Pact Property Pty Ltd v APF Commercial Pty Ltd

[2009] NSWCA 218

New South Wales

Court of Appeal

CITATION:	PACT PROPERTY PTY LTD v APF COMMERCIAL PTY LTD [2009] NSWCA 218
HEARING DATE(S):	26 May 2009
JUDGMENT DATE:	27 July 2009
JUDGMENT OF:	Beazley JA at 1; Basten JA at 2; Young JA at 49
DECISION:	1. The questions should be answered as follows: Question 1(a): No. Question 1(b): Yes. Question 1(c): No. Question 1(d): Unnecessary to answer. Question 2(a)-(c): Unnecessary to answer. 2. Direct the parties to confer as to the orders required to dispose of the appeal and, if a common position cannot be reached, (a) each to file and serve its proposed orders and submissions in support thereof within 14 days, and (b) each to file and serve submissions in reply (if any) within a further seven days. Liberty to apply within the 14 day period noted in (a) if an extension of time is to be sought.

CATCHWORDS:	CONTRACTS – construction and interpretation of contracts – sale agreement – total purchase price payable in two stages – sale conditional on novation of agreements with numerous clients – variation of sale agreement when condition not met – lesser amount agreed for first payment – whether second payment to be calculated as percentage of first payment or on basis of novated agreements
LEGISLATION CITED:	Property Stock and Business Agents Act 2002 (NSW), s 55
CATEGORY:	Principal judgment
PARTIES:	Pact Property Pty Ltd (Appellant) APF Commercial Pty Ltd (Respondent)
FILE NUMBER(S):	CA 40309/08
COUNSEL:	B A Coles QC/A F Fernon (Appellant) S Donaldson SC/J L Chambers (Respondent)
SOLICITORS:	O'Neill Marengo (Appellant) Ian Abelitis Solicitors (Respondent)

LOWER COURT JURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 50036/07
LOWER COURT JUDICIAL OFFICER:	McDougall J
LOWER COURT DATE OF DECISION:	22 July 2008; 23 July 2008 (unrep)
LOWER COURT MEDIUM NEUTRAL CITATION:	Pact Property Pty Ltd v APF Commercial Pty Ltd [2008] NSWSC 889

CA 40309/08
SC 50036/07

BEAZLEY JA
BASTEN JA
YOUNG JA

27 July 2009

PACT PROPERTY PTY LTD v APF COMMERCIAL PTY LTD

Headnote

On 30 September 2005 the appellant entered into an agreement with the respondent to sell its property management business. The sale was to be achieved by obtaining novated agreements from the property owners to whom the appellant provided services. Under the agreement, payment of the purchase price was to be made in two tranches, the first on completion and the balance at a later date, this latter amount being known as the "retention amount". The total purchase price, expected to be approximately $2 million, was to be determined in accordance with a detailed formula, the component elements of which related to the agreements constituting in large part the business to be sold. The amount payable on completion was to constitute seventy-five percent (approximately $1.5 million) of the total purchase price. When the novated agreements were not obtained within the timeframe specified in the sale agreement, a variation agreement was entered into on 30 Nov 2005. This provided for part payment on or shortly after 30 Nov 2005 of $700,000. The retention amount was to be paid one year later.

A dispute arose as to the correct construction of the sale agreement as varied by the variation agreement in relation to the quantification of the retention amount. The appellant commenced proceedings in the Equity Division of the Supreme Court. McDougall J held that the retention amount was to be assessed as twenty-five percent of the purchase price calculated by application of the formula to the agreements actually novated at the time the variation agreement was executed. The appellant appealed from this decision.

The Court held, allowing the appeal in part:

(per Basten JA, Beazley and Young JJA agreeing)

1. The provision by the variation agreement for an initial payment of $700,000, rather than through application of the formula, was inconsistent with an approach to construction that calculated the retention amount either on the basis of the agreements actually novated as at 30 November 2005, or on the basis that the original anticipated total purchase price of approximately $2 million still provided guidance as to the calculation of the outstanding retention amount: [24], [33]–[35].

