Pace & Pace v Chhabra

Case •

[2015] SADC 75

•

19 May 2015

DISTRICT COURT OF SOUTH AUSTRALIA

(Civil)

PACE & PACE v CHHABRA

[2015] SADC 75

Judgment of His Honour Judge Slattery

19 May 2015

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES

The defendant breached a contract for sale and purchase of share capital in a company by failing to make a payment of $220,000 to the plaintiffs.  An accountant who acted for the plaintiffs and for the company of which the defendant was a shareholder and director informed the plaintiffs of the defendant's proposal to discharge her indebtedness. The accountant  prepared a settlement agreement which the parties executed.  It contained an obligation to make a payment of $50,000 " ... followed by six monthly payments of $5,000 per month until the full balance has been finalized",  an obligation "in the interim term" to pay interest monthly, a default provision and an obligation on the plaintiffs to continue to provide information to the company.

On the question of the interpretation of the settlement agreement,  the plaintiffs sought to lead evidence of a conversation between the plaintiffs and the accountant as evidence of statements of the defendant's agreement to perform an obligation not recorded in the settlement agreement and as part of the background matrix of facts in aid of the interpretation of the contract. 

Whether the accountant was an agent of the defendant; whether and if so on what basis the evidence of the conversation of the plaintiffs with the accountant  before  execution of the settlement agreement was relevant and admissible.

Held:

1.  There was an identifiable ambiguity in the terms of the settlement deed;

2.   The ambiguity justified reception of evidence of the objective background to the formation of the settlement.

3.    The evidence of the plaintiffs' conversation with the accountant before execution of the settlement deed were relevant and admissible only on the basis the accountant was acting on the conduit of the information between the plaintiffs and the defendant.

4.   The defendant did not clothe the accountant with any form of authority as her agent such that after execution, the defendant was bound to perform the  settlement in a manner not recorded in the settlement agreement.

5.    The evidence of the plaintiffs did not inform the interpretation of the settlement agreement.

6.     In appropriate circumstances the Court is entitled to treat the inclusion of particular words  in an agreement as drafting errors and so to avoid the agreement making commercial nonsense or causing inconvenience; the inclusion of the word "six"  in the third line of the second paragraph of the settlement agreement was a drafting error and may be ignored.

7.    Properly construed as a whole, the obligation on the defendant was to make a first payment of $50,000 and thereafter  to make 34 monthly payments of $5,000 plus interest at rate of 8% per annum on a reducing balance.

The plaintiffs' claim is dismissed.

Codelfa Construction v State Rail Authority (1982) 149 CLR 337; Electricity Generation Corporation t/as Verve Energy v Woodside Energy Limited [2014] HCA 7; Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; Echunga Football Club Inc v Hills Football League Inc [2014] SASC 201; Western Export Service Inc v Jireh International Pty Ltd [2011] HCA 45; Martin Francis Byrnes & Anor v Clifford Frank Kendall [2011] HCA 26, applied.
Watson & Anor v Phipps [1986] 60 ALJR 1; Insurance Company of Australia Ltd v Phillips [1925] 36 CLR 60; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd [2014] 84, considered.

PACE & PACE v CHHABRA
[2015] SADC 75

Introduction

  1. This action concerns the interpretation of a term of a settlement agreement reached between the defendant, a purchaser of shares in a company and the plaintiffs as vendors of those shares. The agreement was drawn by an accountant who acted in that capacity for the plaintiffs and for the company. The defendant was in breach of an earlier agreement for sale and purchase of those shares.

  2. A principal question in the action was whether that clause contained an ambiguity. The plaintiffs contended for the receipt of evidence of events leading up to the execution of the Settlement Agreement in order to resolve the ambiguity that they submitted existed within the clause. The plaintiffs also contended that information supplied to them by their accountant concerning an alleged intention of the defendant could be received as evidence binding the defendant as principal (of the accountant as her agent) to an obligation not expressed in the terms of the Settlement Agreement.

  3. The defendant contended that no ambiguity existed, or alternatively that evidence sought to be led by the plaintiffs was not relevant or admissible. The defendant further contended that it was not necessary to identify an ambiguity before a court may receive evidence at least of the context of the circumstances in which the Settlement Agreement was drawn but in this case, the plaintiffs were asking the Court to re-write the parties’ agreement.

  4. I was satisfied that an ambiguity existed within the relevant clause. The plaintiffs were given permission to lead evidence of the background matrix of facts leading to the execution of the Settlement Agreement. The evidence led by the plaintiffs did not assist me to resolve the ambiguity in the clause. It was necessary to interpret the clause on its terms and in the background of the whole of the terms of the Settlement Agreement. The accountant was not in any relevant sense the agent of the defendant. The Court was permitted to disregard a word in the clause of the Settlement Agreement that caused a commercial inconvenience or made a nonsense of the clause.

  5. For reasons set out hereunder, I dismiss the plaintiffs’ claim.

    Decision

  6. Yatelle Pty Ltd is the proprietor of the business name Pace Print. Up to and including the 22 March 2012, the plaintiffs were the owners of the whole of the issued share capital in Yatelle. Under a contract of purchase dated 22 March 2012 the defendant Naini Chhabra, agreed to purchase the whole of the issued share capital in Yatelle for the sum of $420,000 subject to certain terms and conditions. Under the contract Gregory and Emilia Pace agreed to provide their services as employees and agreed to enter into some form of agreement to provide additional services at an agreed rate. No time limit is specified in the contract within which those services are to be provided. Gregory and Emilia Pace also agreed to enter into a non-competition agreement.

  7. Under the Sale and Purchase Agreement, Naini agreed to pay to Gregory and Emilia the sum of $200,000 in cash on the settlement date being 7 April 2012. Gregory and Emilia in turn agree to provide to Naini vendor finance for a period of 24 months for an amount of $220,000 under specific terms. Interest on the outstanding loan at the rate of 8 per cent per annum, would be paid monthly in arrears. A charge in the form of a mortgage would be given over the shareholding to secure this debt. If at the conclusion of the 24 month vendor finance period Naini is not in a position to fully discharge her obligations under the Agreement, then she was obliged to obtain finance from an external source to pay out her debt on the shares to Gregory and Emilia.

