Sapphire (SA) Pty Ltd (trading as River City Grain) v Barry Smith Grains Pty Ltd (In Liquidation)
[2012] NSWSC 771
•10 July 2012
Supreme Court
New South Wales
Medium Neutral Citation: Sapphire (SA) Pty Ltd (trading as River City Grain) -v- Barry Smith Grains Pty Ltd (In Liquidation) [2012] NSWSC 771 Hearing dates: 19 June 2012 Decision date: 10 July 2012 Jurisdiction: Equity Division - Commercial Arbitration List Before: Hammerschlag J Decision: See paragraphs 61, 68 and 69
Catchwords: COMMERCIAL ARBITRATION - appeal against arbitral award pursuant to ss 38(2) and 38(4) of the Commercial Arbitration Act 1984 (NSW) - CONTRACT - contracts for the sale and purchase of grain incorporating the National Agricultural Commodities Marketing Association Ltd Trade Rules (NACMA Rules) - construction of the NACMA Rules - provision for contract to be closed out on occurrence of an Insolvency Event of which the defaulting party must give immediate notice - provisions for determination of the Fair Market Price in the event that notice is given and also where notice is not given as required - where Insolvency Event occurs but no notice is given and then another Insolvency Event occurs of which notice is given - how the NACMA Rules operate in these circumstances Legislation Cited: Commercial Arbitration Act 1984 (NSW) Cases Cited: Sapphire (SA) Pty Ltd (trading as River City Grain) v Barry Smith Grains Pty Ltd (In Liq) [2011] NSWSC 1451
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151
Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522
Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99
Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622
Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137
Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1
Alghussein Establishment v Eton College [1991] 1 All ER 267
Brothers v Park [2004] ANZ Conv R 451
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130Category: Principal judgment Parties: Sapphire (SA) Pty Ltd ACN 076 858 029 (trading as River City Grain) - Plaintiff
Barry Smith Grains Pty Ltd (In Liquidation) ACN 003 151 166 - First Defendant
David John Kerr and Peter William Marsden (in their capacities as joint and several liquidators of the first defendant and as receivers and managers of the property of the Barry Smith Family Trust and Barry Smith Family Trust No.2)Representation: Counsel:
J.A. Watson with F.T. Roughley - Plaintiff
M.T. McCulloch SC - Defendants
Solicitors:
Eastern Bridge - Plaintiff
Henry Davis York - Defendants
File Number(s): 2011/149286
Judgment
INTRODUCTION
HIS HONOUR:This is an appeal brought, with leave, pursuant to s 38(4) of the Commercial Arbitration Act 1984 (NSW) ("the Act") against an arbitral award described as GTA Arbitration No 89, published as an interim award on 16 August 2010 and as a final award on 16 March 2011. Leave to appeal was granted by Ward J on 28 November 2011; Sapphire (SA) Pty Ltd (trading as River City Grain) v Barry Smith Grains Pty Ltd (In Liq) [2011] NSWSC 1451.
BACKGROUND
At all material times both parties were grain traders.
The Woodside contract
On 7 March 2007 the plaintiff, as seller, entered into a contract, designated number 7339, with the defendant, as buyer, to sell 1,000 metric tonnes of barley at $213 per metric tonne for delivery at Goulburn Valley from January through, and including, September 2008 at buyer's call ("the Woodside contract", so named because of the broker through which it was transacted).
The Woodside contract incorporated the then current National Agricultural Commodities Marketing Association Ltd Trade Rules ("NACMA Trade Rules"), which contained, relevantly, the following provisions:
RULE 3.0 TIME
All stipulations set forth in the Terms of Trade as to "Time" are of the essence.
