Nitschke v Foraco Australia P/L

Case •

[2014] SASC 88

•

4 July 2014

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 v The Corporation of the Town of Walkerville [2007] SASC 437; Betfair Pty Ltd v Racing New South Wales & Ors (2010) 189 FCR 356; Mintech Resources Pty Ltd & Anor v Russell-Taylor & Anor (2012) 113 SASR 80; Marini v MLH Insurance Brokers Pty Ltd [2004] SASC 400; Coonawarra Premium Vineyards Ltd v Nugan Group Pty Ltd [2006] SASC 5; Coe v The Commonwealth (1979) 53 ALJR 403; AON Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175; Duke Group Ltd (In Liq) v Arthur Young (1991) 4 ACSR 355; Kirton Investments Pty Ltd v CC Bottlers Ltd (1984) 118 LSJS 110; Rajski v Powell (1987) 11 NSWLR 522; Duke Group v Arthur Young (No 5) (1991) 159 LSJS 362; Pavlovic v Commonwealth Bank of Australia (1992) 56 SASR 587; Scholle Industries v AEP Industries (NZ) Ltd (2007) 99 SASR 178; Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564; Pope & Ors v Harris Orchard [2010] SASC 354; Morgan v Roberts & Ors [2006] SASC 15; Pilmer v The Duke Group Pty Ltd (2001) 207 CLR 165; Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; Daly v Sydney Stock Exchange (1986) 160 CLR 371; Alghussein Establishment v Eton College [1988] 1 WLR 587; Hope Island Resort Holdings Pty Ltd v Jefferson Properties (Qld) Pty Ltd [2005] QCA 315; Ruthol Pty Ltd v Tricon (Australia) Pty Ltd [2005] NSWCA 443; Canyon (Australia) Pty Ltd & Ors v Aktieselskabet Dampskibsselskabet Svendborg & Ors (2004) 232 LSJS 206; Farah Construction Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; National Mutual Property Services (Australia) Pty Ltd & Ors v Citibank Savings Ltd [1998] FCA 564; Blomley v Ryan (1956) 99 CLR 362; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; CG Berbatis Holdings Pty Ltd (2003) 197 ALR; Arrowcrest Group Pty Ltd v Ford Motor Co of Australia Ltd [2002] FCA 1450; ACCC v Radio Rentals (2005) 146 FCR 292; ASIC v National Exchange Ltd (2005) 148 FCR 132; Gartner v Ernst & Young (No 2) [2003] FCA 1436, considered.

WORDS AND PHRASES CONSIDERED/DEFINED

"reasonably arguable cause of action or defence', 'amendment of pleading"

NITSCHKE & ORS v FORACO AUSTRALIA P/L & ANOR
[2014] SASC 88

Application

STANLEY J

Introduction

  1. In this matter the defendants seek permission to amend their defence and counterclaim pursuant to 6SCR 54. Permission was sought in terms of a draft third defence and cross action exhibited to an affidavit in support of the application. In response to complaints made in correspondence from the plaintiffs’ solicitors, the defendants now bring forward a revised draft. At the hearing of the application the plaintiffs were content to address the second proposed third defence and cross action as the basis of the application.

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

  3. In order to understand the respective contentions, it is necessary to set out the background to the claim and proposed third defence. 

    Background

  4. 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. 

  5. 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. 

  6. 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. 

  7. 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). 

  8. 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). 

  9. 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).

  10. The SPA confers the right on the purchaser and the seller to serve a notice of dispute in relation to the completion balance sheet and the adjustment statements within 10 business days after the receipt of the same (clause 10.1).  Critically, clause 10.1(e) of the SPA provides that the first defendant will be deemed to have accepted the completion balance sheet and adjustment statement, and the adjustments set out in the adjustment statement will be deemed to be final and conclusive, if the first defendant fails to notify the plaintiffs of any dispute in relation to the completion balance sheet and the adjustment statement within that 10-day period.  Equally, the sellers will be deemed to have accepted the completion balance sheet and the adjustment statement, and the adjustments set out in the adjustment statement will be deemed to be final and conclusive, if they fail to notify the Company of any dispute within that 10-day period (clause 10.1(f)). 

  11. The SPA provides that the first defendant shall prepare the earn out accounts within 60 business days of completion (clause 11.2).  The buyer must procure the preparation of the earn out accounts and the earn out statement.   The earn out accounts must comply with the earn out principles set out the SPA, the Australian IFRS accounting principles and the historical accounting practices of the Company.  It further provides that the sellers and the first defendant are obliged to act in good faith towards each other and cooperate with each other in the preparation of the earn out accounts and the earn out statement and the calculation of the earn out amount (clause 11.5). 

  12. The SPA provides that the sellers may serve a notice of objection to the earn out accounts and earn out statement (clause 11.4).  There is no corresponding provision entitling the buyer to serve a notice of objection.  The SPA provides that if the parties cannot resolve any dispute as to the earn out accounts and earn out statement they must refer the dispute to an independent accountant to decide the dispute as an expert (clause 11.4(c)).

  13. The seller is to give notice of any dispute within 20 business days after receipt of the earn out accounts and the earn out statement. 

  14. On 18 February 2012 the completion balance sheet and adjustment statement and the earn out accounts and earn out statement were provided to the parties.  The completion balance sheet disclosed a shortfall in net assets at completion of $1,153,000 and the adjustment statement showed the plaintiffs owed this sum to the first defendant less any cash balance.  The earn out accounts and the earn out statement disclosed an earn out amount of nil as the operating profit was recorded as $10,245,000.  The effect of the completion balance sheet and adjustment statement and earn out accounts and earn out statement, if accepted by the parties, was that the purchase price would be reduced by $1,153,000 less any cash balance. 