2. The preferable construction was that the agreed amount of $700,000 was to be paid in lieu of the originally anticipated amount of $1.5 million. This constituted a part payment, originally intended to be seventy-five percent, of the total purchase price. Accordingly, the retention amount ought to be regarded as constituting the remaining twenty-five percent, an amount of $233,333. [34]–[37].

CA 40309/08
SC 50036/07

BEAZLEY JA
BASTEN JA
YOUNG JA

27 July 2009

PACT PROPERTY PTY LTD v APF COMMERCIAL PTY LTD

Judgment

1 BEAZLEY JA: I agree with Basten JA.

2 BASTEN JA: On 30 September 2005 the appellant entered into an agreement with the respondent to sell its property management business. Pursuant to heads of agreement prepared some three months earlier, the sale was to be achieved by obtaining novated agreements from the property owners to whom the appellant provided services.

3 The expectation, as recorded in the sale agreement executed on 30 September 2005, was that the purchase price would be approximately $2 million. It was anticipated that novated agreements would be obtained within approximately 30 days. As it happened, that expectation was not met and, on 30 November 2005, a variation agreement was entered into.

4 Under the sale agreement, the purchase price was to be paid in two tranches, with the bulk of the sum, namely $1.5 million, payable on completion and the balance of about $500,000 payable either one year or two years after completion. The latter amount was known as the “retention amount”. The variation agreement provided for part payment on or shortly after 30 November 2005 of the amount of $700,000. The retention amount was to be paid one year later. The present dispute relates to the amount of the second payment.

5 The primary contention of the appellant was that it was entitled to payment of the balance of $1.3 million, based on a purchase price of $2 million. The trial judge, McDougall J, did not accept that contention, but answered certain questions, which resulted in a payment to the appellant of a little over $73,000: see Pact Properties Pty Limited v APF Commercial Pty Limited [2008] NSWSC 889. The appellant challenges the basis of the calculation which resulted in that amount, by reference to the answers given to the questions. (The questions appear at the end of these reasons: their formulation is not presently significant.)

6 The sale agreement was lengthy, convoluted and to an extent repetitive. It covered some 64 pages, including annexures. Many of the provisions were set out by the trial judge and need not be repeated here. The key provision was cl 3.1 which identified the purchase price payable under the sale agreement in the following terms:

“ 3.1 Purchase Price
The Purchase Price payable by the Purchaser will be:
(a) the amount calculated by applying the following formula:
PP = [(A x 2.5) + (B x 1.5) + (C-D)]
And the amount payable by the Purchaser on Completion Date will be calculated by applying the following formula:
PP = [(A x 2.5) + (B x 1.5) + (C – D)] - RA
where:
PP is the Purchase Price payable by the Purchaser on Completion subject to any adjustments arising by application of the provisions of this Agreement;
A is the base annual income from Property Management Agreements;
B is the base annual income from Facilities Agreements;
C is any increases by way of the adjustments arising by application of the provisions of clause 3.2(c) – clause 3.2(e) inclusive; and
D is any decreases by way of the adjustments arising by application of the provisions of clause 3.2(d) and clause 3.2(d) and clause 3.2(e); and
RA is the Retention Amount.
(b) the parties record that at the date of this Agreement and based upon the figures for May 2005;
(i) A is $51,852.87 such that (A x 2.5) in the formula in clause 3.1(a) equals $1,555,586.10
(ii) B is $24,757.41 such that (B x 1.5) in the formula in clause 3.1(a) equals $445,633.38
(iii) that in application of that formula (A x 2.5) + (B x 1.5) equals $2,001,219.48
(c) the parties record that because it is not yet possible to quantify the values to be attributed to the other elements in the formula in clause 3.1(a) that the amount to be paid by the Purchaser on Completion Date is to be such sum not exceeding $1,500,000.00 which in application of the formula in clause 3.1(a) represents the amount (when annualised) equal to 75% (plus GST if applicable) of PP being the Purchase Price as defined in the formula in clause 3.1(a).
3.2 Component elements in ascertaining Purchase Price
The Purchase Price is the Consideration as defined in clause 21.2 that is to say the Property Management Business Consideration the Facilities Management Business Consideration and the Leasing Business Consideration each of which is as quantified in Item 3 of the Reference Schedule and compromises of:
(a) the base annual income from Property Management Agreements is set out in clause 3.1(b);
(b) the base annual income from Facilities Agreements is set out in clause 3.1(b);
(c) the Retention Amount as detailed in clause 3.7 which is the amount represented by RA in the formulae appearing in clause 3.1(a);
(d) the increases represented by C in the formulae appearing in clause 3.1 arising by application of the provisions of clause 3.3 are those occasioned by the apportionments and adjustments called for under clauses 3.3, 3.7, 3.8(g) 9.1 and 9.2; and
(e) the decreases represented by D in the formulae appearing in clause 3.1(a) arising by application of the provisions of clause 3.3 are those occasioned by the apportionments and adjustments called for under clauses 3.3, 3.7, 9.1 and 9.2.”