RULE 17.6 DEFAULT DUE TO INSOLVENCY
1. Definition of Insolvency Event
"Insolvency Event" means, in respect of a person (which shall be construed as including a corporation):
(a) an order being made, or the person passing a resolution, for its winding up;
(b) an application being made to a court for an order for its winding up unless the application is withdrawn or dismissed within 5 days;
(c) an administrator being appointed to the person;
(d) (i) the person resolving to appoint a Controller or analogous person to the person or any of the person's property;
(ii) an application being made to a court for an order to appoint a Controller, provisional liquidator, trustee for creditors or in bankruptcy or analogous person to the person or any of the person's property unless the application is withdrawn or dismissed within 5 days; or
(iii) an appointment of the kind referred to in subparagraph (ii) being made (whether or not following a resolution or application);
(e) the holder of a Security Interest taking possession of any of the person's property;
(f) the person being taken under section 459F(1) of the Corporations Act to have failed to comply with a statutory demand;
(g) the person:
(i) suspending payment of its debts, ceasing (or threatening to cease) to carry on all or a material part of its business, stating that it is unable to pay its debts or being or becoming otherwise insolvent; or
(ii) being taken by applicable law to be (or if a court would be entitled or required to presume that the person is) unable to pay its debts or otherwise insolvent;
(h) the process of any court or authority being invoked against the person or any of its property to enforce any judgment or order for the payment of money or the recovery of any property, unless the person is able, within 5 days, to satisfy the other party that there is no substantial basis for the judgment or order in respect of which the process was invoked;
(i) the person dying, ceasing to be of full legal capacity or otherwise becoming incapable of managing its own affairs for any reason;
(j)the person taking any step that could result in the person becoming an insolvent under administration (as defined in Section 9 of the Corporations Act);
(k) the person taking any step toward entering into a compromise or arrangement with, or assignment for the benefit of, any of its members or creditors; or
(l) any analogous event,
unless this takes place as part of a solvent reconstruction, amalgamation, merger or consolidation that has been approved by the other party.
2. Consequences of Insolvency Event
a)If before the fulfilment of a contract the Buyer or the Seller commits an Insolvency Event, the Buyer or Seller shall immediately notify the other party within two business days of the occurrence and shall be deemed to be in Default.
b) In the absence of any express written agreement to the contrary, any contracts between the parties shall be closed out at Fair Market Price on the business day following the giving of the notice. If notice is not given as required, the other party, on learning of the occurrence of the Insolvency Event, shall have the option of declaring the contract closed out at either the Fair Market Price on the first business day after the date when such party first learnt of the occurrence of the act of insolvency or at Fair Market Price ruling on the first business day after the date of the Insolvency Event occurred [sic].
Rule 17.7 Fair Market Price Defined:
For the purposes of this Rule 17, Fair Market Price shall be construed as meaning;
a) the price per tonne ascertained by Repurchase or Resale for the commodity which is actively trading, or
b) in the case of Seller Default the indication of the price being offered by other sellers in the market place on the business day following the giving of notice by the Buyer pursuant to clause 17.1 or 17.5, or
c) in the case of Buyer Default the indication of the price being bid by other buyers in the market place, on the business day following the giving of notice by the Seller pursuant to clause 17.2, or 17.5.
Rule 17.8 Repurchase Defined
The term "Repurchase" shall be construed as meaning an actual bona fide purchase of a commodity of like kind and quantity on the open market.
Rule 17.9 Resale Defined
The term "Resale" shall be construed as meaning an actual bona fide sale of a commodity of like kind and quantity on the open market.
Rule 17.10 Ascertaining Fair Market Price
Where either party is dissatisfied with the ascertained Fair Market Price and damages cannot be mutually agreed, then the determination of Fair Market Price may be referred by either party for determination according to the NACMA Expert Opinion Rules, and which shall, for the purpose of this sub-rule only, be final and binding on both parties.
Rule 26.0 of the NACMA Trade Rules provides for the submission to and settlement by arbitration of any dispute arising out of or relating to any contract subject to them in accordance with the NAMCA Dispute Resolution Rules.
Under Article 25.1f of the NACMA Dispute Resolution Rules, the arbitration tribunal has the power (after giving the parties a reasonable opportunity to state their views) to decide whether or not to apply strict rules of evidence as to admissibility, relevance or weight of any material tendered by a party.
