McCrackens Water Services Pty Ltd v Philip Peter Ridgeway
[2011] VSC 320
•18 February 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST B
S CI 2010 3222
| McCRACKENS WATER SERVICES PTY LTD (ACN 010 118 895) | Plaintiff |
| v | |
| PHILIP PETER RIDGEWAY AND ORS (according to the attached schedule of parties) | Defendants |
| AND BETWEEN: | |
| PHILIP PETER RIDGEWAY AND ORS (according to the attached schedule of parties) | Plaintiffs by Counterclaim |
| McCRACKENS WATER SERVICES PTY LTD (ACN 010 118 895) | First Defendant by Counterclaim |
| - and - | |
| TOTAL EDEN MCCRACKENS GROUP PTY LTD (formerly known as TOTAL EDEN HOLDINGS PTY LTD ) (ACN 116 714 802) | Second Defendant by Counterclaim |
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JUDGE: | Gardiner AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25 November 2010 | |
DATE OF JUDGMENT: | 18 February 2011 | |
CASE MAY BE CITED AS: | McCrackens Water Services Pty Ltd v Philip Peter Ridgeway & ors | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 320 | |
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PRACTICE AND PROCEDURE ― application to strike out statement of claim, alternatively, requirement that plaintiffs provide further and better particulars ― r 13.02 of the Supreme Court (General Civil Procedure) Rules ― where the pleadings provided sufficient clarity of the case and issues which the Court was required to decide ― application to strike out statement of claim dismissed
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Braham SC | Hall & Wilcox Lawyers |
| For the Defendant | Mr D A Klempfner | Rigby Cooke Lawyers |
HIS HONOUR:
The defendants (the Ridgeway parties) make application to strike out paragraphs 15 to 18 inclusive of the plaintiff’s statement of claim dated 10 June 2010. In the alternative, the Ridgeway parties seek further and better particulars of what they describe as the “offending paragraphs”. Counsel for the plaintiff, Mr Braham SC, had prepared his written submissions on the understanding that he would be resisting an application for further particulars. While counsel for the defendants, Mr Klempfner, did not abandon the issue of particulars, it could be said that it was only faintly pressed in oral argument and his written submissions argued the matter as a strike out application. As Mr Klempfner’s written submissions properly contended, it is not the function of particulars to cure pleadings that are susceptible of being struck out for want of material facts.[1]
[1]See defendants’ written submissions dated 22 November 2010, paragraphs 20-21, citing Bruce v Oldhams Press Ltd [1936] 1 KB 697.
Background
The proceeding concerns a sale by the Ridgeway parties to the plaintiff of all their shares in three companies which are collectively described as “Plastic Plumbing Supplies”. The agreement documenting the sale is dated 29 June 2007 and is entitled Plastic Plumbing Supplies Share Acquisition Agreement (“PPSA”).
The purchase price for the shares was to be calculated by reference to the formula defined in clause 1.1 of the PPSA. That calculation in turn required a determination of what is described as the June EBIT. “June EBIT” was defined in clause 1.1 as meaning “the EBIT [earnings before interest and taxation] for the three target companies for the period ending 30 June 2007, determined in accordance with clause 6”.
Clause 6, which dealt with the adjustment of the purchase price, required the Ridgeway parties to provide a document called the completion balance sheet to the plaintiff. Clause 6.2 required the parties to meet to determine the amount of June EBIT. The parties were required to apply what is described in the agreement as the company normalisation principles in the determination of June EBIT.
Clause 6.4 of the PPSA provided a regime for resolution of disputes in respect of the completion balance sheet, the June EBIT (and what is described as the TEH EBIT, which is not presently relevant). Under clause 6.4(a), if the completion balance sheet or June EBIT is disputed by any party, that party may give the other parties a dispute notice. Clauses 6.4(b) to (k) then prescribed a procedure for the engagement of an expert to resolve disputes concerning the completion balance sheet, June EBIT or TEH EBIT. Under clause 6.4(m), the expert’s written determination was to be final and binding on the parties in the absence of manifest error. Clause 6.5 then went on to provide that the plaintiff was to pay to the Ridgeway parties what is described as the Second Cash Payment on a date described as the Adjustment Date period.