7 Two explanations are required as to peripheral aspects of these provisions. The first is that the calculations of A and B in cl 3.1(b) require that the initial figure (in each case said to be based upon the figures for May 2005) must be multiplied by 12 to obtain an annual figure to which the multipliers of 2.5 or 1.5 respectively are applied. The second point is that the references in various paragraphs of each sub-clause to other provisions of the agreement are in several instances inappropriate, but those infelicities do not affect the construction of the agreement for present purposes.

8 It is clear from cl 3.1(c) that it was not considered possible to identify the purchase price accurately at the time of the sale agreement. In its terms, cl 3.1(c) recorded that it was not yet possible to quantify the values to be attributed to “the other elements” in the formula, which would appear to mean the elements other than A and B identified in par (b), those elements being C and D. Those elements were defined both in cl 3.1(a) and 3.2(d) and (e). What is less clear is whether the actual figures included in par (b) with respect to A and B are the actual figures which satisfied those parts of the definition of purchase price, or are merely examples of the calculation which needed to be undertaken at completion.

9 Clause 3.1(a) may best be understood as incorporating the opening line (or chapeau) of 3.1, as those words do not readily apply with respect to paragraphs (b) and (c). That construction is also consistent with par (a) having two purposes, namely to identify the full purchase price and to identify the amount payable by the purchaser on completion date. If that were to be the governing clause, then the matters which the parties “record” in pars (b) and (c) may be thought to provide examples or explanations of the required calculations.

10 On the other hand, paragraph (b) may record an actual working out of the purchase price, to the extent that that was possible at the date of the sale agreement, namely by calculating the amounts resulting from the insertion of dollar figures for A and B. That approach obtains support from the fact that cl 3.2 in effect treats the amounts set out in par (b) as so quantified. Further, they are so quantified in item 3 of the reference schedule which contains the total amount of $2,001,219.48, as appears in cl 3.1(b)(iii).

11 The quantification of the retention amount is dealt with in part in cl 3.1(c) and further in cl 3.7. In substance, cl 3.7 repeats cl 3.1(c), but then makes allowance for variations in the income obtained from the business between the completion date and the date of payment of the retention amount which was envisaged as being either one year or two years after completion. The retention amount is only calculable as the balance of the purchase price beyond the amount paid on completion. Clause 3.1(c) provided that the amount payable on completion would be not more than $1.5 million. That amount would have constituted 75% of a $2 million purchase price. As the calculation based on A and B was a little over $2 million, the retention amount would, ignoring C and D, have amounted to fractionally more than 25% of the purchase price.

12 Items C and D permitted variations in the purchase price in either direction depending upon contingencies which, in the majority of cases (but not all) would arise after completion, but before payment of the retention amount. There was a possibility of such variations arising prior to completion although whether the variations were intended to apply to events happening only after execution of the sale agreement or whether they were to apply after the May 2005 calculations, to the extent that they formed part of the purchase price, is unclear. It appears from the definition of completion date that the sale agreement was expected to be capable of completion in three weeks. That definition provided:

“ Completion Date
The later of either 20 October 2005 or 3 Business days following the advice in writing by the Vendor to the Purchaser that the Novated Agreements have been executed.”