The Teague contract
On 7 September 2007, the plaintiff, as seller, entered into a contract, designated number 7555, with the defendant, as buyer, to sell 1,000 metric tonnes of barley at $408 per metric tonne for delivery at a location at the seller's option (including Geelong) between 1 December 2007 and 31 January 2008 ("the Teague contract", so named because of the broker through which it was transacted).
The Teague contract incorporated the NACMA Trade Rules as they then stood. Rule 17.6 of the NACMA Trade Rules applicable to the Teague contract differs from that which applies to the Woodside contract only in the respect that the words "and shall be deemed to be in Default" in sub-rule 2a) do not appear in the Teague contract.
Where it is not necessary to distinguish between the Woodside contract and the Teague contract, I shall refer to them collectively as the contracts.
Insolvency Events
On 25 September 2007, in proceedings by the defendant in this Court for the appointment of provisional liquidators to it, Mr Barry Ronald Smith, a director of the defendant, swore an affidavit providing information about the defendant's financial position.
Mr Smith referred to the fact that as at September 2007 the defendant was expecting to receive $300,000 from the Commonwealth Bank under an invoice factoring facility but that the Bank had refused to pay. He deposed to the fact that "this created an immediate cash flow deficit of $300,000". He went on to depose as follows:
The Company's businesses effectively ceased trading as at Wednesday, 19 September 2007. All wages and operational expenses (including electricity and rent) have been paid to date. The Businesses have been in "caretaker mode" since at least June 2007. As the time for delivery of the contracts expires and the contracts are closing out, more and more creditors are emerging. While the Company has not yet been served with a statutory or other demand, I believe that it is a matter of days before a statutory demand is issued.
On 24 September 2007, Mr Smith had a conversation with a Mr David Charles Barlow, a grain grower, in which Mr Smith said words to the effect, "I am putting myself into voluntary liquidation" and "I can't pay you". This conversation was deposed to by Mr Barlow in a statutory declaration dated 11 June 2009, made for the purposes of arbitration proceedings between companies associated with Mr Barlow and the defendant, to which the plaintiff was not a party. A copy of this statutory declaration had apparently been emailed to the plaintiff.
On 26 September 2007, Messrs Peter Marsden and David Kerr were appointed joint and several provisional liquidators to the defendant by this Court. Ultimately, on 11 February 2008, they were appointed joint and several liquidators.
On 27 September 2007 the liquidators wrote to the plaintiff notifying it that they had been appointed to the defendant and stating that their notification was, with respect to the contracts, notification of an Insolvency Event as required by Rule 17.6.2a).
The arbitration
The parties differed as to the consequences of the notifications under the contracts, and went to arbitration before a tribunal of three members under the NACMA Trade Rules.
The defendant's stance was that an Insolvency Event had occurred on 26 September 2007 upon the appointment of the provisional liquidators, and that notice of this, under Rule 17.6.2a), had been given on 27 September 2007. It put to the arbitrators that Rule 17.6.2b) required the contracts to be closed out at the Fair Market Price on 28 September 2007, being the first business day following the giving of the notice.
The plaintiff put to the tribunal that a number of Insolvency Events had occurred before the appointment of the provisional liquidators. Amongst others, it identified the following such events:
(a) the placing into "caretaker mode" of the defendant's businesses in June 2007;
(b) the defendant's businesses effectively ceasing to trade on 19 September 2007; and
(c) the admitted inability of the defendant to pay Mr Barlow's companies and Mr Smith's intention to go into voluntary liquidation, as disclosed in Mr Barlow's statutory declaration.
The plaintiff put to the tribunal that the defendant had failed, in breach of its obligation under Rule 17.6.2a), to give the plaintiff notice of these events. It submitted that under Rule 17.6.2b) it had the option of declaring the contracts closed out at either the Fair Market Price on the first business day after it learnt of the earliest of those events or at Fair Market Price ruling on the first business day after the date the relevant event occurred.
In written submissions to the tribunal, the plaintiff put that it first learnt about Mr Smith's telephone conversation with Mr Barlow on 28 July 2009. In written submissions to the tribunal dated 9 April 2010, it said that it came into possession of Mr Smith's affidavit on 23 March 2010. In those submissions, the plaintiff purported to close out the contracts as at 24 March 2010.
