Nitschke v Foraco Australia P/L

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SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

NITSCHKE & ORS v FORACO AUSTRALIA P/L & ANOR

[2014] SASC 88

Judgment of The Honourable Justice Stanley

4 July 2014

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS - GENERALLY

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PROCEDURE UNDER RULES OF COURT - PLEADINGS - DEFENCES AND COUNTERCLAIM

EQUITY - GENERAL PRINCIPLES - FIDUCIARY OBLIGATIONS - ASCERTAINMENT OF RELATIONSHIP

EQUITY - GENERAL PRINCIPLES - UNCONSCIONABILITY, UNCONSCIONABLE DEALINGS AND OTHER FORMS OF EQUITABLE FRAUD - GENERALLY

Application to amend defence and counterclaim pursuant to rule 54 of the Supreme Court Civil Rules 2006 (SA).

The defendants seek permission to amend their defence and counterclaim.  Permission is sought in terms of a draft third defence and counterclaim exhibited to an affidavit in support of the application.  

The plaintiffs oppose the grant of permission to amend in the terms proposed.

Whether the draft defence and counterclaim comply with the rules of pleadings. Whether the draft defence and counterclaim are untenable. Whether the draft defence and counterclaim put the plaintiffs on fair notice of the defendants’ case.

Held:

1.   Paragraphs 2 and 3 of the draft defence and counterclaim are reasonably arguable. The plaintiffs are not substantially prejudiced by the form of the proposed pleadings in paragraphs 2 and 3 (at [47] – [56]).

2.   The bases of the proposed pleas in subparagraphs 5.14 and 5.17(a) are tolerably clear.  They cannot be said to be unarguable (at [58] – [63]); [68] - [69].

3.   Subparagraph 5.15 puts the plaintiffs on notice of the defendants’ case. The contract will be construed in accordance with the accepted cannons of construction (at [66] – [67]).

4.   Subparagraphs 5.16 and 5.17(b) are not reasonably arguable.  Subparagraphs 5.16 and 5.17(b) are to be repleaded in conformity with these reasons (at [58] – [65]; [68] - [69]).

5.   The pleas in subparagraphs 7.2(k)(B) and 7.2(1) - (s) are untenable.  Subparagraphs 7.2(k)(B) and 7.2(1) to (s) are to be struck out of the draft defence. The remainder of paragraph 7 gives fair notice to the plaintiffs of the defence case (at [77] – [92]).

6.  Subparagraph 7.3 joins the issue of the construction of the Sale and Purchase Agreement.  It is not an inconsistent plea (at [93]). 

7.   Reference to subparagraphs 7.2(p) and 7.2(q) is to be struck out from paragraph 21 of the counterclaim (at [94]). 

8.   The phrase “and unconscionable conduct” is to be struck out from paragraph 23 of the counterclaim (at [94]).

Supreme Court Civil Rules 2006 (SA) r 28, r 54, r 90, r 98, 102, referred to.
Arthur Young v Tieco (1995) 182 LSJS 367; H Stanke & Sons Pty Ltd v O’Meara (2007) 98 SASR 450; Prolift Equipment Pty Ltd v Pronto Software Pty Ltd [2003] SASC 170; Iacullo v Iacullo [2013] NSWSC 1517; Riverland Fruit Cooperative Pty Ltd v 007 953 380 Pty Ltd [2008] SASC 258; Holcon Australia Pty Ltd…

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Details
Case
[2014] SASC 88
Decision Date

CaseChat Overview and Summary

Nitschke v Foraco Australia P/L involves a dispute between the plaintiffs, who were the sellers of shares in a drilling company, and the defendants, the buyers of those shares. The plaintiffs argue that they are owed an adjustment amount and an earn out amount as per the Sale and Purchase Agreement (SPA). The defendants contest these claims. The Supreme Court of South Australia was tasked with resolving the dispute over the calculation of the adjustment and earn out amounts as stipulated in the SPA. The court had to determine whether the defendants were liable to pay the amounts claimed by the plaintiffs based on the net assets and operating profits of the company at the relevant times.

The legal issues centred around the interpretation of the SPA, specifically the provisions regarding the calculation of the adjustment amount and the earn out amount. The court needed to assess the evidence provided by the plaintiffs and the defendants concerning the net assets and operating profits of the company. Additionally, the court had to consider the procedural aspects of the pleadings, including whether the defences and counterclaims were sufficiently particularised. The court was also required to examine the fiduciary obligations of the parties and the potential for unconscionable conduct.

The court held that the defendants were permitted to file an amended third defence and cross action, subject to certain conditions. The court struck out certain subparagraphs and phrases that were considered vague or irrelevant to the plaintiffs' conduct. The court found that the plaintiffs were given fair notice of the defendants' case on the cross action and that the absence of cross-referencing to earlier pleas did not substantially prejudice the plaintiffs. The court also ruled that the plea of “and unconscionable conduct” was not permissible. The defendants were granted permission to amend their pleadings in accordance with the court's directions.