  15. The plaintiffs served a notice of dispute in relation to the completion balance sheet and adjustment statements.  The defendants did not serve a notice of dispute.  The plaintiffs served a notice of objection in relation to the earn out accounts and earn out statement.  The defendants did not serve a notice of objection. 

  16. The plaintiffs and the first defendant tried to resolve their differences without success.  The plaintiffs allege that they served by email an effective notice in writing to the defendants referring the dispute in relation to the completion balance sheet and adjustment statement to the independent accountant in accordance with the terms of the SPA.  The defendants deny that the notice was effective because the SPA did not permit the giving of notice by email.  There is no dispute, however, that the plaintiffs served a notice referring the dispute in relation to the earn out accounts and earn out statement to the independent accountant.  The parties have not, however, agreed upon an independent accountant.  As a consequence the plaintiffs issued these proceedings. 

    The second proposed third defence and cross action

  17. The proposed pleading consists of 127 pages.  The pleading is complex, sometimes repetitious and discursive.

  18. The plaintiffs’ complaints centre on the pleas in paragraphs 2, 3, 5.14, 5.15, 5.16, 5.17, 7.2 and 7.3 of the proposed defence.  There are further complaints in relation to the cross action.  Subparagraph 7.2 alone occupies some 53 pages of pleadings.  One important feature of the proposed defence is that it alleges, inter alia, breaches by Lomax and KPMG of fiduciary duties owed by them to the defendants, and that the plaintiffs were knowingly concerned and participated in these breaches. 

  19. In order to understand the nature of the dispute on this application, it is necessary to set out the basis of the defence sought to be raised on the proposed pleading. 

  20. The defendants dispute the adjustments to the completion balance sheet and adjustment statement raised by the plaintiffs in their notice of dispute.  In addition, the defendants wish to dispute other items that have not been raised by the plaintiffs in their notice of dispute.  In issue is whether the terms of the SPA prohibit the defendants from disputing those other items when they did not serve a notice of dispute as required by the SPA and in the face of the deeming provision in the SPA. 

  21. The defendants also dispute the adjustments to the earn out accounts and earn out statement raised by the plaintiffs in their notice of objection.  In addition, the defendants wish to dispute other items in the earn out accounts that have not been raised by the plaintiffs in their notice of objection. 

  22. In issue is whether the terms of the SPA bar the defendants from raising their disputes since the SPA does not provide for the service of a notice of objection by the buyers. 

  23. The nub of the proposed defence is that the completion balance sheet and adjustment statement and the earn out accounts and earn out statement do not comply with the SPA and the first defendant did not serve a notice of dispute because of the conduct of the plaintiffs, which meant that the first defendant did not become aware of the errors in the completion balance sheet, the adjustment statement, the earn out accounts and the earn out statement, until long after it was entitled to dispute these matters in accordance with the SPA.  The conduct alleged against the plaintiffs is a breach of their obligations under the SPA to provide all reasonable assistance to the Company to prepare the completion balance sheet and adjustment statement, breach of warranties expressly given in the SPA as to the accuracy of the company’s records, complicity in breaches of fiduciary duty owed by KPMG and Lomax to the defendants, and unconscionable conduct by the plaintiffs. 

  24. The defendants want to defend the plaintiffs’ claim on the principle that a party should not benefit from its own wrong (“the prevention principle”). 

  25. In reliance upon the prevention principle the defendants seek to plead that the plaintiffs cannot take advantage of the deeming provision in the SPA and/or the SPA is to be construed by reference to the prevention principle so that it is open to the defendants to dispute the completion balance sheet and adjustment statement, earn out account and earn out statement, notwithstanding the failure to give the notice required by the SPA or the absence of any provision in the SPA permitting such a dispute by reason of the plaintiffs conduct, and/or the plaintiffs are estopped from relying upon the first defendant’s failure to serve a notice in accordance with the SPA or from asserting that the SPA prohibits the first defendant from raising its earn out disputes by reason of their conduct.  The defendants also seek to plead unconscionable conduct on the part of the plaintiffs. 

  26. The plaintiffs submit that these pleas are untenable.  In addition they submit that the proposed defence does not comply with the rules as to pleading, fails to plead material facts and impermissibly introduces claims for breach of fiduciary duty against non-parties.

    Requirements of pleadings

  27. Under the 2006 Rules, the fundamental requirements for a proper pleading remains that it defines the issues in dispute (6SCR 90(1)) and that it gives fair notice of the case a party has to meet (6SCR 98).

  28. In the case of a defence, the rules require that it indicate what allegations of fact in the statement of claim are admitted or not proposed to be challenged at trial, raise any special defences and state the basis on which any special defences are raised, and contain a short statement of the material facts on which any special defences are based.

  29. In the case of a statement of claim (including a statement of claim brought by way of cross action (6SCR 28(3)), the rules require that it state the basis of each cause of action (6SCR 99(1)(b)), and that it contain a short statement of the material facts on which each cause of action is based (6SCR 99(1)(c)). If the plaintiff relies on separate causes of action, the statement of material facts must differentiate between facts that are common to both or all causes of action and facts that are relevant only to a particular cause of action (6SCR 99(2)).

  30. A proper pleading will contain the material but not all the facts and will contain sufficient particulars being material facts necessary to give fair notice. Whether the material facts and whether sufficient particulars have been pleaded will depend upon the cause of action, the complexities of the case and the whole of the circumstances of the case.

  31. None of these matters can be considered in isolation any more than each of the paragraphs of the pleading can be considered in isolation.[2]

    [2]    Arthur Young v Tieco (1995) 182 LSJS 367 per Lander J; H Stanke & Sons Pty Ltd v O’Meara [2007] SASC 246, (2007) 98 SASR 450.