  8. In the period up to 7April 2012, an accountant, Mr Bernie Glaser of Glaser and Associates acted as the accountant for Yatelle and for the plaintiffs. After that date he appears to have acted as the accountant for the company as well as for the plaintiffs in their separate rights.

  9. The first tranche of $200,000 was paid on the date of settlement, 7 April 2012. A letter dated 28 January 2014 from, Mr Bernie Glaser, on the letterhead of Glaser and Associates Accountants, informed Naini that the contract for vendor finance was drawing to a close and that the payment of the outstanding $220,000 was due and payable on 7 April 2014. Mr Glaser requests advice from Naini about whether matters are “in order” and enquires about the drawing of documents for the final release of the mortgage for the vendor finance. It seems implicit from the contents of the letter that Mr Glaser may have known something of the status of the profitability of Yatelle and in turn the prospective ability (or inability) of Naini to satisfy the balance due under the terms of the Sale and Purchase Agreement.

  10. Naini was incapable of discharging the vendor finance portion of the Sale and Purchase Agreement in the amount of $220,000 on 7 April 2014. She was therefore in breach of her obligations under the 22 March 2012 agreement.

  11. A Settlement Agreement was then drawn up and executed by the parties dated 8 April 2014. It was drawn by Mr Glaser. There is no evidence that Mr Glaser was the accountant for Naini personally although he was plainly the accountant for Yatelle. The defendant sought to place significance upon the difference in position of Mr Glaser acting for the company and not for the individual. In light of the fact that the company is a closely held private company that distinction sought to be made by the defendant may be more apparent than real. Although no point was taken by either party on the topic, I have treated this settlement agreement as a form of an accord and satisfaction that replaces the obligation of Naini under the 22 March 2012 agreement to pay the second tranche of the settlement sum. The parties did not raise any issues about consideration or whether the agreement should be in the form of a deed under seal. I will leave those matters to one side.

  12. Mr Glaser drew the Settlement Agreement. The terms of the Settlement Agreement are as follows:

    This Agreement made this the 8th day of April, 2014 between the parties in recognition of the settlement of the balance of funds outstanding from the contract of sale for Yatelle Pty. Ltd. “Pace Print” representing the Vendor’s finance portion of the agreement specifically $220,000.

    The parties herewith agree that on the settlement date being the 8th of April, 2014, Naini Chhabra will pay the sum of $50,000 as a portion of the total outstanding settlement sum towards the settlement, followed by six monthly payments of $5,000 per month until the full balance has been finalised.

    In the interim term, the interest payable on the outstanding sum will be calculated and paid at the rate previously applied to the vendor’s finance agreement and added to the $5,000 payment on a per month basis.

    The monthly payments are to fall due on the 8th of each month after the original payment of $50,000 and any failure to pay, shall bring about a default interest rate of 12% on the outstanding sum, until such sum is rectified.

    In the event of a default of payment or a default in general that is not rectified, the Vendor shall have full rights to take whatever action to retrieve their outstanding sum and that the cost of any such action, shall be bourne by the Purchaser.

    The Vendor will render to the Purchaser any and all assistance in relation to transferring of any information required by the Purchaser of the business that may be applicable.

  13. My principal focus here is upon the second, third, fourth and fifth clauses of this agreement.

  14. An ordinary reading of the Settlement Agreement indicates that it is an agreement between the parties to vary the obligations of Naini under the 2012 Sale and Purchase Agreement. Rather than pay $220,000 on 7 April 2014, clause 2 of the Settlement Agreement imposed an obligation upon Naini, on 8 April 2014, to pay the sum of $50,000 as portion of the total outstanding settlement sum (of $220,000). The meaning and operation of the phrases which follow are the cause of the conflict between the parties in this matter.

  15. There are a variety of possible interpretations of the phrases which follow in the second clause. The first is that it may be argued that the payments of $5,000 were to be made 6 monthly (at 6 month rests in discharge of the balance which would then be owing of the sum of $170,000). Neither party put this proposition because of the words which follow the expression $5,000 in the clause, namely ‘per month’. Therefore, the common position between the parties is that the phrase is to be interpreted as 6 separate monthly ‘payments’ of $5,000 per month. Thus the word ‘payments’ is to be read as being qualified by the adjective ‘monthly’ and the numerical ‘six’.

  16. That phrase is then followed by the phrase “… until the full balance has been finalised”. An obvious tension arises by the use of the wording within this phrase. For example, is this phrase to be understood as meaning ‘when the full balance will be finalised’ such that, upon the payment of the 6 monthly payments of $5,000 ($30,000 over 6 months) then the full balance would be finalised. If that be the case, then the words used within the clause must be substituted for other words in order to obtain that meaning. Alternatively, is the phrase to be understood as meaning that monthly payments will continue until the full balance has been finalised. The full balance at the commencement of the first monthly payment is $170,000 such that, there would be 34 monthly payments of $5,000.

  17. The contentions of the parties are, in summary, set out below.

  18. The plaintiffs contend that the insertion of the word ‘six’ in the clause means that there must be a distinction between the six monthly payments of $5,000 per month and the payment of the full balance. This includes the method of the payment of the full balance. The proper interpretation of the clause is that there are to be six payments of $5,000 and then the payment of the balance. It would be for the Court to interpret the words in the clause about when this payment should be made. The Plaintiffs contend for an October 2014 date or perhaps a November 2014 date. Though trite, those dates are not included in the words of the agreement.

  19. The plaintiffs submit that the Settlement Agreement is ambiguous and susceptible to more than one meaning and contends for the reception by the Court of evidence of the background matrix of facts consistent with the judgment of Mason J in Codelfa Construction v State Rail Authority.[1] This evidence would be received to assist the Court in the interpretation of this agreement and so as to establish the objective framework of facts within which the Settlement Agreement came into existence. The plaintiffs sought to read in evidence a witness statement of Mr Gregory Pace which was separately confirmed by his wife in her limited witness statement. As reflected in that witness statement the plaintiffs contend  for the position that Mr Glaser, the accountant (who was the accountant for the plaintiffs), was also acting as the accountant for Yatelle Pty Ltd and ought to be seen as a person with authority as an agent to bind the defendant. The plaintiffs also contend that on the basis of the statements made by Mr Glaser the proper understanding of the Settlement Agreement (drawn by Mr Glaser) is that at the end of the 6 month payments, a lump sum of $170,000 was payable on a particular day or days.