13 This definition identified a precondition to payment of the purchase price, namely the provision by the vendor of advice that its agreements with the owners of property had been novated. That this could be done expeditiously appears to have been an underlying assumption of the parties. It was also reflected in the warranties given by the vendor in the following terms in annexure 2 to the sale agreement:

“ 1. Assignment consideration
1.1 The Management Agency Agreements comprised in the sale comprise all the current Management Agency Agreements held by the Business.
1.2 The Vendor has complete and unrestricted power and right to novate and transfer all Management Agency Agreements comprised in the sale pursuant to this Agreement.
1.3 There is no known impediment to the novation and transfer of any of the Management Agency Agreements comprised in the sale.”

14 The underlying assumption proved false. On 30 November 2005 a variation agreement was entered into by the parties which noted, in recital 3:

“The completion date as defined in the Agreement has not yet arrived as the Vendor has been unable to provide sufficient Novated Agreements to comply with the terms of the Agreement.”

15 Before turning to the operative provisions of the variation agreement, it may be noted that Mr Matthew Cook, who was associated with the appellant, and who had also been party to the sale agreement, had agreed to enter into a consultancy arrangement with the purchaser. That arrangement was to commence on completion.

16 The operative provisions of the variation agreement, so far as presently relevant, were as follows:

“1. The definitions set out in the Agreement and the Consultancy Agreement are applicable to this Agreement.
2. At the request of the Vendor and Cook the Purchaser has agreed to pay the sum of SEVEN HUNDRED THOUSAND DOLLARS ($700,000.00) as part payment of the purchase price, subject to the following:
(a) Upon payment of the moneys the Vendor will provide to the Purchaser a full release of [a registered bank charge];
(b) the Vendor will grant to the Purchaser a First Ranking Registered Fixed and Floating Charge over the assets and undertaking of the Vendor.
3. The definition of Commencement Date in the Consultancy Agreement shall be amended to mean the date of the payment of the moneys set out herein.
…
5. As from the date of the part payment of the purchase price all income derived from the Business will be the property of the Purchaser and the Purchaser will assume the responsibility for all operational expenses of the Business.
6. Clause 3.5 of the Agreement is amended to provide that the Retention Amount is payable on the first anniversary of the date of the part payment of the purchase price as allowed for herein.”

17 A number of aspects of the variation agreement should be noted. First, it goes to some length to avoid identifying the date of payment of the $700,000 as the completion date for the purposes of the sale agreement. For example, the legal and beneficial title to the business, which was to pass on completion (sale agreement, cl 2.3) clearly did not pass on the part payment referred to in the variation agreement, as the vendor was to grant the purchaser a charge over the assets and undertakings of the vendor. Secondly, it appears that the commencement of the consultancy agreement was to occur on the completion of the sale agreement: however, the variation agreement altered the commencement date in the consultancy agreement, without changing the definition of completion date either in that agreement or in the sale agreement to which it referred. Thirdly, cl 6 did not equate the date of part payment of the purchase price with the completion date.

18 The parties placed some weight on the proper construction of cl 6 of the variation agreement. On its face, cl 6 did no more than amend the date on which the retention amount was payable pursuant to cl 3.5 of the sale agreement. That clause provided that the retention amount was:

“[P]ayable in full on the first anniversary of the Completion Date but that the Vendor may in its absolute discretion on the occasion of that first anniversary elect to delay the quantification under clause 3.7 of the Retention Amount and also the repayment [sic] of the Retention Amount and:
…
(b) if the Vendor elects to delay the repayment of the Retention Amount then the Retention Amount is then payable in full not later than the second anniversary of the Completion Date …”

19 Perhaps curiously, cl 2.6 of the sale agreement identified the primary obligation as payment of the retention amount “on the second anniversary of the Completion Date”, but noted the possibility of “early payment” under cl 3.5. The appellant contended that one effect of cl 6 of the variation agreement was to remove the possibility of payment of the retention amount at any time beyond the first anniversary of the payment of the amount provided for in the variation agreement. That contention was not challenged.