  32. A pleading must have sufficient precision to allow a proper response by the opposing party.[3]

    [3]    Prolift Equipment Pty Ltd v Pronto Software Pty Ltd [2003] SASC 170 (Unreported, Lander J, 6 June 2003); Iacullo v Iacullo [2013] NSWSC 1517 (Unreported, Black J, 18 October 2013) at [63].

  33. A proper pleading must contain all material facts and not merely a cause of action based on a hypothesis.[4]

    [4]   Riverland Fruit Cooperative Pty Ltd v 007 953 380 Pty Ltd [2008] SASC 258 (Unreported, Bleby J, 17 July 2008).

  34. In Holcon Australia Pty Ltd v The Corporation of the Town of Walkerville[5] White J stated:[6]

    Ordinarily, one would expect that a statement of claim which complied with the requirements of subrules 98(2)(a)-(c) inclusive and r 99 would, without more, plead sufficient facts to give fair notice of the plaintiffs’ case at trial. It is likely to be a rare case in which a plaintiff will need to plead additional facts in a statement of claim in order to comply with subrule 98(2)(d). When it is necessary to plead an additional matter for the purpose of giving fair notice, it is a material fact, and not evidence, which is to be pleaded. …

    [5] [2007] SASC 437.

    [6] [2007] SASC 437 at [18].

  1. In Betfair Pty Ltd v Racing New South Wales & Ors[7] the Full Court observed:[8]

    Pleadings provide a structure for a proceeding for the purpose of the attainment of justice. The pleadings identify the material facts upon which the parties rely and the issues the parties seek to have determined. Because the pleadings require the parties to identify all material facts and issues, the pleadings provide the benchmark for discovery before trial and the admissibility of evidence at trial. Parties are required to plead the material facts upon which the party relies and the issues which that party seeks to have resolved for the further purpose of giving the opposing party fair notice of the case to be met at trial thereby minimising any risk of injustice by taking the opposing party by surprise. Pleadings incidentally are the record of the proceeding for the purpose of any subsequent arguments relating to res judicata or issue estoppel or any like issue.

    [7] [2010] FCAFC 133, (2010) 189 FCR 356, cited with approval by the Full Court in Mintech Resources Pty Ltd & Anor v Russell-Taylor & Anor [2012] SASCFC 67, (2012) 113 SASR 80.

    [8] [2010] FCAFC 133 at [50], (2010) 189 FCR 356 at 373 - 374, cited with approval by the Full Court in Mintech Resources Pty Ltd & Anor v Russell-Taylor & Anor [2012] SASC 67, (2012) 113 SASR 80.

  2. The court is entitled to take into account from the face of the pleading the scope of the investigation and preparations that a party will be required to undertake if material facts, such as to provide fair notice, are not provided.[9]  

    [9]    Marini v MLH Insurance Brokers Pty Ltd [2004] SASC 400.

  3. The court may order a party to file further particulars of its case (6SCR 102). It will only do so where the pleadings do not give fair notice of the party’s case and the order is necessary to avoid substantial prejudice to the other party. Prejudice consequent on the form of a pleading may be apparent on its face.[10]

    [10]   Coonawarra Premium Vineyards Ltd v Nugan Group Pty Ltd [2006] SASC 5.

  4. In considering an application to amend a pleading the court has a discretion as to whether to allow an amendment, and if it is not in the proper form, to refuse permission to amend.[11]

    [11]   Coe v The Commonwealth [1979] HCA 68, (1979) 53 ALJR 403.

  5. In AON Risk Services Australia Ltd v Australian National University[12] Gummow, Hayne, Crennan, Kiefel and Bell JJ said:[13]

    An application for leave to amend a pleading should not be approached on the basis that a party is entitled to raise an arguable claim, subject to payment of costs by way of compensation.  There is no such entitlement.  All matters relevant to the exercise of the power to permit amendment should be weighed.  The fact of substantial delay and wasted costs, the concerns of case management, will assume importance on an application for leave to amend.

    [12] [2009] HCA 27, (2009) 239 CLR 175.

    [13] [2009] HCA 27 at [11], (2009) 239 CLR 175 at 217.

  6. An amendment to pleadings ought not to be permitted in circumstances where, if pleaded initially, it could have been struck out as a plea which is patently bad in law or on some other ground.[14] 

    [14]   Duke Group Ltd (In Liq) v Arthur Young (1991) 4 ACSR 355 at 382.

  7. Accordingly, a proposed amendment to a defence must disclose a reasonably arguable ground of defence.[15]  Whether the proposed amendment discloses a reasonably arguable ground of defence is to be decided on the assumption that the defendants will prove the facts alleged in the proposed pleading.[16] 

    [15]   Kirton Investments Pty Ltd v CC Bottlers Ltd (1984) 118 LSJS 110; Rajski v Powell (1987) 11 NSWLR 522; Duke Group v Arthur Young (No 5) (1991) 159 LSJS 362; Pavlovic v Commonwealth Bank of Australia (1992) 56 SASR 587; Scholle Industries v AEP Industries (NZ) Ltd [2007] SASC 322 at [15], (2007) 99 SASR 178 at 182.

    [16]   Johnson Tiles Pty Ltd v Esso Australia Pty Ltd [2000] FCA 1572, (2000) 104 FCR 564.

  8. Permission to file a proposed amended pleading should only be granted if the court would not order further material facts to be pleaded.[17]

    [17]   Morgan v Roberts & Ors [2006] SASC 15 at [1].

  9. In Pope & Ors v Harris Orchard,[18] White J said:[19]

    … An amendment to pleadings should not be permitted unless is complies with the pleading rules and, in particular, if it would be vulnerable to being struck out on the grounds of non-compliance or would inevitably give rise to an application for further and better particularisation.

    [18] [2010] SASC 354.

    [19] [2010] SASC 354 at [24].