The defendant contended before the tribunal (and subsequently before Ward J) that Mr Barlow's statutory declaration was not admissible against it because the material was confidential, having been prepared for other proceedings.
In written submissions to the tribunal, dated 18 May 2010, the defendant submitted that the events described by Mr Smith in his affidavit did not disclose the occurrence of an Insolvency Event.
By their interim award of 16 August 2010, the arbitrators upheld the defendant's contention in the following terms:
4.2Timing of the Insolvency Event
The Respondent has argued that the relevant insolvency event for the purposes of Rule 17.6 was Mr Smith's statement to Mr Barlow that Mr Smith intended to put his company into "voluntary liquidation". The Respondent says that this amounted to a statement that the claimant was "threatening to cease to carry on all or a material part of its business, stating that it is unable to pay its debts" for the purposes of the Trade Rule 17.6(g)(i).
The sole evidence of this alleged insolvency event is the affidavit of Mr Barlow prepared for the purposes of another arbitration to which the Claimant was party. Its disclosure in this matter would appear to depart from the general rule of confidentiality and privacy which applies to arbitral proceedings. The Claimant urges us, with some force, not to read Mr Barlow's affidavit.
However, even if we accept that an insolvency event occurred on 24 September 2007 of which the Respondent was not given notice until (it says) almost 2 years later, the Respondent was clearly given notice of insolvency on 27 September 2007 rendering 28 September 2007 as the relevant date for fixing the "fair market price". The alternative construction would be that notice on 27 September 2007 was a nullity and the Respondent had the option of fixing the fair market price on either 25 September 2007 or 29 July 2009 being the day after actually becoming aware. Such a result and construction would cause great uncertainty and cannot be preferred.
We have no hesitation in finding therefore that the relevant date for establishing the fair market price was 28 September 2007.
The tribunal determined that the contracts were to be closed out at the Fair Market Price as at 28 September 2007. They went on to determine that price to be $439 per metric tonne for the Woodside contract and $436 per metric tonne for the Teague contract. The Woodside contract price was $213 per metric tonne, resulting in an award in favour of the defendant for $226,000 ($439 - $213 x 1,000). The Teague contract price was $408 per metric tonne, resulting in an award in favour of the defendant of $28,000 ($436 - $408 x 1,000). The total award in favour of the defendant was $254,000.
It may be observed that there was evidence before the tribunal that the Fair Market Price of the applicable commodities was, in the days before 28 September 2007, lower than it was on that date. Some evidence pointed to it being as low as $365 per tonne. Other evidence indicated a price of $425 per tonne. By virtue of the manner in which the tribunal approached the matter, it did not find it necessary to determine the Fair Market Price at any earlier date.
At this point it is necessary to mention that in addition to the contracts, the parties had a third contract, known as the Mallon contract, about which they were also in dispute. That dispute was arbitrated, resulting in a finding that the defendant owed the plaintiff $97,582.39, an obligation which is now not in dispute. The arbitrators failed, in their award, to allow this amount to the plaintiff and by a consent order made by Ward J on 24 November 2011, an appeal against the award was allowed and it was varied to deduct this figure from the amount first awarded. Accordingly, the award under appeal is for the amount of $157,417.61.
Leave to Appeal
In the application for leave to appeal, the plaintiff contended that the tribunal erred in law, or acted in breach of the rules of natural justice, by:
(a) failing to take into account the affidavit of Mr Smith on the question of prior insolvency;
(b) failing to consider the proper construction and meaning of Insolvency Event for the purposes of rule 17.6, including for the purpose of ascertaining an Insolvency Event date; and
(c) failing to consider the consequences on the respective rights and obligations of the parties under the Rule of an earlier Insolvency Event (arising prior to 26 September 2007) and any failure on the part of the defendant to have notified the plaintiff of it immediately and within two business days.
These grounds were described in the plaintiff's Commercial Arbitration List Statement in the leave proceedings before Ward J as the "fifth ground" for the application.