20 In its terms, cl 6 of the variation agreement made no other variation to cl 3.5 or to any other provision of the sale agreement. Even accepting an implied variation of cl 2.6 of the sale agreement, there remained nothing in the variation agreement which made any provision with respect to the calculation of the retention amount. Nor did it provide for any variation in the calculation of the purchase price.

21 Because the definition of completion date was not varied, it was at least possible that there were three payments to be made, namely the part payment provided for in the variation agreement itself, the balance of the cl 3.1(a) amount payable by the purchaser on completion date and the retention amount. On that basis, one could have been confident that, subject to variations on account of factors C and D, the purchase price remained approximately $2 million. That was the implication for which the appellant contended, although it contended that only two payments were to be made.

22 An alternative implication was that the amount of $700,000 was intended to replace the payment of $1.5 million anticipated as payable on the completion date. However, if that was so, there remained a question as to how the retention amount was to be calculated. On one view, which was apparently an alternative construction advanced by the respondent below, the payment (now reduced to $700,000) should have been treated as equal to 75% of the purchase price, leaving the retention as one-third of that figure (or 25% of the total price).

23 A further possibility, which was accepted by the trial judge, was that the retention amount was to be calculated as 25% of the agreements which had been the subject of novation as at 30 November 2005. That produced a figure of $57,815.86.

24 Before ascertaining how that figure was reached, it may be noted that it is somewhat implausible as a commercial construction of the variation agreement. If the proportion contained in cl 3.1(c) is to remain unvaried, it must be understood as a proportion of the purchase price calculated by reference to the base annual income from the various agreements which constituted the business the subject of the sale agreement. Those agreements, to the extent that they had been novated as at 30 November 2005, gave rise to an amount (for the purposes of cl 3.1(b)) of $251,679.85. On that calculation, the amount payable on completion would have been less than $200,000. Because that amount bore no relationship to the payment of $700,000, it is difficult to understand why the parties would have envisaged that the total purchase price was comprised of $700,000 plus 25% of an unrelated figure.

Reasoning of trial judge

25 A critical step in the reasoning of the trial judge in calculating the retention amount was the conclusion that “the fixed amount” identified in cl 3.1(b) was “what might be called an indicative purchase price”: at [30]. His Honour held that this conclusion was supported by the fact that cl 3.1(a) set out the basis of the calculation based (in part) on factors A and B, a process which would have been unnecessary had the result already been known: at [31]. That approach was confirmed, his Honour said, by the recognition in cl 3.1(c) that “some of the elements in the formula in clause 3.1(a) are not capable of quantification at the date of the agreement”: at [32]. Further confirmation was found in other clauses (including cll 2.6 and 3.7) which referred to the sum of $1.5 million as payable on completion, but also recognised that the amount might be varied by further calculation.

26 With respect, none of those reasons is persuasive, although each must be taken into account. The element of uncertainty, referred to in the second and third reasons, is undoubtedly acknowledged in cl 3.1(c) (and other clauses). However, as noted above, that is attributed to “the other elements” in the formula which, factors A and B having been identified and calculated in the previous paragraph, must reasonably refer to factors C and D. So understood, neither the second nor the third reason provides support for the conclusion.

27 The first reason depends upon there being no purpose in identifying the precise role played by factors A and B in the calculation of the purchase price, unless there was an intention that further calculations be undertaken. However, that appears not to be so for two reasons. Each of these involves the calculation of the variations to be undertaken with respect to factors C and D. First, so far as factors C and D could have given rise to variations as at completion date, by reference to the changes in income, it might have been thought that such variations could be achieved on the recalculation of the amounts dependent on factors A and B if those factors were still variables. Secondly, it does not appear to have been the intention that the variations resulting from income be treated as straight deductions or additions, but rather that the variations reflect the use of multipliers as in the case of factors A and B. On this approach, not only were the calculations based on A and B treated as fixed, but the method of calculation based on those factors was to be a component of the variations required by factors C and D. Accordingly, the use of the formula still served a useful purpose despite the calculations in par (b).