    Paragraphs 2 and 3 of the proposed defence

  10. The plaintiffs contend that paragraphs 2 and 3 of the proposed defence are evasive, vague, ambiguous and embarrassing in that they:

    1.Confuse the services allegedly provided (as between the completion balance sheet, the earn out accounts and other related documents); and

    2.Confuse and obfuscate the time at which the various services were allegedly provided.

  11. The plaintiffs also contend that subparagraph 2(c)(i) is not a proper plea and is wholly unparticularised.  It alleges that at all material times after 19 November 2012 KPMG provided accounting services to the Company and the first defendant for the purposes of clause 9.1(a) of the SPA, further particulars of which the defendants cannot give without disclosure by KPMG.

  12. The plaintiffs submit that having regard to the terms of the SPA the Company was in the control of the defendants at the relevant time and what services were provided are matters within the defendants’ knowledge.  Further, the plaintiffs submit that paragraphs 2 and 3 do not plead any material facts such as might establish that KPMG, a firm of accountants providing accounting and auditing services, owed a fiduciary duty either to the Company or either of the defendants.  In this regard, the plaintiffs submit that the pleading of fiduciary duties does not include any material facts such as might give rise to a fiduciary relationship. 

  13. I do not accept that paragraphs 2 and 3 confuse the services allegedly provided and confuse and obfuscate the time at which the various services were allegedly provided. 

  14. Paragraph 2(c)(i) alleges that after 19 November 2012, being the completion date, KPMG provided accounting services to the Company for the purposes of clause 9.1(a) of the SPA and the preparation of the completion balance sheets.  There is a further allegation in paragraph 7.2(l)(v) that KPMG also provided services to the first defendant in relation to the earn out accounts and earn out statement separately from the services contemplated by clause 9.1(a) of the SPA.

  15. Paragraph 2(c)(i) alleges that KPMG provided accounting services to the Company for the purpose of clause 9.1(a) of the SPA and the preparation of the completion balance sheet and adjustment statement. The pleading makes clear that the completion balance sheet and adjustment statement were provided by the Company to the plaintiffs and the first defendant on 18 February 2013.  So much is apparent from the plea in paragraph 7.2(g)(i).  Nonetheless, while the pleading must be read as a whole, the plaintiffs’ complaint is understandable given that in order to make sense of the pleading on p 2, they must read through to p 30 of the pleading to identify the period during which the relevant accounting services were provided.  The gravamen of the allegation sought to be pleaded is that services were provided by KPMG to the plaintiffs between the completion date i.e. 19 November 2012 and the date when the completion balance sheet and adjustment statement were provided by the Company, i.e. 18 February 2013.  While the allegation is pleaded, it could have done so more clearly.  Likewise, the pleas in paragraph 2(c)(ii) necessarily allege the provision of services after 18 February 2013.  These services are pleaded to relate to both the completion balance sheet and the earn out accounts.  While all this could have been pleaded more clearly, I do not consider that the terms of the pleading occasion substantial prejudice to the plaintiffs. 

  16. The second issue of which the plaintiffs complain in relation to paragraphs 2 and 3 relates to the allegation that KPMG owed a fiduciary duty to the Company or the defendants.  There are two limbs to the complaint.  First, that the pleading alleges a fiduciary duty unknown to the law.  Secondly, that the plea of the existence of a duty is unsupported by any material facts which would give rise to the existence of such a fiduciary relationship. 

  17. Dealing with the first complaint, the plaintiffs submit that the relationship between an accountant and client does not of itself create fiduciary obligations.  They submit that fiduciary obligations arise because a person has come under an obligation to act in another’s interests.  They do not arise out of the relationship between an accountant and its client. 

  18. The distinguishing characteristic of a fiduciary relationship is that its essence or purpose is to serve exclusively the interests of another person.[20]  The fiduciary undertakes or agrees to act on behalf of or in the interests of another person to the exclusion of the fiduciary’s own interests or the interest of a third party.  In that regard the courts have held that the scope of the alleged fiduciary aspect of a relationship must be consistent with any agreement between the parties which is effective to control their relationship.  In Pilmer v Duke Group Pty Ltd,[21] the High Court said that fiduciary obligations will not ordinarily be superimposed on commercial relationships whose obligations are fixed by contract, but in some circumstances contractual and fiduciary relationships coexist.  As Mason J (as he then was) said in Hospital Products Ltd v United States Surgical Corporation,[22] the existence of a contractual relationship frequently provides the foundation for a fiduciary relationship.  In these circumstances, it is the contract which regulates the basic rights and liabilities of the parties.  The fiduciary relationship must be consistent with and conform to the terms of the contract:[23]

    The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contact was intended to have according to its true construction.

    [20]   Pilmer v The Duke Group Pty Ltd [2001] HCA 31, (2001) 207 CLR 165.

    [21] [2001] HCA 31, (2001) 207 CLR 165.

    [22] [1984] HCA 64, (1984) 156 CLR 41 at 97.

    [23]   Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, (1984) 156 CLR 41 at 97.

  19. Daly v Sydney Stock Exchange[24] is an example where a financial advisor owed fiduciary obligations to a client.  

    [24] (1986) 160 CLR 371.

  20. The nature of fiduciary obligations are proscriptive rather than prescriptive.  Fiduciary duties are not analogous to a duty of care so as to impose a positive legal duty on the fiduciary to act in the interests of the person to whom the duty is owed.  Rather, they restrain the fiduciary from obtaining any unauthorised benefit from the relationship or from acting in conflict with the obligation the fiduciary owes to act in the interests of another.  If these obligations are breached, the fiduciary must account for any profits or make good any losses arising from the breach.