In paragraphs [243]-[245] of her Honour's judgment granting leave, Ward J concluded, and I respectfully agree, that the construction adopted by the tribunal ignored the obligation on the defendant in Rule 17.6.1(a) to give notice within two business days of the occurrence of an Insolvency Event and the clear words of Rule 17.6.2b) as to the consequence of there being no notice within that time.
Her Honour granted the plaintiff leave to appeal in the following terms:
That leave to appeal be granted pursuant to s 38(4)(b) of the Commercial Arbitration Act 1984 (NSW) on the question of law more particularly described as the "fifth ground" in the plaintiff's Commercial Arbitration List Statement arising out of arbitration award GTA Arbitration No 89 published as an Interim Award on 16 August 2010 and as a Final Award on 16 March 2011.
Her Honour also gave leave to the defendant to raise, by way of Notice of Contention, grounds upon which the tribunal's decision could be supported.
THE APPEAL
On the appeal, Mr J A Watson and Ms F T Roughley of counsel appeared for the plaintiff and Mr M T McCulloch SC appeared for the defendant.
The parties provided comprehensive written submissions. With the benefit of debate, the issues narrowed significantly and the parties refined (perhaps even reformulated - without objection) their positions.
Both parties eschewed the suggestion that any issue which remained to be decided should be remitted to the tribunal. Their common position was that all outstanding issues should be determined by the Court.
At the outset, it is appropriate to record that there was evidence before the tribunal that the Fair Market Price in the week ended 26 September 2007 was lower than the Fair Market Price on 28 September 2007.
The plaintiff put that on 19 September 2007 the defendant ceased to carry on all or a material part of its business, being or becoming otherwise insolvent, and that this was an Insolvent Event either within the meaning of Rule17.6.1(g) or Rule 17.6.1(l).
Its starting position was that the defendant was obliged immediately to give the plaintiff notice of the event, and that it breached that obligation with the result that notice had "not [been] given as required" within Rule 17.6.2b). It put that the consequence of the failure to give notice was that it had the option to declare each contract closed out or not (that is, to leave it on foot notwithstanding the occurrence of an Insolvency Event) and that if it chose to declare the contract closed out, it had the further option to declare either the first business day after when it first learnt of the Insolvency Event or the first business day after the date that event occurred, as the date for the determination of the Fair Market Price at which the contracts would be closed out.
However, ultimately (and correctly, in my view) the plaintiff did not press for a finding that it had an option to declare the contracts either not closed out or closed out. The proposition is unsustainable. In my view, Rule 17.6.2 envisages two factual scenarios where an Insolvency Event occurs, both of which have the inexorable result that the contract is closed out.
Where the defaulting party complies with its obligation to notify of the Insolvency Event immediately, the contract comes to an automatic end. Where the defaulting party fails to give notice as required but the non-defaulting party learns of the Insolvency Event (before either fulfilment or the contract is otherwise closed out), the non-defaulting party has one of two options. It can declare the contract closed out on the first business day after the date the Insolvency Event occurred or on the date when it first learns of the event, but it must do one of those things. This option affords it protection against, or enables it to take advantage of, movements in price in the interim, that is, from the date it should have received notice to the date on which it actually learns of what it should have been told.
The plaintiff (also correctly, in my view) did not press for a finding of an entitlement to declare the contracts closed out as at the first business day after it first learnt of earlier Insolvency Events, that is, either on 28 July 2009 when it first learnt of the Barlow-Smith conversation or on 23 March 2010 when it received Mr Smith's affidavit.
Rule 17.6.2 requires a party who, in any case, commits an act of insolvency to give notice of it. The invariable operation of the Rule when this obligation is complied with, is that the contract is closed out at the Fair Market Price on the business day following the giving of the notice. An undoubted commercial motivation for this is to ensure that a commodity trader does not have an insolvent counterparty to unfulfilled contracts. It is also to be remembered that ordinarily there will be a ready market for the commodities concerned and immediate notice and closing out enables a party to act in that market to protect its own interests.
However, what the Rule does not contemplate is an Insolvency Event occurring, of which the defaulting party fails to give notice, and then a later and further Insolvency Event occurring of which it does give notice. That is what happened here if an Insolvency Event occurred on 19 September 2007.