The plaintiff alleges that, in breach of clause 6.1 of the PPS agreement, the Ridgeway parties failed to provide a completion balance sheet to the plaintiff in the required time or at all. The plaintiff provided the Ridgeway parties with a completion balance sheet on 25 February 2008 and it is alleged by the plaintiff that the Ridgeway parties subsequently treated this document as the completion balance sheet for the purposes of the agreement.
The parties were not able to agree on the figure for June EBIT as required by clause 6.2 and on 7 March 2008 the Ridgeway parties served a dispute notice in relation to completion balance sheet and June EBIT under clause 6.4(a).
In late April 2008, the parties appointed Mr David Ferrier of BDO Kendalls as the expert pursuant to clause 6.4(f). On 23 December 2008, Mr Ferrier delivered what purported to be a written determination for the purposes of clause 6.4(m). On 30 June 2009, Mr Ferrier provided a revised determination.
The pleadings
Paragraphs 15 to 16 of the plaintiff’s statement of claim, which are the subject of the current application, state as follows:
In his determination of the Completion Balance Sheet, in each of the December determination and the June revised determination, the Expert made an adjustment to the provision for doubtful debts to remove from that provision as at Completion those receivables recognised as doubtful debts in the accounts of PPS after September 2007.
In making the adjustment referred to in the last preceding paragraph the Expert failed to comply with the requirements of the PPS agreement in the following respects:
(a)The Expert took into account matters which were irrelevant to the task he was required to perform, namely:
(i)the timing of the preparation of the audited accounts;
(ii)the timing of the recognition in the accounts of matters which were properly brought to account as at completion;
(b)the Expert failed to address the question he was required to address, namely the actual state of Plastic Plumbing Supplies’ financial position at Completion and, in particular, the value of its recoverable debts as at that date.
17.In his calculation of June EBIT, in each of the December Determination and the June Revised Determination, the Expert:
(a)based the calculation on an agreed procedures report by KPMG dated 17 October 2007 rather than the audited accounts;
(b)made an adjustment to the provision for doubtful debts which was described as a ‘normalisation adjustment’; and
(c)made an adjustment to write-back the provision of amortisation of good will.
18.By reason of the matters in clauses 15-17 hereof, each of the Determination and June revised determination:
(a)fails to meet the requirements of a Determination for the purposes of clause 6.4(m) of the PPS agreement; or, alternatively,
(b)is affected by manifest error.
The Ridgeway parties in their defence filed 30 July 2010 say in response to those paragraphs:
15.They do not admit the allegations in paragraph 15.
16.They (a) deny the allegations in paragraph 16; and (b) say further that, in making a written determination the Expert had to:
(i)apply the Company Normalisation Principles and the TEH Normalisation Principles (as applicable) as those terms are defined in the PPS agreement – (see clause 6.4(j) of the PPS agreement);
(ii)subject to the previous sub‑paragraph, apply the accounting standards (as that term is defined in the PPS agreement) – (see clause 6.4(k) of the PPS agreement);
(iii)decide the procedures to be followed to resolve the matters of disagreement in the absence of agreement between the plaintiff and the defendants – (see clause 6.5(l) of the PPS agreement).
17.They (a) do not admit the allegations in paragraph 17; and (b) say further that if the Expert did the things alleged in paragraph 17 of the statement of claim he was authorised to do so by:
(i)the provisions set out in sub‑clauses 6.4(j), (k) and (l) of the PPS agreement; and
(ii)the fact that he was acting as an expert, not an arbitrator.
18.They deny the allegations in paragraph 18.
The Ridgeway parties say that the offending paragraphs do not identify the obligations of the expert which had been breached. I observe at this juncture that the Ridgeway parties do not appear to have had any difficulty in pleading to the statement of claim by reason of it being embarrassing or the like.