  21. The defendants wish to plead that a fiduciary relationship existed between KPMG and the Company and the defendants.  That allegation is the foundation for its case that the plaintiffs knowingly assisted or participated in the breach of the fiduciary obligations KPMG owed to the Company and the defendants.  In my view, it is not unarguable that the nature of the relationship the defendants seek to plead gave rise to such a fiduciary relationship.  The defendants wish to plead that KPMG breached the fiduciary obligation it owed, by reason of the allegation that KPMG was in a position of conflict in continuing to act for the plaintiffs after the completion date.  In my view, that case is reasonably arguable. 

  22. The second complaint is that the proposed pleading fails to plead any material facts such as gives rise to the existence of the fiduciary relationship sought to be alleged.  Whether there is a sufficient pleading of the nature of the relationship between KPMG and the Company and the defendants does not matter.  The proposed defence pleads that KPMG acted for the Company in the preparation of the completion balance sheet and the adjustment statement and the earn out accounts.  Further, it pleads that KPMG acted for the plaintiffs after the completion date.  The material facts proposed to be pleaded give the plaintiffs fair notice of the defendants’ case.  In any event, I am satisfied that the plaintiffs are not substantially prejudiced by the form of the proposed pleading. 

    Paragraphs 5.14 and 5.16 of the proposed defence

  23. The plaintiffs complain that paragraphs 5.14 and 5.16 are confused, ambiguous and embarrassing.  In addition, they submit they variously appear to plead that express terms of the SPA are to be construed (or avoided) by reference to post contractual conduct. The plaintiffs submit this is an approach to the construction of a contract contrary to principle.  The defendants assert that they are not relying upon post contractual conduct but rather relying on the prevention principle. 

  24. Paragraphs 5.14 and 5.16 are not without their difficulties, but they must be read in the context of the proposed defence as a whole.  The proposed pleas seek to rely upon the prevention principle that a party cannot benefit from the party’s own wrong nor take advantage of a condition which the party has brought about.[25]  In Ruthol Pty Ltd v Tricon (Australia) Pty Ltd,[26] Giles JA, with whom Santow JA and Hunt AJA agreed, referred to the prevention principle as a rule of construction by which, in the absence of clear words, a contractual entitlement upon a particular event will not be enlivened if the event came about through the breach of the party seeking to rely on it.  Accordingly, a party in breach of contract may be precluded from relying on a contractual entitlement arising from the breach, but will not be precluded from relying on a contractual entitlement which does not arise from the breach.

    [25]   Alghussein Establishment v Eaton College [1988] 1 WLR 587 per Lord Jauncey of Tullichettle at 591 – 595; Hope Island Resort Holdings Pty Ltd v Jefferson Properties (Qld) Pty Ltd [2005] QCA 315 at [8].

    [26] [2005] NSWCA 443 at [20].

  25. Giles JA observed:[27]

    In Broom's Legal Maxims, 10th ed (1969 reprint) it is said at 191 that the maxim that no man shall take advantage of his own wrong is “based on elementary principles” and “admits of illustration from every branch of legal procedure”.

    [27] [2005] NSWCA 443.

  26. But the operation of the principle is qualified so that while it prevents a party from gaining a right by his own wrong, it does not result in a party losing a right or the power to exercise a right by a wrong done in connection with it.[28] 

    [28] [2005] NSWCA 443 at [21].

  27. The proposed pleas in paragraphs 5.14 and 5.16 wish to allege that the SPA should be construed in the light of the prevention principle so as to prevent the plaintiffs from relying upon the fact that the defendants did not serve a notice of dispute in relation to the completion balance sheet and adjustment statement, and relying upon any deeming effect of clause 10.1(e) of the SPA and from relying upon the fact that clause 11 of the SPA does not contain any express provision for the defendants to serve a notice of objection to the earn out accounts and the earn out statement. 

  28. In my view, paragraphs 5.14 and 5.16 are not an impermissible pleading that the contract is to be construed by reference to post-contractual conduct.  Rather, it is a plea, as I understand it, that the plaintiffs cannot rely upon provisions in the SPA in circumstances where they have breached clause 9.1(d)  or any of the contractual warranties, where they knowingly assisted or participated in the breach of fiduciary duties by Lomax and/or KPMG, or where they have engaged in unconscionable conduct, where such breaches and/or conduct somehow prevented the first defendant from procuring the Company to prepare the completion balance sheet and adjustment statements and from giving reasonable consideration as to whether to serve a notice of dispute under clause 10.1(a) of the SPA, so as to disentitle the plaintiffs from relying upon clause 10.1(e) of the SPA and entitling the first defendant to dispute or seek adjustment to the completion balance sheet and adjustment statement.  Similarly, the defendants submit that by reason of the same wrongdoing which prevented the first defendant from procuring the preparation of the earn out accounts and earn out statement in accordance with clause 11.2 of the SPA, clause 11.4 does not have the effect it otherwise would have and the first defendant is permitted to dispute or seek adjustments to the earn out accounts and earn out statement. 

  29. In my view, the bases of the proposed pleas are tolerably clear.

  30. The proposed plea in paragraph 5.14, relying as it does upon the application of the prevention principle, cannot be said to be unarguable.  However, I am not satisfied the same can be said of the proposed plea in paragraph 5.16.  The defendants’ case relying as it does upon the prevention principle is conditioned on a construction of clause 11 of the SPA preventing the first defendant from disputing any items in the earn out accounts or earn out statement even when the plaintiffs have given an earn out objection notice under clause 11.  If that is the proper construction of clause 11, which the defendants dispute, it appears to me there is no scope for the operation of the prevention principle in the way in which the proposed plea seeks to contend.  The prevention principle does not permit the rewriting of the contract.  It merely operates so as to prevent a contractual entitlement being enlivened upon the particular event if the event came about through the breach of the party seeking to rely upon it.  It cannot entitle the first defendant to dispute or seek adjustments to the earn out accounts and the earn out statement if the contract does not permit this, by reason of any wrongdoing by the plaintiffs.  The prevention principle acts as a shield not a sword.  It cannot confer a right or rights on a party to a contract if the contract does not confer such right or rights expressly or by implication.  Whether, as a matter of legal analysis, the prevention principle is considered to operate as an implied term to a contract, or as a rule of construction, or as an overriding principle of law, it does not operate so as to confer positive contractual rights upon a wronged party that do not otherwise exist. 