The court's final orders allowed the defendants to file and serve an amended third defence and cross action, subject to specific alterations to the pleadings as outlined in the judgment. The defendants were required to replead certain paragraphs and strike out others, ensuring that the pleadings were clear and focused on the relevant conduct of the plaintiffs. This decision ensures that the dispute can proceed with the necessary clarity and precision in the pleadings.

Orders

Orders of the court

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Background

Background to the litigation

In order to understand the respective contentions, it is necessary to set out the background to the claim and proposed third defence. Background By a Sale and Purchase Agreement (SPA)[1] the plaintiffs contracted to sell their shares in John Nitschke Drilling Pty Ltd (the Company) to the first defendant for $30 million plus or minus an adjustment amount, in addition to seven million warrants in the first defendant giving the right to be issued seven million shares in the second defendant (clause 4.1). The SPA further provided a contingent entitlement on the part of the plaintiffs to an earn out amount in certain circumstances (clause 11.1). The second defendant guaranteed the first defendant’s obligations under the SPA. [1] For the purposes of hearing and determining the within application I received a copy of the SPA into evidence without objection. At completion on 19 November 2012 the first defendant paid the plaintiffs $30 million and transferred the shares in the second defendant. The first defendant has not subsequently made any further payment by way of an adjustment amount or an earn out amount. The plaintiffs claim an adjustment amount of $124,919 and an earn out amount of $4 million. The statement of claim identifies the dispute between the parties as a question concerning the correct calculation of the adjustment amount and the earn out amount. The SPA provides the adjustment amount is to be determined by reference to the net assets of the Company at completion compared with the Company’s net assets as at 30 June 2012 according to the reference balance sheet (clause 9.1). The SPA provides the earn out amount is to be determined by reference to the operating profit of the Company for the period 1 January 2012 to 31 December 2012 (clause 1.1). Pursuant to the SPA, if the earn out operating profit was equal to or less than $11 million, the first defendant had no obligation to pay an earn out amount. If the operating profit exceeded $11 million, the first defendant was obliged to pay an earn out amount up to $6 million depending upon the amount of the operating profit. The plaintiffs claim that the operating profit was between $12 million and $13 million. Accordingly, they claim an amount of $4 million pursuant to the SPA (clause 11.1). The SPA provides for the preparation of the completion balance sheet, by which the adjustment amount is to be calculated, and the earn out accounts and earn out statement, by which the earn out amount is to be calculated (clauses 9 and 11). Clause 9.1 of the SPA requires the Company, with the support of its consultant, Mr Lomax (Lomax), and KPMG Adelaide (KPMG), to prepare the completion balance sheet within 20 business days of the date of completion. It further provides that the first defendant must procure the Company to do so. The SPA provides that the completion balance sheet must comply with the accounting principles defined in it and the historical accounting practices of the Company. Importantly, the SPA obliges the plaintiffs to provide the Company with all reasonable assistance, including access to all books and records in their possession or control that the Company did not already hold and that are reasonably required by the Company to enable the Company to prepare the completion balance sheet and the adjustment statement (clause 9.1).

Evidence

Evidence Before The Court

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Decision

Reasons for decision

The plaintiffs submit that the pleas in paragraphs 21 and 23 of the cross action are vague and embarrassing. They submit proposed paragraph 21 alleges particular conduct of the plaintiffs by reference to various subparagraphs in proposed paragraph 7.2 which are not exclusively concerned with the conduct of the plaintiffs. I would not permit the defendants to refer to subparagraph 7.2(p) and (q) for the reasons set out earlier. Otherwise I consider the plaintiffs are given fair notice of the defendants’ case on the cross action. Likewise, the plaintiffs’ submit that paragraph 23 asserts a breach of fiduciary duty and/or breaches of fiduciary duties without identifying which duty or duties or by whom. In my view, the proposed plea in paragraph 23 must be read in the context of the pleadings as a whole. No useful purpose is served by further repetition of the pleas of breach of fiduciary duty iterated earlier in the pleading. I do not consider that the plaintiffs will be substantially prejudiced by the absence of such cross-referencing. On the other hand, I would not permit the plea of “and unconscionable conduct” for the reasons set out above.Conclusion I would give permission to the defendants to file and serve an amended third defence and cross action in the form exhibited to the third affidavit of Rebecca Tenille Heath sworn 29 May 2014 as Exhibit RTH 7 subject to:1.Paragraph 5.16 being repleaded in conformity with my reasons;2.Subparagraph 5.17(b) being repleaded in conformity with my reasons;3.Subparagraph 7.2(k)(B) being struck out; 4.Subparagraphs 7.2(l) – (s) being struck out; 5.Reference to subparagraphs 7.2(p) and (q) being struck out from paragraph 21 of the cross action; and 6.The phrase “and unconscionable conduct” in paragraph 23 of the cross action being struck out.

Ratio Decidendi

Legal Principle Established

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