    [1] (1982) 149 CLR 337 at [351] – [352].

  20. The primary contentions of the defendant were that it is necessary for the Court to construe the Settlement Agreement in accordance with established principles by ascertaining the objective meaning of the words, considering the agreement as a whole having regard to the surrounding circumstances known to the parties at the time the contract came into existence, the commercial purpose and object of the transaction, and the meaning of the words within the agreement itself. The defendant relied upon the decision of the High Court in Electricity Generation Corporation v Woodside Energy Limited[2] and contended that there were two identifiable commercial objects of the settlement agreement, namely a commitment by the defendant to pay an outstanding sum over an extended period of time and for the plaintiffs to give assistance to the defendant in relation to the transferral of information concerning the business. The defendant then made three further submissions. The first: that when the commercial object of the settlement agreement was properly ascertained, there was an agreement to make payments over a period of time. The second: the Court is not able to re-write a contract but is required to search for the objective intention of the parties recorded in the words of their agreement. This requires an examination of the words used by the parties in their agreement. The third: that properly construed, the wording of the agreement meant that the parties had recorded an agreement to make payments over a period of time at the rate of $5,000 per month until a balance then remaining after a payment of $50,000 has been discharged. That meaning is to be obtained from the use of the terminology within the contract including the reference to the words “until the full balance has been finalised”, a reference in the third clause of the Settlement Agreement to the expression “in the interim term” which must mean a period of time after the initial payment and the default provisions.

    [2] [2014] HCA 7 at [35].

  21. The defendant points to the fact that although there is a reference in the Settlement Agreement to making 6 payments of $5,000 per month, there is no term within the agreement as to when an outstanding balance might be paid. In contradistinction to the plaintiffs’ case which contends for an interpretation by the Court that an outstanding balance (of $170,000) should be paid on 8 October 2014 or 8 November 2014, the defendant contends that there would be no outstanding balance after the discharge of the contractual liability by payments of $5,000 per month.

  22. The defendant opposed the receipt into evidence of the witness statement of Mr Pace. There were a number of grounds. The first was that the witness statement of Mr Pace, which recites information provided by Mr Glaser, was hearsay. Second, the defendant asserted that it was inadmissible parol evidence, and thirdly that the evidence was irrelevant. In the pleadings in this matter, there is no assertion that Mr Glaser was the ostensible agent of the defendant. There is no evidence of any express agency of Mr Glaser on behalf of the defendant. Mr Glaser’s position was that he was the accountant for Yatelle, the shares of which had been purchased by the defendant. The defendant submitted that implied agency could only arise in three particular circumstances namely incidental to usual authority, usual authority or customary authority. None of those three categories of agency had any application in these circumstances. The defendant submitted that the witness statement of the plaintiff recorded a conversation between the plaintiffs and their accountant and is not admissible evidence against the defendant on any basis. Even if it were admitted under the rules for the admission of background material, such material is only admissible on a limited basis and the difficulties associated with the nature of the evidence means that it gives no assistance to the Court.

  23. After hearing submissions from both sides, I gave permission for the plaintiffs to read into evidence paragraphs 1, 2, 3, 4, 5, portion of paragraph 6, 9, and 10 of the statement of Mr Gregory Pace. I did so on the basis that the only relevant evidence that could be led in the matter was evidence concerning the question of the surrounding circumstances to which recourse could be had in interpreting the contract. It is necessary for the sake of completeness that I set out those paragraphs hereunder.

    1.   My wife Emila (sic) & I were directors and shareholders of Yatelle Pty Ltd.

    2.   In 2012 we agreed to sell our shares in Yatelle to Naini Chhabra. We both continued to work in the business under our arrangements in the sale contract.

    3.   In about 2013, Naini purchased a building at 2 Arlington Terrace. She renovated the building and the business moved into it in March 2014.

    4.   In January 2014, we commenced to become concerned about payment of the balance of the purchase price which was due in April 2014. We instructed our accountant, Bernie Glaser, to send a letter reminding Naini and her husband Prince of the obligation to pay this amount.

    5.   The payment was due on Tuesday 8 April 2014.

    6.   On Thursday 3 April 2014 we had a meeting at Caffe Primo on Port Road with Bernie. Bernie requested that meeting urgently. He said that Naini and Prince didn’t have the cash to pay us the $22,000 and needed an extension for payment of the second tranche. He said they could pay a lump sum and the balance when a refinance of the Arlington Terrace property had been completed. …

    7.    …

    8.   …

    9.   On 8 April 2014 Bernie, Naini & Prince presented us with the “Settlement Agreement” for signature. We signed it upstairs at the 2 Arlington Terrace premises during working hours.

    10.  We never saw any previous draft of that agreement.

  1. For the reasons which follow I obtained no assistance from the evidentiary material admitted on the application of the plaintiffs.

  2. Paragraph 6 of the witness statement of Mr Pace referred to the plaintiffs’ meeting at a café on Port Road with Mr Glaser who had urgently requested the meeting. The meeting took place on 3 April 2014 and at the meeting, the plaintiffs were informed that the defendant did not have sufficient cash to pay the amount of $220,000 and required an extension for payment of the second tranche. A lump sum could be paid when a refinance of a property had been completed. Then on 8 April 2014, the Settlement Agreement, was given to the plaintiffs by the defendant and it was executed. There is no contest between the parties that it was drawn by Mr Glaser. There is no admissible evidence before me that by that time any particular refinance by the defendant secured over real property had been commenced or completed.

  3. In making my decision to accept the evidence, I relied upon the decision of Mason J in his Honour’s decision in the Codelfa Construction case. I was satisfied that the terms of clause 2 of the Settlement Agreement disclosed, an ambiguity and a susceptibility to more than one meaning. I formed the view that the expression ‘six monthly payments of $5,000 per month until…’ was ambiguous because it was unclear whether the word six, where it first appears in the clause was otiose or was intended to govern the period over which the payments of $5,000 were to be made. Conversely it is not clear whether the parties intended for the monthly payments of $5,000 to continue or for something else to happen in order to fully discharge the outstanding obligation. This latter meaning arises because of the inclusion of the word ‘six’ where it first appears followed later by the words ‘per month until…’ does not stipulate what is to happen after the first six payments of $5,000 per month even though, implicitly, it might be said that something else is then to occur.