  31. Accordingly, while I am far from persuaded that the construction point the defendants wish to agitate can succeed, I am not prepared to conclude that it is unarguable.  However, the proposition that if the construction of clause 11 contended for by the defendants is wrong, they can rely upon the prevention principle in the way they seek to do in the proposed pleading, is an untenable proposition.  I do not consider it reasonably arguable.  Accordingly, I would not permit the defendants to plead paragraph 5.16 as proposed.  It must be redrafted in conformity with these reasons.  I will give the defendants permission to do so.

    Paragraph 5.15 of the proposed defence

  32. The plaintiffs submit that paragraph 5.15 is manifestly vague and embarrassing.  It asserts that on the basis of some unpleaded method of “proper construction” of the SPA the first defendant is “at liberty” to and “is not prevented” from disputing the earn out accounts where the plaintiffs have given an earn out objection notice.  It is submitted that by failing to plead the “proper construction” relied on, the pleading fails to give proper notice of the defendants’ case to the plaintiffs.

  33. I do not accept this submission.  The proposed plea puts the plaintiffs on notice that the defendants will submit that on the proper construction of the SPA, where the plaintiffs serve a notice of dispute under clause 11.4(a), the first defendant is at liberty to dispute and is not prevented from the SPA from disputing or seeking adjustments to the earn out accounts or the earn out statement.  There is no requirement to plead a method of construction.  The contract will be construed in accordance with the accepted canons of construction. 

    Paragraph 5.17 of the proposed defence

  1. The proposed plea in paragraph 5.17 concerns related provisions in the SPA entitling the plaintiffs to refer a dispute provided for in the contract to an independent accountant requiring the defendants to agree the selection of an independent accountant, and in the absence of such agreement, to agree to an accountant selected by the President of the Institute of Chartered Accountants and to otherwise sign a release in favour of the President of the Institute for the purpose of resolving the dispute.  The proposed plea in paragraph 5.17 seeks to put in issue the application of those contractual provisions either on the basis of the proper construction of the SPA or by reason of the implication of a contractual term by operation of the prevention principle.

  2. For the reasons set out above in relation to paragraphs 5.14 and 5.16, the proposed plea in paragraph 5.17(a) is not unarguable.  On the other hand, the proposed plea in paragraph 5.17(b), subject to one matter, in my view, is untenable.  It is untenable for the reasons I have given already in relation to the proposed plea in paragraph 5.16.  It is not necessary to repeat those reasons.  The one qualification is that, for the same reasons as I have given above in relation to paragraph 5.16, I do not consider that it is unarguable that the SPA can be construed in accordance with the ordinary principles of construction to have the effect the defendants wish to plead.  Accordingly, I would not permit the defendants to file a further defence that includes the proposed plea in paragraph 5.17(b) but I would give permission for them to replead in conformity with these reasons.

    Paragraph 7.2 of the proposed defence

  3. The plaintiffs submit that the proposed paragraph 7.2 is unresponsive to anything that is pleaded in paragraph 8 of the statement of claim, factually inconsistent, vague, ambiguous, prolix and all but impossible to plead to. 

  4. Proposed subparagraph 7.2 must be read in its context in the whole pleading.  Proposed paragraph 7.2 is pleaded in answer to the entire claim of the plaintiffs.  I accept the plea is complex and could present difficulties to the plaintiffs in formulating a reply.  Nonetheless, it gives the plaintiffs fair notice of the defence case. 

  5. The plaintiffs submit that subparagraph 7.2(a) and (b) are in substance no more than vague, ambiguous and vexatious complaints.  But they cannot be read in isolation.  They set up the foundation for the plea of the existence of a fiduciary obligation by Lomax and KPMG to the Company and the defendants.

  6. The plaintiffs submit that subparagraph 7.2(c) asserts a failure on the part of Lomax and KPMG to do certain things contrary to clause 9.1(a) of the SPA, without distinguishing between them or pleading what they each failed to do.  In my view, the proposed pleading gives fair notice to the plaintiffs of the defence case. 

  7. Fundamentally the plaintiffs’ objection to the proposed amended defence arises by reason of the extensive pleading of breaches of fiduciary duty against non-parties, Lomax and KPMG.  The plaintiffs submit that the proposed pleading fundamentally is a dispute between, on the one hand the Company, and on the other hand KPMG and Lomax, who are non-parties.

  8. The plaintiffs invoke the principle enunciated in Canyon (Australia) Pty Ltd & Ors v Aktieselskabet Dampskibsselskabet Svendborg & Ors[29] where Debelle J said:[30]

    The general rule is that the plaintiff is entitled to pursue its remedy against the defendant of its choosing and ordinarily cannot be compelled to sue a person who it does not wish to sue.  A very strong case must be established to join an additional defendant.  If that were not so, legal proceedings could become quite unmanageable with different causes of action against different parties.

    [Citations omitted].

    [29] [2004] SASC 36, (2004) 232 LSJS 206.

    [30] [2004] SASC 36, (2004) 232 LSJS 206 at [18].

  9. The plaintiffs submit that by parity of reasoning, the courts will not permit a party to litigate disputes against non-parties to an action.  Accordingly the amendment sought by the defendants which produces this result should not be permitted. 

