3:00pm on 3 June 2013, the solicitors for Lactalis delivered a letter to the Vendors’ solicitors (referred to as the 3 June Notice) which stated, inter alia:

If the parties cannot agree on the amount of the Bona Fide Claims our client will issue proceedings as required by clause 4.2 of the [Business Sale Agreement]. 

Pending agreement on the amount of the Bona Fide Claims or the determination of the Bona Fide Claims, the Substitute Purchaser requires that the Deferred Amount continue to be held by the Deferred Amount Holder in accordance with the Deferred Amount Deed.  A copy of this notice will be given to the Deferred Amount Holder. 

Please notify us whether the Vendors agree that the Deferred Amount Holder continue to hold this Deferred Amount.[46]

[46]Chesterman Affidavit 25 July 2013, [13], Exhibit SCC–6, 3.

  1. At approximately 3:14pm on the same day, Mr Scott Chesterman, solicitor for Lactalis sent the Deferred Amount Holder a letter by email enclosing a copy of the 3 June Notice and a letter which stated, inter alia:

Pursuant to clause 4.2 of the [Business Sale Agreement], pending agreement on the amount of the Bona Fide Claims or in determination of the Bona Fide Claims, the Deferred Amount should continue to be held by you in accordance with the Deferred Amount Deed. 

We would be grateful if you could confirm that you will continue to hold the Deferred amount in accordance with the Deferred Amount Deed until otherwise directed by the parties.[47]

[47]Chesterman Affidavit 23 August 2013, Exhibit ‘SCC-Exhibit Book 1’, 5.

  1. At approximately 4:28 pm on the same day, the Deferred Amount Holder responded by email to Mr Chesterman’s letter and confirmed that he would ‘continue to hold the Deferred Amount until instructed otherwise in accordance with the [Deed]’.[48] 

    [48]Chesterman Affidavit 23 August 2013, Exhibit ‘SCC-Exhibit Book 1’, 11.

  1. On 5 June, the solicitors for the Vendors then sent a letter by fax to the Deferred Amount Holder disputing the validity of the 3 June Notice and contending that the Deferred Amount Holder had an obligation to release the Deferred Amount for many of the same reasons advanced in this application.[49]  The solicitors for Lactalis responded to these contentions in a letter to the Vendors’ solicitors on 7 June 2013 (a copy of which was emailed to the Deferred Amount Holder on the same day) and maintained that the Deferred Amount Holder had to retain the Deferred Amount.[50]  In response, the Vendors’ solicitors sent a further letter by fax on 13 June 2013 to the Deferred Amount Holder again demanding that he release the Deferred Amount.[51] 

    [49]Chesterman Affidavit 23 August 2013, Exhibit ‘SCC-Exhibit Book 1’, 13–19.

    [50]Chesterman Affidavit 23 August 2013, Exhibit ‘SCC-Exhibit Book 1’, 23–26.

    [51]Chesterman Affidavit 23 August 2013, Exhibit ‘SCC-Exhibit Book 1’, 28–34.

  1. On 18 June 2013, the Deferred Amount Holder responded in detail to the parties correspondence and stated, inter alia:

At the present time I have the dilemma that:

1. on the one hand the Vendors have raised a very persuasive argument that a Bona Fide Claim has not been made.  Also, a Direction has not been given.  Therefore, according to the Vendors I must release the Deferred Amount. 

If I do not  release the Deferred Amount in accordance with clause 3.4, I am at risk of having breached clause 3.4, certainly from the point of view of the Vendors. 

Release of the Deferred Amount is already overdue because the Deferred Amount Expiry Date has passed, and I have delayed dealing with it while the Correspondence has been unfolding up to the present time;

2. on the other hand there is clearly a dispute between the Vendors and the Purchaser as to whether a Bona Fide Claim has been made or not. 

Minter Ellison have stated that they now have instructions to issue proceedings in respect of the Bona Fide Claim, which I interpret as including the proceedings contemplated in the second limb of clause 3.1(b) that is, “proceedings [issued] within 30 days after making the Bona Fide Claim”; and

3. whilst I am not totally confident that my retention of the Deferred Amount fits squarely within paragraphs (i) or (ii) of clause 3.1, it seems sensible that I should in any event retain the Deferred Amount for the time being, pending the determination of the release or otherwise of the Retention Amount, one way or the other. 

In other words, if a Court finds that I have erred in retaining the Deferred Amount for the time being, that is clearly better than erring in releasing the Deferred Amount without giving the Purchaser a reasonable opportunity to restrain me from releasing it.[52] 

[52]Chesterman Affidavit 23 August 2013, Exhibit ‘SCC-Exhibit Book 1’, 36–39.

  1. The Vendors submit that the Deed requires the Deferred Amount Holder to pay the Vendors the Deferred Amount unless, before the Deferred Amount Expiry Date:

(a)the Purchaser makes a valid Bona Fide Claim; and

(b)the Deferred Amount Holder receives a written Direction signed by both the Purchaser and the Vendors.[53] 

[53]Vendors’ Submissions [38].