  4. Mr Pace was then cross examined by Mr Burnett, counsel for the defendant.[3] This elicited that Mr Glaser had acted for the plaintiffs for many years up to and including April 2014. He continued to be employed by the plaintiffs as accountant after the sale of the shares in Yatelle to the defendant.

    [3] T30-35.

  5. It is necessary to say something about paragraph 6 of the witness statement of Mr Pace. I am only prepared to accept that Mr Glaser was a conduit of information between the defendant and the plaintiffs. The background evidence discloses that Mr Glaser was actively involved in resolving the question of the inability of the defendant to pay the balance of the purchase price in full. Paragraph 6 of the witness statement makes reference to the fact that Mr Glaser said that the defendant could pay a lump sum and then a balance when the refinance of the property had been completed. There is evidence of activity connected to real property associated with the defendant in about July 2014.[4] This activity was apparent from the public record documents in any event. However, those facts must be looked at in context which is the terms of the agreement executed between the parties which is the subject of this proceeding.

    [4] Paragraph 11 of witness statement of Mr Pace.

  6. In the end, I have obtained no assistance from the witness statement of Mr Pace in making my decision. A comparison may be made of the content of the discussion between the plaintiffs and Mr Glaser on 3 April 2014 and the terms of the Settlement Agreement executed by the relevant parties on 8 April 2014, prepared by Mr Glaser. For example, in the last phrase within clause 2 of the Settlement Agreement, there is no reference to refinancing. There is only a reference to the full balance being finalised. The ordinary meaning of those words is for payments to be made until a balance is discharged. Those payments would continue to be made ‘until’ the full balance is discharged. This contemplates the continuation of payments on a particular basis and not that the obligation would be discharged by a lump sum at the end of a particular period of time.

  7. On that basis, no assistance is obtained from the knowledge (from the public record) that there was a registration of a security over the relevant property in or about July 2014. I am left to speculate about what may have occurred. I would not presume that some particular amount of loan finance was obtained; this is a matter that requires some formal proof. This topic is not identified within the terms of the agreement even through there was mention of that topic in prior discussions. There is no evidence that, in the background, there was any suggestion by the plaintiffs that they would not contemplate payments over a period of 34 months as I have calculated them.

  8. I consider the submissions of the parties in that background.

  9. The defendant contends there is no evidence of any agency of Mr Glaser to bind the defendant to any particular obligation to pay any amount of money at any time. I accept the submission of the defendant. In my opinion, the evidence of Mr Pace in this case does not indicate any ostensible, actual or implied authority in Mr Glaser to bind the defendant to any particular obligation which might otherwise be found in the Settlement Agreement. A proper reading of the statement of Mr Pace, discloses that Gregory and Emilia were being informed of the inability of the defendant to make the payment of $220,000 that was due on 7 April 2014 under the contract of purchase of shares. Some other arrangement had to be made. That arrangement was evidenced within the Settlement Agreement. There is no evidence of any form of agency agreement existing between the defendant and Mr Glaser empowering Mr Glaser to bind the defendant as a “principal” to any particular obligation.

  10. The defendant then made submissions about the applicable legal principles that inform the question of the proper interpretation of the contract. The defendant’s principal contention was that as a result of the decision of the High Court in Electricity Generation Corporation v Woodside Energy Ltd,[5] in the interpretation of the Settlement Agreement, it is no longer necessary to identify ambiguity before “… you, to at least only look at the commercial background or the context in which the agreement is made… there has been a long debate about what was meant by Mason J, Codelfa. This is the last word on that in the sense of the ambiguity I should say that Blue J (in Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd[6] … had come to the conclusion in relation to the interpretation of Woodside in the Essential Beauty Franchising case… (and) adopted the view that ambiguity is no longer the way, at least to the context of the agreement.”[7]

    [5] (2014) 251 CLR 640.

    [6] [2014] SASC 84 at [203].

    [7] T41-42

  11. Mr Burnett then submitted that the High Court’s decision in Woodside tried to “put to bed” the occasions when the Court can look at context but only to the extent of context. Mr Burnett went on to submit[8] that I should follow the decision of Blue J in Essential Beauty Franchising wherein his Honour at paragraph [203] as follows:

    In light of this recent decision of the High Court (Electricity Generation Corporation v Woodside, I consider that ambiguity is not a prerequisite to the admission of evidence of surrounding circumstances in existence at the time of the contract known to both parties.

    [8] T42 line 29 et seq

  12. On the question of the meaning of the expression “known to both parties”, Mr Burnett also relied upon the decision of Stanley J in Echunga Football Club Inc v Hills Football League Inc[9].

    [9] [2014] SASC 201.

  13. The general proposition put by the defendant was that the decision of Mason J in Codelfa was no longer authority on the question of when a Court may look at the commercial background or the context in which a contract is made in aid of the interpretation of that contract. The general proposition was put that it is no longer necessary to identify an ambiguity before a court may look at the context of an agreement as an aid in its interpretation. Having read the authorities referred to me by Mr Burnett, I am unable to accept that general proposition.

  14. In the Electricity Generation case the High Court considered the interpretation of contracts in Western Australia for the supply of gas between a group of suppliers and a central purchaser called Verve which used gas in its power stations and for other purposes. There are a number of suppliers of gas called the sellers. Each of the contracts between Verve and the sellers obliged each of the sellers to make a proportionate share of a minimum daily quantity of gas available for delivery to Verve and at an agreed price. This was called the maximum daily quantity of gas or MDQ. There was a second obligation upon the sellers to use reasonable endeavours to make available “to Verve a supplemental maximum daily quantity (SMDQ)”.[10] This second ‘obligation’ included an agreement on the price of gas supplied as SMDQ.

    [10] Paragraph [2].

  15. There was a disruption in the supply of gas because of an explosion at a gas plant operated by one of the suppliers. There was therefore a shortage of gas. The sellers withheld supplies of further gas under the supplemental obligation. The reasons are fairly obvious. The sellers could obtain a better price in the general market for that gas than they could obtain from Verve under the existing arrangements. This was of a considerable commercial benefit to those suppliers during the period of the gas shortage. The suppliers wanted to take full advantage of this opportunity. The question in the appeal was whether or not the sellers had breached their reasonable endeavours obligation in refusing to supply the whole of the SMDQ as requested by Verve.