If an Insolvency Event occurred on 19 September 2007, two pivotal questions, both of contractual construction, arise. The first is, did the notifications given on 27 September 2007 have the effect of closing out the contracts? The second is, if those notifications did have that effect, what is the date upon which the Fair Market Price is to be determined?
Before considering these questions, it is appropriate to consider whether an Insolvency Event occurred on 19 September 2007, a matter in respect of which the arbitral tribunal did not make any finding. The defendant put that the evidence did not establish such an event.
The plaintiff did not press for findings either that an Insolvency Event should be found to have occurred sometime in June 2007 based on Mr Smith's "caretaker mode" utterance, or on 24 September 2007 on the basis of the Barlow-Smith conversation. As to the former, the term used by Mr Smith is not of sufficiently certain import to sustain a finding that what he described was an Insolvency Event. As to the latter, the defendant persisted (albeit rather faintly and perfunctorily) with a submission that Mr Barlow's statutory declaration was not admissible against it for the reason that it attracted confidentiality, having been prepared for other proceedings. In my view, the evidence of the Barlow-Smith conversation is admissible and Mr Smith's statements reported by Mr Barlow are sufficient to warrant a finding that the defendant was suspending payments of its debts or ceasing to carry on business because it was insolvent.
The defendant put that Mr Smith's statement that the defendant's business effectively ceased trading as at 19 September 2007 was unclear and that more was required for the plaintiff to establish that the defendant in fact ceased carrying on its business at that time. It drew attention to a submission which it had made to the arbitrators that when the provisional liquidators took possession of the defendant and its businesses, the defendant continued to operate from premises it had occupied for some time, continued to employ staff who continued to maintain accounts and take other steps necessary to carry on the defendant's businesses.
It is to be remembered that Mr Smith's affidavit was sworn for the purpose of persuading the Court to appoint provisional liquidators precisely because of the defendant's insolvency.
Mr Smith's statement that on 19 September 2007 the defendant effectively ceased trading is a clear statement that it was ceasing to carry on all, or a material part, of its business. This is not inconsistent with the defendant continuing to operate, employing staff to maintain accounts or taking other steps necessary to carry on what was left of its business, but nevertheless ceasing to trade.
Mr Smith's statement was not made in a vacuum. On 18 September 2007, the defendant had an immediate cash flow deficit of $300,000, a clear indication that it was unable to pay all of its debts as and when they were due, the hallmark of insolvency. More and more creditors were emerging and statutory demands were anticipated. The following day the defendant effectively ceased trading.
Had the arbitral tribunal (which was not bound to apply strict rules of evidence) considered the question, it is hard to see how it would have reached any conclusion other than that the defendant had, on 19 September 2007, ceased to carry out all or a material part of its business, being insolvent as contemplated by Rule 17.6.1(g)(i).
I find that an Insolvency Event occurred on 19 September 2007.
It is not necessary to consider whether there was also an event or events analogous to other events identified in Rule 17.6.1, within the meaning of Rule 17.6.1(l).
But for the defendant's failure to meet its contractual obligation to give notice, the contracts would have been closed out earlier, at which time the Fair Market Price was lower. The defendant would benefit through its own wrong if the higher Fair Market Price as at 28 September 2007 applied.
I turn to whether the notifications of 27 September 2007 had the effect of closing out the contracts and if so, at what price.
As I have said earlier, patently Rule 17.6.2 does not in terms contemplate what happened here. It is nevertheless necessary to determine how the Rules operate, on their proper construction, in the face of the events that have occurred.
The meaning of words used in the Rules is to be determined by what a reasonable person would have understood them to mean. This requires consideration of the language used, the surrounding circumstances known to the parties, the purpose of the transaction and the objects which it was intended to secure: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160, [8].
The whole of the instrument has to be considered. Preference is given to a construction supplying a congruent operation to the various components of the whole of an instrument: Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 529, [16].
If the words used are unambiguous, the Court must give effect to them. If the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust: Australian Broadcasting Commission vAustralasian Performing Right Association Limited (1973) 129 CLR 99 at 109; Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622; Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137; Western Export Services Inc v Jireh International Pty Ltd (2011) 86 ALJR 1 .