  1. To support their interpretation that receiving a written Direction signed by both the Purchaser and the Vendors is a condition precedent to the Deferred Amount Holder retaining the Deferred Amount, the Vendors point to the interaction between clauses 3.1 to 3.4 of the Deed.  The Vendors submit that a plain reading of clause 3.4 of the Deed obliges the Deferred Amount Holder to pay them the Deferred Amount on the Deferred Amount Expiry Date only ‘[s]ubject to a Direction being provided under clause 3.2’.[54]  Although the Vendors acknowledge that clause 3.1 does not refer to a written direction being provided to the Deferred Amount Holder, they contend that clause 3.2 is critical to the interpretation of clause 3.1 as it requires the Purchaser and the Vendors to give the Deferred Amount Holder all written directions necessary to give effect to clause 3.1.[55]  The Vendors contend that clause 3.3 (which provides that the Deferred Amount Holder shall only be obliged to act in accordance with a written Direction signed by the Vendors and the Purchaser subject to clause 3.4) provides context and emphasis to the principal obligation under clause 3.4.[56]  Stated shortly, the Vendors submit that unless the Deferred Amount Holder receives a joint written Direction signed by the Purchaser and Vendors to the contrary, the Deferred Amount must be paid to the Vendors on the Deferred Amount Expiry Date.

    [54]Vendors’ Submissions [78]–[80].

    [55]Transcript 37:12-22.

    [56]Defendant’s submissions [80].

  1. By contrast, the plaintiffs submit that clause 3.1 operates to require the Deferred Amount to be retained if a Bona Fide Claim is made before the Deferred Amount Expiry Date, and that there is no requirement that any direction be provided.  The plaintiffs submit that clause 3.4 is inconsistent with clause 3.1 in that it requires a Deferred Amount to be paid out ‘[s]ubject to a Direction being provided under clause 3.2’. However, they submit that clause 3.1 should be given primacy to the extent of any inconsistency to give effect to the commercial purpose of the Deed.  The plaintiffs submit that the commercial purpose is to provide a mechanism for the retention of the Deferred Amount by a third party for a fixed period of time or, in the event that there is a Bona Fide Claim, until the parties agree or a court determines in order to protect the Purchaser’s interest.[57]

    [57]Plaintiffs’ Submissions [76]–[81], [83].

  1. The plaintiffs submit that this commercial purpose is reflected in clause 2.4 of the Deed which provides that the Deferred Amount Holder must ‘hold the Deferred Amount, and must not release or return it, otherwise than in accordance with this [Deed] or as otherwise required by law’.  The plaintiffs contend that the Vendors’ construction of the Deed creates unreasonable results because it would require the Deferred Amount Holder to pay the Deferred Amount to the Vendors in circumstances where there is a dispute between the parties as to whether or not clause 3.1 has been complied with and the Vendors refuse to provide a joint direction.[58] 

    [58]Plaintiffs’ Submissions, [83]; see Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99, 109.

  1. The Vendors dispute the plaintiffs’ contention that there is inconsistency between the provisions on the basis that the clauses must be read together as a whole.  The Vendors point out that clause 3.1 does not make any provision that the parties serve a notice of a Bona Fide Claim on the Deferred Amount Holder, and clause 3.4 states clearly that the Deferred Amount is to be paid subject to a Direction being provided, not a Bona Fide Claim.  Further, the Vendors submit that clause 3.2 assumes that the Vendors will act in accordance with their contractual obligations and if the Vendors refused to give a joint Direction, despite a Bona Fide Claim being made, the Purchaser could apply to court for a mandatory injunction.

  1. Alternatively, the Vendors contend that if there is any inconsistency, clause 3.1 is a contingent provision and the primary provision is clause 3.4.[59]

    [59]Vendors’ Reply Submissions, [11].

  1. In my view, the contention that receiving a written Direction signed by the Vendors and Purchaser is a condition precedent for the Deferred Amount Holder to retain the Deferred Amount is problematic. 

  1. It is clear that the commercial purpose of the arrangement is primarily to protect the Purchaser by retaining part of the purchase price as security for such time as it takes to determine the Bona Fide Claim (or until there is agreement in relation to the amount of a Bona Fide Claim).

  1. The requirement in clause 3.2 for the Purchaser and the Vendors to give the Deferred Amount Holder ‘all written directions necessary to give effect to clause 3.1’ reinforces the purpose and importance to the parties of the requirement of retaining part of the purchase price under that clause.  This is again reinforced by the fact that the release of the Deferred Amount under clause 3.4 is made subject to a direction being provided which gives effect to clause 3.1. 

  1. The commercial purpose of the Deed is also reflected and emphasised by clause 2.4, which requires the Deferred Amount Holder not to release or return the Deferred Amount otherwise than in accordance with the Deed or otherwise required by law. 

  1. Requiring both the Purchaser and the Vendors to give joint directions as a condition precedent to retention is difficult to reconcile with the notion of security remaining in place where there is a dispute until a claim is determined or agreed.  If the parties legitimately disagreed on the terms of the direction and were unable to provide a joint direction, the Purchaser would be (prima facie) deprived of its protection.  In my view, this would produce uncommercial results and is unlikely to have been intended.  It would, in effect, stymie the orderly working of the regime provided for in clause 3.1.