  16. At the time of the shortage of gas, the sellers informed Verve that if Verve wanted to obtain gas, it would need to enter into a tender process to receive the additional gas and that the highest bid in the tender process would win the supply of gas. Verve did so under protest, claiming that in doing so, the sellers were breaching the terms of the supplemental arrangements. The court identified that resolution of the dispute revolved around, the question of the relationship between clauses 3.3(a) and 3.3(b) of the general supply agreement called the GSA. The GSA indicated that the sellers were supplying gas to buyers other than Verve and so the question of demand for the supply of gas could fluctuate. Outside of the GSA, Verve could, purchase its gas supplies from suppliers other than the sellers.

  17. Clause 3.3(a) of the GSA imposed upon the seller an obligation to use reasonable endeavours to make available for deliver an amount of gas in excess of the MDQ (called the SMDQ). Clause 3.3(b) governed the question of using reasonable endeavours. In determining whether the sellers were able to supply the SMDQ on a particular day, the sellers were required to take into account all relevant commercial, economic and operational matters and also excused the sellers for making available the SMDQ where particular circumstances existed in relation to that quantity. The court described the question of the crucial issue of construction at paragraph [18] of the judgment of the majority as follows:

    The crucial issue of construction is the relationship between the sellers’ obligation in clause 3.3(a) to “use reasonable endeavours” to make SMDQ available for delivery to Verve and the sellers entitlement under 3.3b in determining whether they were able to supply SMDQ on any particular day, to take into account all relevant commercial economic and operational matters.

  18. Verve submitted that the sellers were obliged to make reasonable endeavours to make the nominated quantity of gas available for delivery. The only time that the sellers could take into account the relevant commercial, economic and operational matters was in determining whether they were able to supply the SMDQ. That was said to be a question of capacity not a question of discretion.

  19. The sellers submitted that any obligation under the first sub paragraph (clause 3.3(a)) to supply the SMDQ was subject to the sellers decision about whether they were able to supply SMDQ after taking into account all relevant commercial, economic and operational matters. The court accepted the argument of the sellers. It said:

    Both Verve and the Sellers recognised that this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract.  The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. [citation omitted]  That approach is not unfamiliar. [citation omitted] As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. [citation omitted] Appreciation of the commercial purpose or objects is facilitated by an understanding "of the genesis of the transaction, the background, the context [and] the market in which the parties are operating"[11].  As Arden LJ observed in Re Golden Key Ltd[12], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption "that the parties … intended to produce a commercial result".  A commercial contract is to be construed so as to avoid it "making commercial nonsense or working commercial inconvenience"[13].

    [11] Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350 per Mason J; 91982] HCA 24, citing Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-996; [1976] 3 All ER 570 at 574. See also Zhu v Treasurer of New South Wales (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ; [2004] HCA 56; International Air Transport  Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160 [8] per Gleeson CJ.

    [12] [2009] EWCA Civ 636 at [28].

    [13] Zhu v Treasurer for New South Wales (2004) 218 CLR 530 at 559 [82] per Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ. See also Gollin & Co Ltd v Karenlee Nominees Ltd (1983) 153 CLR 455 at 464; [1983] HCA 38.

  20. The court made three general observations about an obligation to use reasonable endeavours.[14] The obligation is not an absolute or unconditional obligation; the nature and extent of the obligation imposed is necessarily conditioned by what is reasonable and this can include what might affect the business of the sellers. Some contracts containing an obligation to make reasonable endeavours may contain their own standard of what is reasonable, including by reference to a business interest of someone such as the seller.

    [14] At paragraph [41].

  21. The court held that the contract itself is a commercial contract between parties at arms length. Those parties have their own independent business interests to look after and in that circumstance, the contract itself should be given what is described as a “business like interpretation”. The obligation in respect of the SMDQ is to be viewed in an entirely different commercial context. Verve could obtain the equivalent of the SMDQ from other suppliers. The sellers were not bound to hold capacity for supply of the SMDQ. The contractual arrangements in relation to SMDQ must be looked at differently from the mandatory obligations in relation to the MDQ. Thus the language in relation to SMDQ is in respect of what is described as a “qualified obligation” by reference to an internal standard of reasonableness. It is against that internal standard of reasonableness by which the obligation to use the reasonable endeavours to supply the SMDQ could be measured. However, that internal standard was conditioned by a number of facts. The first is the sellers responsibility, contractually in relation to the SMDQ, and by the sellers express entitlement to take into account relevant commercial, economic and operational matters about if and when they would supply the SMDQ if requested by Verve. The sellers may take into account matters that affect their own business interests. Those matters include commercial and economic considerations and are not merely confined to questions of capacity.The sellers could not be said to be in breach of the agreement by not supplying SMDQ because they have refused to forgo or sacrifice their own business interests when using reasonable endeavours to make SMDQ available. The court was not prepared to read the word “able” in the clause in any narrow way. It should be read broadly to have regard to the capacity of the sellers as well as their own business interests in supplying the SMDQ. That was consistent with all surrounding circumstances known to both parties at the time of entering into the GSA. The court expressed their view at paragraph [48] as follows:

    The construction which has been accepted as consistent with surrounding circumstances known to both parties at the time of entering the GSA, which included the circumstances that the sellers sell and supply gas to customers and buyers in the market other than Verve, some essential services depend on gas supply and the prevailing market price of gas at any particular time may be greater (or less) than the tranched 3 price in the GSA.

  22. The tranche 3 price was the price to be paid for SMDQ. The court held that the sellers were therefore not obliged to supply SMDQ when, as in this instance, there was a conflict between the sellers business interests and Verve’s interest in obtaining nominated SMDQ at the fixed gas price under the SMDQ arrangements. Gageler J was in dissent.

  23. I have gone to some lengths to explain the decision in the Electricity Generation case because I respectfully disagree with the submissions made by Mr Burnett for the defendant about the effect of that decision of the High Court upon the question of the applicability of the principles enunciated by Mason J in Codelfa. It is necessary that I briefly explain my reasons for so saying. In the decision of Blue J in the Essential Beauty Franchising case, his Honour discussed the question of the consideration by the Court of background circumstances and pre-contractual communications at paragraphs [199] – [206]. His Honour then went on to consider the relevance, if any, of subsequent conduct. Blue J made reference at [201] to the decision of the High Court in Western Export Service Inc v Jireh International Pty Ltd.[15] Unusually, this is a reported decision on a special leave application to the High Court where special leave to appeal was refused. The Justices of the High Court affirmed the applicability of the decision in Codelfa.