The expert was obliged to apply the company normalisation principles, the TEH normalisation principles and the accounting standards in going about his task under the PPSA. The Ridgeway parties complain that there is no reference in the offending paragraphs to any breach by the expert of the company normalisation principles or any breach of an agreement between the parties as to the procedures to be followed to resolve the dispute. They say that the offending paragraphs allege matters which are not referrable to, or readily identifiable as being related to, the framework on which the expert was to make his determination. They say that the breaches alleged in the offending paragraphs are conclusionary and that the obligations alleged to have been breached are not set up earlier in the pleading.
In this regard, counsel for the Ridgeway parties, Mr Klempfner, referred to paragraph 16 of the statement of claim where it was pleaded:
In making the adjustments … the expert failed to comply with the requirements of the PPS agreement in the following respects …
Mr Klempfner complains the “requirements” of the PPSA relevant to the making of adjustments are not identified by the plaintiff. It is said that this deficiency makes paragraph 16 embarrassing and the position in this regard is compounded by the further reference in paragraphs 16(a) and (b) to a task and question required to be performed and addressed in circumstances where there is no identification of the requirement pleaded.
Mr Klempfner makes similar complaints in regard to paragraph 17 of the statement of claim. It is said that the matters described in paragraph 17(a) – (c) do not make it clear how such conduct is alleged to create a determination affected by manifest error. That is to say there is no allegation that the conduct referred to in those sub‑paragraphs departed from the tasks the expert was required to perform in clause 6.4(j), (k), (l) and (m) of the agreement. As with clause 16, it is said that the plaintiff has pleaded the alleged conduct as being erroneous with no pleading of the immaterial facts as to why this is so.
Mr Klempfner contends that it is incumbent upon the plaintiff to plead both the obligation and the alleged breach with precision and particularity.
Mr Klempfner submitted that in order for an error to be “manifest” it must be “evident and obvious rather than merely arguable”.[2] Mr Klempfner contended that in order to understand the complaints made by the plaintiff as to the expert’s conduct, the Ridgeway parties need to be properly put on notice as to the specifics of that improper conduct and identify the obligations of the expert. If they are not articulated with sufficient clarity or precision, it is not possible for the Ridgeway parties to instruct their expert engaged for the trial to critique the expert’s conduct. Unless, it is said, the Ridgeway parties know what the task of the expert was, it is not possible to instruct the expert as to how Mr Ferrier has breached his engagement.
[2]Reference was made in this regard to Leung v Hungry Jacks Pty Ltd [2000] V Con R 64,348 (54-614) per Hedigan J.
The plaintiff’s submissions
Mr Braham SC, counsel for the plaintiffs, commenced his submissions with an exposition as to the matters pleaded in paragraphs 15 to 18. He noted that the formula for computation of the purchase price required the application of a multiplier of $5.75 for every dollar of shareholder equity revealed in the completion balance sheet. At the centre of the plaintiff’s complaint of the expert’s conduct was the matter described in paragraph 15 where the complaint is made that, in the determination of the completion balance sheet in both the December determination and the later revised determination in June 2009, the expert made an adjustment to the provision for doubtful debts to remove from that provision receivables which were later recognised in the audited accounts as doubtful debts after September 2007. In March 2008, the auditors, going back to the balance date of 30 June 2007, said of the debts then payable to the company, that some $800,000 ought to have been recognised as at that date as written off and included in the provision for doubtful debts. The expert determined that, because the audit did not occur until March 2008, those doubtful debts should not be included.
In paragraph 16, it is pleaded that, in making the adjustment referred to, the expert failed to comply with the requirements of the agreement in that he took into accounts matters which were irrelevant to the task he was required to perform, that is the timing of the preparation of the audited accounts and, secondly, the timing of the recognition in the accounts of matters which were properly brought to account as at completion.
Mr Braham then went on to deal with paragraph 16(b) where it is alleged that the expert failed to address the question he was required to address, that is, the actual state of Plastic Plumbing Supplies’ financial position at completion, in particular, the value of its doubtful debts at that date. He states that that pleading is intended to convey that Mr Ferrier as expert was required to address what was the actual financial position of the target companies as at balance date.