  1. The Deed is non-specific as to the content of directions, apparently leaving it to the judgment of the parties.  All that is required are ‘written directions necessary to give effect to clause 3.1’.  Clause 3.1 cannot operate without a communication informing the Deferred Amount Holder that a Bona Fide Claim is on foot, and whether there has been an agreement or determination.  The Deferred Amount Holder requires sufficient information to enable compliance with the obligation to retain the appropriate amount. 

  1. In my view, the Deed contemplates not just the giving of joint directions (as in directions signed by both the Vendors and Purchaser), but directions signed by either the Vendors or Purchaser.  I note that clause 3.3 provides that the Deferred Amount Holder is only ‘obliged to act in accordance with a written Direction signed by the Vendors and the Purchaser’.  In my view, Clause 3.3 is not inconsistent with the Deferred Amount Holder receiving a direction from one party and not the other, however, the Deferred Amount Holder would not be obliged to act upon it.  If the Deferred Amount Holder decided not to act upon it in the particular circumstances, the Purchaser would then have the option of applying to a court for an injunction   

  1. Clause 3.2, properly construed in its context, provides that the Purchaser and the Vendors both have an obligation to give written directions necessary to give effect to clause 3.1.  It does not necessarily follow that those directions are required to be joint directions.

  1. Support for this construction is provided by other provisions of the Deed.  Clause 4.1 provides:

This Deed shall terminate on the earlier to occur of:

…

(b)the day which is 14 days after the escrow parties jointly give notice to the Deferred Amount Holder of such termination; or

(emphasis added)

  1. Clause 4.2 provides:

If this Deed is terminated pursuant to clause 4.1, then notwithstanding any other provision of this Deed each of the escrow parties together must jointly provide a written notice to the Deferred Amount Holder directing the Deferred Amount Holder in relation to the manner in which it is to release a Deferred Amount and any Deferred Amount accrued interest as at the effective termination date. (emphasis added)

  1. It is apparent from clauses 4.1(b) and 4.2 that where the parties intended to provide that notices be provided jointly they have said so expressly.

  1. Clause 5.1 provides:

Acknowledgment

The Escrow Parties acknowledge and agree that the Deferred Amount Holder will not be obliged to enquire into or be liable to any person whatsoever for the accuracy, description or relevance of the terms, conditions or contents of this deed or accuracy of any information contained in any notice from any party to this deed, except as expressly set out in this deed. (emphasis added)

  1. This clause contemplates notices received from any party to the Deed, not necessarily jointly.  Likewise, clause 7.2 provides that the Vendors and the Purchaser ‘each agree severally to pay’ the Deferred Amount Holder’s charges and expenses.

  1. As a whole, I consider that there are sufficient indications in the Deed to conclude that the ‘written directions necessary to give effect to clause 3.1’ provided for in clause 3.2 are not necessarily required to be joint directions.  It is evident that where the parties wanted a notice to be given or an obligation to be performed either jointly or severally then they made express provision in the Deed.  No express provision was made under clause 3.2.  This tends to suggest that the written directions under clause 3.2 might be given jointly or given separately by either party.  This construction harmonises and gives commercial efficacy to the arrangements. 

  1. It appears to be common ground between the parties that a written Direction signed by both the Purchaser and the Vendors was not provided to the Deferred Amount Holder either before or after the Deferred Amount Expiry Date.  In relation to the 3 June 2013 letter from the Purchaser to Mr Trumble, the Vendors submit that it did not amount to a Direction or satisfy the requirement of clauses 3.2 and 3.4 of the Deed and that accordingly, the Deferred Amount Holder was obliged to pay to the Vendors the Deferred Amount on the Deferred Amount Expiry Date.

  1. The 3 June letter from the Purchaser to Mr Trumble (which attached a copy of the 3 June Notice) states that the Deferred Amount Holder should continue to hold the Deferred Amount.  In my view, that is a Direction for the purposes of clause 3.2 as it gives effect to clause 3.1, thus satisfying the requirement under clause 3.4.  That this direction was not signed by both the Purchaser and Vendors meant that, in accordance with clause 3.3, the Deferred Amount Holder was not obliged to act upon it. 

  1. It is apparent that Mr Trumble took the view it would be appropriate to act on the request of the Purchaser not to release the Deferred Amount in the circumstances.  In my view, not only was this course open to Mr Trumble, it was a pragmatic and appropriate course to take in the circumstances. 

  1. For the reasons given, the answer to Question 5 is No.

Conclusion

  1. In this matter, I have answered the questions as follows:

Question 1.1  4 June 2013

Question 1.2  3 June 2013

Question 1.3  Yes.

Question 2No.

Question 3No.

Question 4No.

Question 5No.

  1. It follows that the Deferred Amount Holder is not presently obliged to pay to the Vendors the Deferred Amount under clause 3.4 of the Deed and that the Vendors’ application is refused.


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