    [15] [2011] HCA 45; (2011) 84 ALJR 1.

  24. In Western Export the court said at paragraphs [2]-[5] as follows:

    The primary judge had referred to what he described as "the summary of principles" in Franklins Pty Ltd v Metcash Trading Ltd. The applicant in this Court refers to that decision and to MBF Investments Pty Ltd v Nolan as authority rejecting the requirement that it is essential to identify ambiguity in the language of the contract before the court may have regard to the surrounding circumstances and object of the transaction. The applicant also refers to statements in England said to be to the same effect, including that by Lord Steyn in R (Westminster City Council) v National Asylum Support Service.

    Acceptance of the applicant's submission, clearly would require reconsideration by this Court of what was said in Codelfa Construction Pty Ltd v State Rail Authority of NSW by Mason J, with the concurrence of Stephen J and Wilson J, to be the "true rule" as to the admission of evidence of surrounding circumstances. Until this Court embarks upon that exercise and disapproves or revises what was said in Codelfa, intermediate appellate courts are bound to follow that precedent. The same is true of primary judges, notwithstanding what may appear to have been said by intermediate appellate courts.

    The position of Codelfa, as a binding authority, was made clear in the joint reasons of five Justices in Royal Botanic Gardens and Domain Trust v South Sydney City Council and it should not have been necessary to reiterate the point here.

    We do not read anything said in this Court in Pacific Carriers Ltd v BNP Paribas; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd; Wilkie v Gordian Runoff Ltd and International Air Transport Association v Ansett Australia Holdings Ltd as operating inconsistently with what was said by Mason J in the passage in Codelfa to which we have referred. [citations omitted] [my emphasis].

  1. In Essential Beauty, after discussing Western Export, Blue J goes on to contrast Western Export with Electricity Generation by referring to excerpts from the majority decision in Electricity Generation.  Blue J appears to be emphasising a point of distinction.

  2. In the majority decision of the High Court in Electricity Generation their Honours referred to and applied the Codelfa decision.

  3. In 2011 the High Court in Western Export very firmly expressed the binding nature of the decision in Codelfa.  In Electricity Generation the High Court did not indicate an intention to depart from the rule in Codelfa in its judgment.  The High Court did not indicate that Codelfa was inconsistent with the approach adopted in Electricity Generation.

  4. I am also of the view that the decision in Codelfa is not in any way at odds with the decision in Electricity Generation Corporation case. So much is apparent from a reading of the relevant passages of the judgment of Mason J in Codelfa wherein his Honour said:[16]

    Lord Wilberforce… in Reardon v Smith (1976) 1 WLR 989 in a speech concurred by the majority of the members of the House of Lords he acknowledged that it is legitimate to have regard to… “the surrounding circumstances”. He went on to say:

    “in a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presuppose knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

    After discussing Utica, Prenn and Whitman, his Lordship continued:

    It is often said that in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively – the parties cannot themselves give direct evidence of what their intention was – and what must be ascertained as what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object or commercial purpose, one is speaking objectively of what reasonable persons would have had in mind in the situation of the parties.

    [16] Codelfa Construction v State Rail Authority(1982) 149 CLR 337 at pages 350-351.

  5. At page 351 of the Codelfa decision his Honour went on to say:

    In DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at [429] Stephen and Jacobs JJ and I following Prenn in a joint judgement said:

    A court may admit evidence of surrounding circumstances in the form of mutually known facts to identify the meaning of a descriptive term and it may admit evidence of the genesis and objectively the aim of a transaction to show that the attribution of a strict legal meaning would make the transaction futile.

    And in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at [605]-[606] in the judgment concurred in by the other members of this court, I not only accepted and applied the statement in the majority judgment in BP Refinery  of the conditions necessary to support the implication of a term, but I also accepted and applied Lord Wilberforce’s different treatment for the purpose of construing a contract, of evidence of surrounding circumstances on the one hand and of the parties intentions on the other hand. Having considered the topic in more detail on this occasion, I see no reason to qualify what I then said.

    The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when a contract was made will not be receivable as part of the surrounding circumstances as an aid to construction unless they were known to both parties. Although, as we have seen, if the facts are notorious knowledge of them will be presumed. [citations omitted] [my emphasis]

  6. When Mason J was referring to the question of the intention of the parties, his Honour was referring to the speech of Lord Wilberforce in Reardon v Smith. There his Lordship said that when speaking of intention of the parties, the question is the objective discernment of intention because the parties cannot themselves give direct evidence of what they intended but the receipt of evidence to enable the court to ascertain what would be taken as their intention according to the standard of what a reasonable person would think if placed in the situation of the parties. Therefore, the question of any evidence of subjective intention is not included in the discussion.

  7. The decision of the High Court in the Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd[17] case concerned a contract for sale and purchase of land where payment to the vendor was to be made in a number of tranches. The final tranche of payment was dependant upon the property that was sold (which was a multi storeyed office block in Toowong Queensland) being fully leased. The contract itself provided for the reduction of the purchase price under a formula in the event that the vendor could not provide evidence to the purchaser’s reasonable satisfaction that aggregate rents under the lease of the premises in the building had reached a specified figure. The purchaser of the building had the right to give approval to all potential leasees but any such approval could not be capriciously or arbitrarily withheld. The only way that the vendor could obtain the full purchase price was to ensure that the property was fully leased and that the return on the leases reached a particular level of rent.

    [17] (1979) 144 CLR 596.

  8. The vendor could not obtain leases for the whole of the property in the commercial market place. Eventually, the vendor offered to lease the vacant portions of the premises so as to increase the aggregate rent and so ensure that the purchaser had an obligation to pay the last tranche of payment for the purchase price. The offer of the vendor was rejected by the purchaser and following that rejection, no further moneys were payable on the purchase price under the contract.

  9. The vendor sued for liquidated damages based upon an alleged breach of an implied term that the purchaser should actively cooperate to secure tenants and would not obstruct the vendor. The purchasers rejection of the vendor as a lessee was alleged to be a breach of that implied term. The landlord failed at first instance, in the Court of Appeal of Queensland and in the High Court. An issue that arose was whether or not evidence of antecedent negotiations or about the expectations of the parties could be used to construe the words of the contract and so identify the obligations upon the purchaser landlord.