Mr Braham says in response to the criticism as to the identification of the source of the expert’s obligation to consider those matters, that there is no clause in the agreement in this regard; it is referrable to the task. There is nothing else that the plaintiff can point to in the agreement which identifies the task that Mr Ferrier, the expert, had to perform. Mr Braham put the plaintiff’s position as being that the expert was required to address the assessment of the actual state of the target company’s financial position. To go further in the statement of claim would be really to advance argument which is appropriately advanced at the final hearing.
Paragraph 17 of the statement of claim deals with Mr Ferrier’s calculation of June EBIT in the two determinations. It pleads that in going about those determinations, Mr Ferrier embarked on irrelevant exercises such as reliance on a report by KPMG of 17 October 2007 rather than the audited accounts, adjusted the provision for doubtful debts and wrote back into the accounts the provision for amortisation of good will. In paragraph 18 it is alleged that by reason of the matters referred to in paragraphs 15, 16 and 17, the determinations failed to meet the requirements of a determination for the purposes of clause 6.4(m) of the PPSA or alternatively is affected by manifest error.
Mr Braham submitted that the offending paragraphs put the defendants in the position of knowing what case they have to meet and be able to plead to it, prepare evidence in respect of it, govern discovery and allow the matter to be fairly tried. He drew attention to the fact that, as I have remarked above, the defence has been pleaded to comprehensively and adequately without suggestion that there is any confusion in the minds of the defendants about the case they have to meet. The vice which is said to be present in the offending paragraphs is that the expert’s conduct has been described without reference to the contractual framework in which the expert’s task was to be undertaken. Mr Braham says that, in so far as the contractual framework exists, it has been described. Put in succinct terms, Mr Braham submitted that the plaintiff’s case is that the PPSA required Mr Ferrier to perform a task and that he has not performed that task, he did other things which are detailed in paragraphs 15 to 17 and, because of this, a proper determination has not been made under the agreement or, if it has, it is affected by manifest error. Mr Braham submitted that anything further is argument and not the proper subject of pleading.
Legal principles
Rule 13.02 of the Supreme Court (Civil Procedure) Rules provides:
13.02(1)Every pleading shall –
(a)contain in a summary form a statement of all the material facts on which the party relies, but not the evidence by which those facts are to be proved;
(b)where any claim, defence or answer of the party arises by or under any Act, identify the specific provision relied on;
(c)state specifically any relief or remedy claimed.
J Forrest J in the recent decision of Cohen v State of Victoria[3] conveniently summarised the principles regarding the adequacy of a statement of claim.
[3][2010] VSC 371.
Nearly a century ago the High Court in Gould v Mount Oxide Mines Ltd[4] said:
[4](1916) 22 CLR 490, 517.
Undoubtedly, as a general rule of fair play, and one resting on the fundamental principle that no man ought to be put to loss without having a proper opportunity of meeting the case against him, pleadings should state with sufficient clearness the case of the party whose averments they are. That is their function. Their function is discharged when the case is presented with reasonable clearness. Any want of clearness can be cured by amendment or particulars. But pleadings are only a means to an end, and if the parties in fighting their legal battles choose to restrict them, or to enlarge them, or to disregard them and meet each other on issues fairly fought out, it is impossible for either of them to hark back to the pleadings and treat them as governing the area of contest. There is abundant authority for this even if the matter were required to rest on authority only.
Seventy-five years later, in Banque Commerciale SA, En liquidation v Akhil Holdings Ltd,[5] the High Court said:
[5](1990) 169 CLR 279, 286-287.
The function of pleadings is to state with sufficient clarity the case that must be met. In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision. The rule that, in general, relief is confined to that available on the pleadings secures a party’s right to this basic requirement of procedural fairness. Accordingly, the circumstances in which a case may be decided on a basis different from that disclosed by the pleadings are limited to those in which the parties have deliberately chosen some different basis for the determination of their respective rights and liabilities.
In Multigroup Distribution Services Pty Limited v TNT Australia Pty Limited,[6] Burchett J said:
[6][1996] ATPR 41-522.