  10. Canyon was an attempt by a defendant to join a defendant by counterclaim in addition to the plaintiff.  It is a case of joinder and an attempt to foist an unchosen defendant upon an unwilling plaintiff.  That is not the issue with which this application is concerned.  In my view, Canyon is neither authority for the proposition submitted by the plaintiffs nor a foundation for the same.  The impugned plea provides the substratum or foundation for the defendants’ case that the plaintiffs knowingly participated in and were concerned in the alleged breaches of fiduciary duty by KPMG and Lomax.  The proposed pleading asserts that clause 9.1(a) of the SPA contemplated that Lomax and KPMG would provide support to the Company in the preparation of the completion balance sheet and the adjustment statement.  The gravamen of the allegation in proposed paragraph 7.2(c) is that the Company did not receive the contemplated support necessary to enable the Company to prepare the completion balance sheet and the adjustment statement in accordance with the SPA, or to enable the first defendant to procure the Company to do so, and to enable the first defendant to consider whether to serve a notice disputing the completion balance sheet and the adjustment statement.  These allegations are directed against both KPMG and Lomax.  Details of the alleged failures are particularised in paragraphs 7.2(c)(iv)(A)-(Q). 

  11. Further, the proposed plea in subparagraph 7.2(d)(vii)(B) is relevant to the defendants’ case that the plaintiffs were in breach of clause 9.1(d) of the SPA obliging them to provide the Company with all reasonable assistance in the preparation of the completion balance sheet and adjustment statement.  This too forms part of the defendants’ case that the plaintiffs are precluded from taking advantage of their wrongdoing in reliance upon the prevention principle. 

  12. It is irrelevant that Lomax and KPMG are non-parties.  The allegations against them are material to the defendants’ reliance upon the prevention principle which in turn depends upon the allegation of wrongful conduct by the plaintiffs in knowingly participating in the breaches of fiduciary duty by KPMG and Lomax. 

  13. The plaintiffs submit that in order to establish a third party’s liability for knowing participation and assistance in a breach of fiduciary duty, it must be proved that the fiduciary committed a dishonest and fraudulent breach which was known to the defendant who assisted or participated in the breach, either in the manner in which it occurred or in the conduct by which it occurred.[31]

    [31]   Farah Construction Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22, (2007) 230 CLR 89; National Mutual Property Services (Australia) Pty Ltd & Ors v Citibank Savings Ltd [1998] FCA 564.

  14. The defendants plead breaches of duty by Lomax and KPMG.  They plead that those fiduciary obligations were owed not only to the Company but to the defendants.  The first defendant was required to procure the preparation of the completion balance sheet and the adjustment statement.   The second defendant guaranteed the first defendant’s obligation.  The defendants allege that between the completion date and 18 February 2013, Lomax and KPMG continued to act for the plaintiffs and advise them while under a fiduciary obligation to the Company and the defendants which it breached.  It pleads these breaches were known to the plaintiffs in proposed subparagraphs 7.2(d)(vi) and (vii).  The defendants further plead that not only were these breaches known, but the plaintiffs encouraged or were complicit in the breaches. 

  15. Accordingly, I reject the plaintiffs’ submission that the proposed paragraph 7.2 does not comply with the pleadings rules.  That leaves the plaintiffs’ submission that the plea in paragraph 7.2 is untenable.  In my view, the plaintiffs’ submission must be accepted in respect of two matters. 

  16. First, subparagraph 7.2(k)(B) alleges that the plaintiffs are estopped from relying upon clauses 10.1(e) and 10.2 of the SPA because of their unconscionable conduct. 

  17. The defendants allege that by reason of the plaintiffs’ breach of the express terms of the SPA to provide reasonable assistance and act in good faith, and their knowing participation in the breaches of fiduciary duty by Lomax and KPMG, it would be unconscionable for the plaintiffs to insist on their strict legal rights under the SPA. 

  18. To establish that a person or corporation’s conduct was unconscionable within the first and usual scope of the concept, the following must be established:

    ·at the time of entering into the transaction the innocent party suffers from a special disability or disadvantage vis a vis the other party to the transaction;[32]

    ·the special disability or disadvantage must seriously affect the innocent party’s ability to make a judgment in their best interests;[33]

    ·the other party knows of the innocent party’s special disadvantage or disability or ought to know of it;[34]

    ·the other party unconscientiously takes advantage of the innocent party’s position.[35]

    [32]   Blomley v Ryan (1956) 99 CLR 362 at 415; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 459 and 474; CG Berbatis Holdings Pty Ltd (2003) 197 ALR 153 at [8] and [46].

    [33]   Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 467 – 8.

    [34]   Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 462.

    [35]   Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 at 461.

  19. It is not in itself unconscionable to breach or repudiate a contract.  If the party breaches or repudiates a contract the law gives appropriate contractual remedies to the other party.[36]

    [36]   Arrowcrest Group Pty Ltd v Ford Motor Co of Australia Ltd [2002] FCA 1450 at [106].

  20. In ACCC v Radio Rentals,[37] Finn J stated:

    Before turning to the case law on this matter, it is necessary to emphasise what I understand to be well accepted propositions. (i) It is not the function of the unconscionable dealings doctrine simply to relieve a person from an improvident bargain (ie ‘contractual imbalance’: O’Connor v Hart at 1024); or from a party’s failure to in fact conserve his or her own interests in a dealing. As Deane J observed in Louth v Diprose (1992) 175 CLR 621 at 638: ‘[t]he intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness.’ (ii) Central to the purpose of the doctrine is to relieve against taking ‘unconscientious advantage’: Amadio at 462; or ‘exploitation’ or ‘victimisation’ of another: O’Connor v Hart at 1024; Bridgewater v Leahy at [75]-[76]; Louth v Diprose at 638. In short, it is to relieve against an abuse of power possessed by one party over the other by virtue of the other’s position of special disadvantage.[38]

    [37] [2005] FCA 1133 at [17], (2005) 146 FCR 292 at 297, cited with approval by the Full Federal Court in ASIC v National Exchange Ltd [2005] FCAFC 226, (2005) 148 FCR 132.