  10. The relevant passage in the judgment of Mason J, who wrote the decision of the court, is at page 606 as follows:

    The respondent also sought to rely on the oral testimony given by officers of the appellant and the respondent as to what was said and done during the course of negotiations leading up to the making of the contract with a view to demonstrating that the parties had “commercial” leases in mind. This was said to be evidence of surrounding circumstances to which recourse could be had in interpreting the contract. In truth the evidence is not evidence of surrounding circumstances; it is evidence of the antecedent oral negotiations and expectations of the party and as such it cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. As Lord Wilberforce said in Prenn v Simmonds [1971] 1 WLR 1381 at [1385]:

    “…evidence of negotiations or of the parties intentions’ … would not be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the genesis and objectively the aim of the transaction.

    As to the circumstances and the object of the parties, there is no controversy in the present case. The agreement, on its face, almost supplies enough without the necessities as supplemented by outside evidence.

  11. Mason J in Codelfa, refers to those passages at the bottom of page 351 of his Honours judgment. This is the reference by his Honour to “what he then said…” in the Secured Income Real Estate case as part of his Honour’s judgment in Codelfa. His Honour accepted the speech of Lord Wilberforce in Prenn about the acceptance of evidence of the factual background known to the parties at or before the date of the contract, including evidence of the genesis and objectively the aim of the transaction. His Honour was also concerned to guard against a preoccupation with those matters and a consequent failure to properly assess and interpret the terms of the contract.

  12. I have already made reference to the passages within the Electricity Generation case where the court cited with approval the decision of Mason J in Codelfa. My reading of that case does not indicate that there, the High Court was embarking upon the exercise of changing its approach to the application of the rule in Codelfa. Rather, the Electricity Generation case is to be understood as a case concerning the proper approach to the interpretation of a commercial contract and the application of the objective approach in determining the rights and liabilities of a party to a contract. In turn, it is to be understood as explaining the proper approach to deciding upon the meaning of the terms of the commercial contract determined by what a reasonable business person would have understood those terms to mean. In the Secured Income Real Estate case, Mason J, did not (for those same purposes) in any sense gainsay the proposition that in the interpretation of the contract recourse may be had to the evidence of “the factual background known to the parties… including evidence of the genesis and objectively the aim of the transaction…” when interpreting the contract. Mason J was there careful to distinguish between what does and what does not constitute such evidence. Evidence of antecedent oral negotiations and the subjective expectations of the parties cannot be used for the purpose of construing the words of a written contract intended by the parties to comprehensively record the terms of the agreement which they have made. In the Electricity Generation case, when interpreting clause 3.3(a) and 3.3(b) of the agreement, the High Court discussed the chief commercial purpose and objects of the GSA and the construction of those terms of the contract having regard to the circumstances known to both parties at the time of entering into that agreement: viz paragraph [48] of their Honours’ judgment. It was in light of all of that background, that the court decided whether the word ‘able’ in the relevant part of the contract, should be construed narrowly or broadly and also, what may be identified as the sellers’ commercial, economic and operational matters affecting their business interests.

  13. I am therefore unable to accept the submissions of Mr Burnett. For the sake of completeness, I refer to the decision of Echunga Football Club v Hills Football League Inc that was also referred to by the defendant. The relevant discussion of Stanley J in that decision is at paragraph [17]. I respectfully agree with his Honour’s comments and apply them in this case. It is necessary to approach the interpretation of the contract in accordance with the relevant authorities.

  14. I have already discussed the content of the second clause of the Settlement Agreement. I agree with the proposition of Mr Burnett that I do not have the power to remake or amend the contract according to what I might consider a just or reasonable result.

  15. In that context, the defendant submits that the words ‘monthly payments of $5,000 per month until the full balance has been finalised’ are words of plain and ordinary meaning. They mean that the liability of the settlement sum after the payment of $50,000 is to be discharged by monthly payments of $5,000 until the full balance has been finalised. It was not in contest between the parties that the word ‘finalised’ means discharged in full. It is not possible for parol evidence to be admitted for the purposes of subtracting from, adding to, or contradicting the plain language of a written instrument. The extrinsic evidence referred to by the plaintiffs and contained within the witness statement of Mr Pace has not given me any assistance in the interpretation of the document. In my opinion, the evidence sought to be relied upon by the plaintiffs, is no more than evidence of the subjective intention of the plaintiffs and of antecedent negotiations. On that basis, the evidence provided no assistance to me in the task of interpretation of the agreement. Applying the decision of Mason J in Codelfa, and reading the contract as a whole, the only logical interpretation is that the monthly payments of $5,000 would continue until the full amount has been repaid.

  16. The plaintiffs contend that the words ‘until the full balance has been finalised’ is to be interpreted as meaning that there is to be 6 monthly payments of $5,000 per month and then a payment in full of the balance at the end of that 6 month period on a date or dates as proposed by the plaintiffs. This date could be October or November 2014. I am unable to accept that submission of the plaintiffs. If it was the case that I was to accede to the plaintiffs argument, then I would be re-writing the terms of the contract itself. Such an approach is contrary to the authorities that I have already discussed. For example, the word ‘until’ has a plain and ordinary meaning and it circumscribes the time period within which amounts are to be paid and within which the liability on a debt amount is to be discharged. The meaning of that word is informed by the obligation to make monthly payments set out earlier in that clause. There is no pleading of an implied term and I need not further consider that matter.

  17. Consistent with the approach required by the High Court in Byrnes v Kendall[18], Electricity Generation and Codelfa, it is also appropriate to look at the balance of the Settlement Agreement to ascertain the meaning of that clause. The third clause of the agreement is an interest provision. It refers to an ‘interim term’. It says that in the ‘interim term’ (which ordinarily begets the meaning of a period of time) interest is payable on the outstanding sum. The defendant argues that the outstanding sum must be the amount of the balance of $170,000 as reduced from time to time by the monthly payments. It is therefore not a default provision. It is an interest provision on a decreasing sum similar to the situation as would occur in respect of some types of ‘straight line’ mortgage payments. The liability to make the interest payment is added monthly to the $5,000 payment. There is no suggestion that the interim term is only the period of 6 months. The meaning to be taken from the method of drafting is that interest is to be calculated on a monthly basis, on the decreasing debt sum, and payable together with the $5,000 payment on a per month basis.