The primary function (of a statement of claim) is to tell the defending party what the claim is that he has to meet. That is a matter of elementary and natural justice; the claim cannot be answered until it is known. When a sufficient defence has been filed to a sufficient statement of claim, a further function will generally have been performed – that of defining the question or questions for decision. This definition is required, of course, from an early stage, or else discovery and other interlocutory procedures are likely to prove misdirected, wasteful and unproductive. In order to achieve these fundamentals, a statement of claim must set out clearly, not just the bare claim that is made, but also ‘the material facts on which it is based’, including facts that, if not specifically pleaded might take the other party by surprise.[7]
[7]Ibid, 42-679.
In Gunns Ltd & Ors v Marr,[8] Bongiorno J said of the rules of this Court and the role of pleadings:
[8][2005] VSC 251.
The fundamental rule of pleading is contained, for this Court, in RSC r.13.02(1)(a) which requires every pleading to contain, in a summary form, a statement of all the material facts upon which a party relies, but not the evidence by which those facts are to be proved. That the pleading must allege material facts is fundamental. That they must be alleged with certainty follows from the principle stated that the pleading must convey a clear conception of the case being made. If it does not, it will be embarrassing in the sense that that word is used in this area of legal discourse and, in particular, for present purposes, in RSC r.23.02 and its predecessors both here and in England. The full Court of this Court has described a pleading as being embarrassing -
…where the pleading is unintelligible, ambiguous, vague or too general, so as to embarrass the opposite party who does not know what is alleged against him.[9]
Finally, I should mention the recent scholarly and detailed analysis of the purpose and function of pleadings of Refshauge J in Canberra Data Centres Pty Ltd v Vibe Constructions (ACT) Pty Ltd.[10] In particular, his Honour said:
Whatever the result of this controversy, the system of formal pleadings is currently the way each party is given notice, reasonably precisely, of the case that it has to meet. Further, however, the pleadings do more, much more, than merely give notice of the case of the other party. Second, and equally importantly, they apprise the court of the issues so that it can manage the trial and all pre-trial interlocutory proceedings.[11]
[9]Ibid, [15]
[10][2010] ACTSC 20.
[11]Ibid, [28].
If one were to distil a succinct statement of principle from the above authorities, they call for sufficient clarity of the case and a definition of the issues which the Court is required to decide. The statement of claim is required to inform the defendants of what the claim is they have to meet and to enable them to plead a defence. Part of that process is that, in addition to the assertion of the case against the defendant, material facts upon which those assertions are based must be provided. Failure to plead the material facts will result in the pleading being regarded as embarrassing in the sense that it is unintelligible, ambiguous, vague or too general so that the party who is required to plead to the statement of claim will be uncertain of what is alleged against them.
Mr Ferrier was engaged under the terms of the PPSA to perform June EBIT and, by reason of the matters pleaded, he miscarried in the performance of the task and such miscarriages are somewhat austerely but adequately described in paragraphs 15, 16 and 17. The plaintiff will need to establish at trial that the matters the plaintiff complains of in respect of how Mr Ferrier went about his determination are such as to justify impeachment of those determinations or are such as to amount to manifest error. The plaintiff will either succeed on the matters pleaded or it will not. In his submissions, Mr Braham employed what I considered to be an apt analogy of the sale of a rural property where an expert has been engaged to report on the number of trees on a property for the purpose of calculating a purchase price. If the expert reported back stating that the number of trees had been counted and that the number of deciduous trees was 100 and that he has discounted the evergreens, the response would undoubtedly be “You were engaged to count the trees but you have discounted the evergreens.” Mr Braham contended that this would amount to a manifest error or task outside the scope of what the expert was retained to do.
In the context of the present case, the matters which Mr Ferrier took into (or failed to take into) consideration, such as not relying on the audited accounts or the actual value of recoverable debts at the completion date will either be considered by the Court hearing this matter to amount to miscarriage of his engagement so as to justify impeachment of the determinations, or they will not. That is the plaintiff’s case, upon which it will either succeed or fail, and I do not consider that the pleading in its present form is embarrassing.
The defendants’ application to strike out paragraphs 15 to 18 of the statement of claim is dismissed. As I have said, the matter proceeded as a strike out application and I will make no order for provision of further particulars. Subject to anything that the parties may wish to say, I will order the defendants to pay the plaintiff’s costs of the application.
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