28 Once these reasons are removed, the factors noted at [10] above favour the conclusion that the calculation in cl 3.1(b) should be seen as a calculation of the actual purchase price, subject to variation on account of factors C and D, both before and after completion date.

29 The second stage in his Honour’s reasoning, involving the relevant income to be identified in calculation of the purchase price, followed from his Honour’s conclusion with respect to the amounts identified in cl 3.1(b). For that purpose, he noted and accepted the submission that the means of transferring the business was by way of novated agreements. Accordingly, his Honour reasoned that the income stream upon which the purchase price was to be based must be the income stream to be derived from novated agreements. If that figure were to be calculated as at completion date, it would be possible to make the calculation based on knowledge of which agreements had been novated, as completion date was three business days after advice that the relevant novated agreements had been executed.

30 This approach, however, revealed an apparent anomaly in the drafting of cl 3.1. Factor A was identified as the base annual income from “Property Management Agreements”; factor B, the base annual income from “Facilities Agreements”. The term “Facilities Agreements” was defined to mean “those agreements for additional services and which are frequently evidenced simply by the exchange of correspondence and which have developed as adjuncts to Management Agency Agreements”: cl 21.2. The term “Management Agency Agreement” was defined as each agreement “creating the relationship of agency between the Vendor as agent and the Principal as principal whereby the Principal appoints and authorises the Vendor to let and manage the property … each of which individual agreement is delivered to the Purchaser on Completion by the Vendor and which the relevant Principal has agreed in writing is to be novated as from Completion to the Purchaser … and where that novation agreement is also delivered to the Purchaser on Completion”.

31 Thus, because the means of sale of the business was by transfer of novated agreements, his Honour concluded that factor A should be calculated by reference to the base annual income from management agency agreements, as defined, being a class which included only those agreements which were novated in favour of the purchaser.

32 There is a degree of circularity in this reasoning. If the purchase price were to be calculated in accordance with the formula in cl 3.1(a) as at completion date, it would have made good sense to adopt the defined term, management agency agreement, as the basis of factor A. However, cl 3.1(a) did not adopt that term, but used an undefined term accepted by his Honour as synonymous, namely “Property Management Agreements”: at [55]. That would be consistent with the fact that the defined term could not operate for the purposes of a calculation undertaken prior to completion date and, in particular, at the date of the sale agreement. Accordingly, his Honour’s reasoning in support of this calculation being based on novated agreements, depends upon his prior conclusion as to the effect of the calculation undertaken at the earlier date and set out in cl 3.1(b). Thus, accepting the correctness of his Honour’s conclusion that the two terms were synonymous, some significance might have been attached to the failure to use the defined term in cl 3.1(a), when considering the status of the calculation in cl 3.1(b).

33 A greater difficulty with the approach adopted by the trial judge is the inconsistency between that approach and the variation agreement. The variation agreement expressly recited that sufficient novated agreements had not been obtained. It did not suggest that the payments were now to be calculated on the basis of those novated agreements which had been obtained, nor was the definition of completion date deemed to have been fulfilled. Indeed, for the reasons given above, the variation agreement did not effectively treat 30 November 2005 as the completion date, as his Honour concluded at [56]. Further, it seems legitimate to take into account the fact, which formed the basis of the calculation undertaken for the purposes of the judgment, that the payment under the variation agreement bore no relationship to the income stream under such agreements as had been novated. But if novated agreements were no longer the basis for the calculation of the purchase price, it was arbitrary to treat them as the basis of that part of the purchase price which remained unpaid. That was not the preferable construction of the effect of the sale agreement, as varied.