    [18] Martin Francis Byrnes & Anor v Clifford Frank Kendall [2011] HCA 26 at [100].

  18. The fourth clause of the Settlement Agreement is a default provision. It describes that monthly payments are to fall due on the 8th of each month after the original payment of $50,000. This phraseology does not suggest a limitation to only six monthly payments as being the period during which the payments are able to be made. It then describes that any failure to pay shall bring about a default interest of 12 per cent on the “…outstanding sum until such sum is rectified”. If there was any default in the monthly payments (which already attracts a further interest payment of 8 per cent under the original finance agreement) and there is any failure to pay then there will be a default interest rate of 12 per cent on the outstanding sum.

  19. In my view the outstanding sum in that instance is the outstanding balance of the sum of $170,000. The figure of 12 per cent may on one view apply only to the monthly payment of $5,000 however, the use of the expression “outstanding sum” would indicate that the parties intentions were that if there was a failure to pay the $5,000 plus the monthly interest then of the outstanding balance of the sum of $170,000, the amount that remained unpaid would attract an interest rate of 12 per cent until such time as the ‘sum’ (meaning position) is rectified. Then the interest rate would revert to 8 per cent. The important point here is that the parties have seen fit to deal with a default provision in the event that any outstanding sum is unpaid.

  20. The sixth clause of the Settlement Agreement requires the plaintiffs to provide to the defendant any and all assistance in relation to transferring any information required by the purchaser that may be applicable. It is difficult to make much of this clause bearing in mind that at the time of the Settlement Agreement, more than 2 years had passed since the agreement between the plaintiffs and the defendant for the transfer of the shares. It would be difficult to comprehend that there would be further information that the plaintiffs would be required to provide to the defendant but it is not necessary for me to do any more than state that the provision exists. It contemplates an ongoing relationship between the parties.

  21. One matter I required the parties to address was the definition of default in the fifth clause of the agreement. The first line reads:

    In the event of a default of payment or a default in general that is not rectified…

  22. I enquired of counsel what meaning might be given to a default in general in contradistinction to a default in payment. The defendant argued that a default in general may for example mean a repudiation of the contract. That approach is consistent with the settled law of Australia. It is well known that a repudiation can include a particular act of a party to a contract that properly construed  is so serious or of such an important nature that it is inconsistent with the continued existence of the contract and the parties ‘obligations’ under it and that the party affected may elect to terminate the contract as a result; or alternatively a series of intermediate acts which, when considered together, indicate that a party is no longer prepared to be bound by the contract and that the maintenance of the contract is inconsistent with the conduct of that party. The party not in default may elect to terminate.

  23. I questioned counsel for the defendant on the inclusion of the word ‘six’ where that word qualifies the word monthly payments in the second clause. The method of interpretation postulated by the defendant would give that word no work to do.  The defendant tacitly agreed with my suggestion but submitted that the word ‘six’ is perhaps not a useful word; ignoring that word would not require a re-writing of the contract. No work should be given to it.

  24. In the decision of Mason J in Secured Income Real Estate, his Honour considered a contract in which there were a number of drafting errors. The relevant discussion commences at page 600 of the report. In that case, in a particular clause (clause 1(c)) there was an overused word ‘not’ and the inclusion of that word was said to make a nonsense of the provision. His Honour decided that the sub-clause should be read as if it were deleted. That is because the proper meaning of the sub-clause could be taken from the words which surrounded the overuse of the word ‘not’ where it second appeared on the fifth line of the clause. There were also drafting errors in other clauses within the agreement. The court was prepared to read the agreement as a whole and to take its meaning based upon that reading including by the exclusion of unnecessary words which rendered the provision a nonsense. Although the High Court in the Electricity Generation case applied the same approach in paragraph [35] of their Honour’s decision, the majority did not find it necessary to refer to the decision of Mason J in Secured Income Real Estate. Their Honours described the principle thus:

    A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.

  1. That is the same approach as was adopted by Mason J in the Secured Income Real Estate decision. It follows that in construing a commercial contract and to avoid it working a commercial inconvenience, I am entitled to approach the interpretation of it on the assumption that the drafter of the agreement may have inadvertently included within the provision a word which is otiose. In my opinion, on the whole of the reading of the Settlement Agreement, the intention as disclosed by the words of the agreement is for there to be a payment of $50,000 reducing the amount owing of the vendor finance amount to $170,000.  The remaining vendor finance amount will then be discharged by monthly payments of $5,000 per month plus interest at the rate of 8 per cent per annum on the decreasing amount until the remaining vendor finance amount is repaid. In my opinion, the inclusion of the word ‘six’ in the third line of clause 2 of the Settlement Agreement works a commercial inconvenience and, on one view, makes a nonsense of the provisions. In my opinion, based upon the authorities that I have cited, I am entitled to ignore the presence of that word in the clause.

  2. The plaintiffs also relied upon the decision of the Privy Council in Watson & Anor v Phipps.[19] In that case, the Privy Council, on appeal from the Court of Appeal of Queensland, identified that:

    The function of a court of construction is to ascertain what the parties meant by the words which they have used. For this purpose the grammatical and ordinary sense of the words is to be adhered to unless they lead to some absurdity or to some repugnance or inconsistency with the rest of the instrument in which case the grammatical and ordinary sense of the words may be modified so as to avoid that absurdity or inconsistency but no further…

    [19] [1986] 60 ALJR 1 at [3].

  3. I am bound by that principle in so far as it is relevant here. In my opinion, it is to be considered together with the principle enunciated by Mason J in the Secured Income Real Estate case and as confirmed by the High Court in the Electricity Generation case at paragraph [35]. In my opinion similar comments apply to the application of the decision of the High Court in Insurance Company of Australia Ltd v Phillips.[20]

    [20] [1925] 36 CLR 60 at [79].

  4. In the result, as a matter of construction, and in the application of principle, I am of the view that the contentions of the defendant are correct. I am therefore of the view that on a proper interpretation of the whole of the Settlement Agreement, the obligation of the defendant is to make a first payment of $50,000 and then monthly payments of $5,000 per month and interest on the reducing sum (the balance of $170,000 owed) at the rate of 8 per cent per annum, until the full balance ($170,000) has been discharged.

  5. I will hear the parties as to costs and ancillary orders.


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