    [38]   See also Kostopoulos v G E Commercial Finance Australia Pty Ltd [2005] QCA 311 at [61]; Spira v Commonwealth Bank of Australia (2003) 57 NSWLR 544, 557 at [89]; Australia & New Zealand Banking Group v Karam (2005) 64 NSWLR 149 at [100].

  21. Similarly in Gartner v Ernst & Young (No 2) Mansfield J held:[39]

    The bank was entitled to look after its own commercial interests. Senior counsel for the applicants would not gainsay that proposition. Assuming it was aware of the matters alleged in paras 66E to 66I, its conduct in putting forward and then entering into the Finance Offer, including accepting the guarantees and the security instruments, could not be unconscionable. Its knowledge was gained in the pleaded context of the Gartner Family Group being advised over some months by the accountants. The bank’s conduct involved assessing the Finance Submission and responding to it. But in assessing the Finance Submission, it was entitled to do so looked at from its own interests. It is no doubt the case that its own interests include considering whether the putative borrower will be able to pay interest on monies advanced and ultimately to repay the sum advanced, as well as considering the quality of the security offered to support the proposed borrowing. But consideration of such matters is to secure its own interests. The allegations are not, in my view, capable of supporting the step of placing the bank in the circumstances that its entry into the Finance Offer, and its acceptance of the supporting guarantees and other security investments, exposed it to the charge of unconscionability as discussed by the High Court in Berbatis.

    [39] [2003] FCA 1436 at [76], [82].

  22. …

    The contentions on behalf of the Gartner Family Group sought to add that the unconscionable conduct was not merely in accepting the guarantees and other security instruments, but in seeking to enforce them. But their enforcement, if they were validly entered into without unconscionable conduct on the part of the bank, could not in any view amount to unconscionable conduct. It would simply be enforcing valid commercial instruments. The focus must be upon the circumstances in which those commercial instruments came to be executed.

  23. The defendants are part of a substantial international corporate group.  By clause 16.2 of the SPA the first defendant acknowledged and agreed that it had received independent professional advice concerning the contract and it had the opportunity to conduct a due diligence investigation.  The facts alleged do not establish that at the time of entering into the transaction, the defendants suffered from a special disability or disadvantage vis a vis the plaintiffs of the kind recognised by the doctrine of unconscionable conduct, that affected the defendants’ ability to make a judgment in their best interests.  They do not establish that there was any abuse of power possessed by the plaintiffs over the defendants because of any special disadvantage the defendants were operating under.

  24. In my view, the plea of unconscionable conduct is untenable.  I would not permit the defendants to plead sub-paragraph 7.2(k)(B).

  25. Secondly, the proposed plea in sub-paragraph 7.2(l) to (s) concerns the earn out accounts, the earn out EBITDA and the earn out statement.  The pleas in these subparagraphs in turn rely upon the plea sought to be raised in the proposed paragraph 5.16 in reliance upon the prevention principle.  The pleas in subparagraphs 7.2(l) to (q) lay the foundation for the pleas in subparagraphs 7.2(r) and (s).  The pleas in subparagraphs 7.2(l) to (q) allege the knowing assistance and participation of the plaintiffs in the breaches of fiduciary duty by Lomax and KPMG, the breaches of warranty and of clause 9.1(d) of the SPA by the plaintiffs by reason of which the defendants allege they are entitled under the terms of the SPA to dispute the items in the earn out accounts, earn out statement, earn out EBITDA and earn out amount or, in the alternative, the defendants allege the plaintiffs are estopped from relying upon clauses 11 and 12 of the SPA and from asserting that the first defendant is not entitled to seek adjustments to the earn out accounts, the earn out statement, the earn out EBITDA and the earn out amount.  For the reasons I have explained above, I consider the defendants’ case in relation to the earn out accounts, earn out EBITDA and the earn out statement relying upon the prevention principle to be untenable.  It is unnecessary to repeat those reasons, save and except that the plea of an estoppel in subparagraph 7.2(s) obscures the remedy actually sought by the defendants, namely, the assertion of positive contractual rights that otherwise do not exist.  In addition, subparagraph 7.2(s)(B) alleges unconscionable conduct on the part of the plaintiffs.  For the same reasons as set out above in relation to the proposed plea in subparagraph 7.2(k)(B), I consider a plea of unconscionable conduct on the part of the plaintiffs is untenable.  Accordingly, I would refuse permission to the defendants to include in the amended third defence and cross action the proposed pleas in subparagraph 7.2(l) to (s). 

    Paragraph 7.3 of the proposed defence

  26. The plaintiffs submit that proposed paragraph 7.3 denies each and every allegation in paragraph 8.2 of the statement of claim, but proceeds to admit paragraph 8.2 by saying that the Company was to deliver the completion balance sheet to the first defendant and the plaintiffs.  It submits that the plea is illogical and inconsistent.  But paragraph 8.2 of the statement of claim alleges that the first defendant was required by clause 9.1 of the SPA to deliver the completion balance sheet and adjustment statement to the plaintiffs.  It is this proposition which is denied in proposed paragraph 7.3 which proceeds to plead positively that it was the Company, not the first defendant, that was obliged to deliver those documents to the plaintiffs and the first defendant.  Accordingly, the issue joined is the construction of the SPA.

    The cross action

  27. 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

  28. 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.


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Cases Cited

40

Statutory Material Cited

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H Stanke & Sons Pty Ltd v O'Meara [2007] SASC 246
H Stanke & Sons Pty Ltd v O'Meara [2007] SASC 246
Prolift Equipment Pty Ltd v Pronto Software Pty Ltd & Ors No. Scciv-01-1073 [2003] SASC 170