An alternative approach

34 Once it is accepted that the calculation involving factors A and B in cl 3.1(b) is part of the calculation of the purchase price, to be varied only in accordance with the calculations required for factors C and D, the variation agreement must be taken to have varied the amount and timing of the payment due on completion date, or the total purchase price, or both. In relation to the former, it either replaced or varied as to time and amount, the part payment envisaged to have taken place on completion. According to the appellant, it also made the balance of the purchase price payable at the beginning, rather than the end of the period envisaged by the sale agreement, namely twelve months after the date of payment. On the appellant’s case, reduction of the payment period may have been seen as a quid pro quo for the vendor which was otherwise to receive approximately one-third of the purchase price, instead of 75% thereof, forthwith. An alternative understanding might be that because the vendor was to receive a highly reduced purchase price, it was to be paid over a shorter period. It is not possible for the Court to choose between these alternatives by construing the variation agreement, in accordance with commercial realities.

35 Several matters of context are, however, significant. First, the agreement to make part payment of the purchase price forthwith had been at the request of the vendor: see recital 4. Secondly, insufficient novated agreements had been obtained up to the date of the variation agreement. Given the assumption that the transfer of the business was to be effected by novation of the vendor’s agreements with its principals, it may have appeared that the substratum of the agreement was about to collapse and that some alternative arrangement must be made. Thirdly, the timing indicated that the smaller payment was to be made some 60 days after the sale agreement was executed, whereas that agreement had contemplated settlement within three weeks. Accordingly, the smaller sum was being paid sometime after the date on which the purchaser had expected to pay a sum of approximately $1.5 million. The purchaser was not obtaining that for which it had bargained, but something which lacked the security of a portfolio of novated agreement. That, in contractual terms, was not unimportant: cl 3.3(b) of the sale agreement had contemplated that fees might no longer be payable under agreements which had not been novated, pursuant to s 55 of the Property Stock and Business Agents Act 2002 (NSW). Indeed, that was a factor which the primary trial judge took into account as supporting the view that the purchase was intended to be calculated by reference to the income flow from novated agreements only: see [51]. The inference underlying his Honour’s reasoning, which was not substantially challenged during the appeal, was that the purchaser was to get something less than the secure and enforceable interests upon which the contract was based. On the probabilities, it therefore appears unlikely that the variation agreement was intended to maintain the vendor’s right to the full purchase price and indeed to an amount payable in full at an earlier time than if it had been in a position to complete its side of the bargain. On that approach, the preferable conclusion is that the amount of $700,000 was agreed to be paid in lieu of the anticipated amount of $1.5 million, which had not become payable under the contract and might never become payable.

36 The second stage in the reasoning involves acceptance of the fact that the $700,000 payment was not the full purchase price but a “part payment”. The anticipated ratio between the initial payment and the retention amount under the sale agreement was 3:1. Assuming that the initial amount was that which was varied by the variation agreement and that the relationship was to remain the same, the retention amount would be $233,333.

37 That was the result for which the respondent contended, in the alternative, in the Court below: Judgment at [28]. That is the preferable construction of the sale agreement as varied.

Answers to separate questions

38 In the Court below, two questions were fixed for separate determination: the first related to the calculation of the retention amount and the second to the calculation of the purchase price. The second question assumed that the retention amount was not to be calculated in the manner accepted above. However, it also assumed that the purchase price was not to be calculated in accordance with cl 3.1(b), once the variation agreement took effect. For the reasons given, that assumption was correct, but his Honour reached the assumption on a different basis, namely that cl 3.1(b) was merely an interim exemplification of the necessary calculation.

39 The separate questions were identified in order to avoid factual issues said to be relevant to the question of rectification: Judgment at [5]. Some of that evidence may have been relevant to provide the commercial context, especially of the variation agreement. No evidence was relied upon by the trial judge in that respect, nor was any material provided to this Court as relevant for that purpose.

40 Questions 1 and 2 as formulated at trial, are set out below. Question 3 related to the calculation of interest and was agreed between the parties prior to judgment.

“1. Whether on a proper construction of the written agreement between the plaintiff and the defendants dated 30 September 2005, as varied by the further written agreement dated 30 November 2005, the Retention Amount payable on the date provided in clause 6 of the 30 November 2005 agreement is;
(a) Twenty five percent of the purchase price calculated as at 30 November 2005 in accordance with formula in clause 3.1 of the 30 September 2005 agreement; or
(b) Twenty five percent of the payment of $700,000 payable under clause 2 of the 30 November 2005 agreement; or
(c) The difference between the purchase price calculated as at 30 November 2006 in accordance with the formula in clause 3.1 of the 30 September 2005 agreement less the sum of $700,000; or
(d) Calculated on some other basis, and if so, what basis.
2. Whether on a proper construction of the written agreement between the plaintiff and the defendants dated 30 September 2005, as varied by the further written agreement dated 30 November 2005, the calculation of the purchase price referred to in paragraph 1(a) or 1(c) is to be arrived at by applying the multiples specified in clause 3.1 to:
(a) only the annual income from ‘Property Management Agreements’ and ‘Facilities Agreements’ that have been novated to the first defendant as at 30 November 2005;
(b) only the annual income from ‘Property Management Agreements’ and ‘Facilities Agreements’ that have been novated to the first defendant as at 30 November 2006; or
(c) all the annual income from ‘Property Management Agreements’ and ‘Facilities Agreements’ that the first defendant received between 30 November 2005 and 30 November 2006.”

41 In accordance with these reasons, the questions should be answered as follows:

Question 1(a): No.
Question 1(b): Yes.
Question 1(c): No.
Question 1(d): Unnecessary to answer.
Question 2(a)-(c): Unnecessary to answer.

Other orders

42 Consistently with these answers, the money judgment (being order 1 made on 23 July 2008) should be set aside. Subject to what follows, judgment should be entered based upon the appellant’s entitlement to payment of a retention amount of $233,333, subject to any variation based on factors C and D, if they remain relevant. It will also be necessary to calculate interest on the outstanding payment.

43 When identifying the separate issues, it was noted:

“1. If questions 1(a) or (b) and 2(a) or (b) are answered in the affirmative, then the following issues remain to be resolved:
a. What adjustment, if any, should be made to the Retention Amount for “Replacement Income” arising out of the agreements entered into:
i. between the first defendant and EMC Asset Management Pty Limited; and/or
ii. between Australia Performance Strata Management Pty Limited and the Owners of Strata Plan 18604.
2. If question 2(c) is answered in the affirmative, then the defendant’s cross claim seeking rectification of the 30 September Agreement needs to be determined.”

44 The effect of the note is not entirely clear: it seems not to have been appreciated that if question 1(b) was answered in the affirmative, the calculation of the purchase price did not depend upon applying multiples to the annual income however calculated, as a result of which question 2 was immaterial. Accordingly, the first remaining issue identified in the note appears to fall away. (Paragraph 1 of the note had only one lettered subparagraph.) Similarly, as the proposed calculation does not depend upon annual income derived from agreements which were not the subject of novation, the issue identified in paragraph 2 of the note also appears to fall away. Whether any remittal for consideration of the rectification claim arises in these circumstances is unclear.

45 The appellant sought to make good two points: the first was that the approach of the trial judge was erroneous, the second that it was entitled to the balance of the $2 million provided as the purchase price in the contract. It has succeeded on the first, but not the second. On one view, the appeal should be dismissed. However, the preferred construction indicated above would allow a better judgment in favour of the appellant than that which was obtained below. It was an alternative approach adopted by the respondent in the Court below. As neither party actively proposed the preferred result, they should have an opportunity to indicate what orders should be made.

46 Orders 3 and 4 below dealt with costs. The appropriate orders with respect to costs both at trial and on appeal should be a matter for further submissions.

47 At this stage it is sufficient to give the following direction:

Direct the parties to confer as to the orders required to dispose of the appeal and, if a common position cannot be reached,
(a) each to file and serve its proposed orders and submissions in support thereof within 14 days, and
(b) each to file and serve submissions in reply (if any) within a further seven days.

48 If further time is required, the Court should be notified within the 14 days referred to in (a) above.

49 YOUNG JA: I agree with Basten JA.

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