The Rules are also to be construed in accordance with the well-established principle that a party will not be permitted to take advantage of its own wrong; see Alghussein Establishment v Eton College [1991] 1 All ER 267 at 270 and following; Brothers v Park [2004] ANZ Conv R 451 at [82]; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 147.
Rule 17.6 makes it inevitable that a contract will be closed out when an Insolvency Event occurs and notice of it is given by one party to the other party or the other party otherwise learns of it. It does not leave open the possibility that a contract is not closed out at all.
The Rule has application if, before the fulfilment of a contract, the buyer commits an Insolvency Event. Such an event did occur on 26 September 2007 and albeit that the defendant was in breach of an obligation to give notice of an earlier Insolvency Event, notice was given but not "given as required", as described by Rule 17.6.2b).
It would be inimical to the commercial rationale underlying Rule 17.6 as a whole to construe the failure to give notice of an earlier Insolvency Event as having the effect that the contracts stayed on foot until the plaintiff learnt of that earlier Insolvency Event, despite the occurrence of an intervening Insolvency Event of which notice was given.
The result is, in my view, that subject to the further operation of Rule 17.6.2b), the contracts were closed out on 28 September 2007.
The defendant accepted that if an Insolvency Event had occurred earlier than 26 September 2007, it became obliged to notify the plaintiff of it but had failed to do so. The defendant also accepted that the contracts should be given operation so as not to permit it to take advantage of its own wrong.
Had the defendant given immediate notice of the 19 September 2007 Insolvency Event, the contracts would have been closed out at a Fair Market Price lower than that ruling on 28 September 2007. It follows that if the defendant has the benefit of a close out on the later date, it would be advantaged by its own wrong.
The rule that a party may not reap benefits by its own wrong is one of contractual construction. Accordingly, the express terms of the contract must accommodate its application. In the present case, as the following analysis reveals, not only do the Rules do so, but their application to the facts that have occurred enable the party who should have received notice but did not, to ensure that mischief is avoided.
Where notice is not "given as required" - which is the case here - the non-defaulting party is given the option of declaring the contract closed out at the Fair Market Price on two alternative dates, that is, the Fair Market Price on the first business day after the date when it learnt of the act of insolvency or the Fair Market Price ruling on the first business day after the Insolvency Event occurred. These are different dates to that which applies where notice is given.
Obviously a contract cannot be closed out unless it is on foot. Thus, the options given are clearly predicated on the assumption that the contract was on foot as at the date upon which it is declared to be closed out.
In the present case, the plaintiff could have no option to declare the contracts closed out with effect from when it learnt of the 19 September 2007 Insolvency Event in 2009 or 2010. By then the contracts were already closed out.
But the plaintiff still had another operative option as the non-defaulting party. It could still declare the contracts closed out at the Fair Market Price ruling on the first business day after the date the 19 September 2007 Insolvency Event occurred, at which time the contracts were still on foot. The defendant's conduct did not, and could not, deprive the plaintiff of this.
If the plaintiff chose not to exercise this option, then the Fair Market Price on the first business day following the giving of the notices, i.e. 28 September 2007, would apply.
The selection of the appropriate date is in the hands of the non-breaching party and the mischief that the breaching party may be advantaged by its own wrong is avoided.
Arguably this requires the plaintiff to exercise an option to declare the contract closed out on the earlier date to avoid 28 September 2007 being the close out date.
As mentioned above, in its submissions to the tribunal the plaintiff purported to close out the contracts as at 24 March 2010. I have concluded that the plaintiff did have an option, but not the one it purported to exercise.
Whilst detailed attention was given during argument as to how the clause operated and a submission was made by the defendant in the context of options which the plaintiff may have had, that it had lost them because of the effluxion of time, no attention was focused on whether it was necessary for the plaintiff to exercise an option by way of selecting 20 September 2007 as the close out date and, if so, whether it has done so (for example, by way of the way in which it formulated its argument before me), can still do so, or can no longer do so. I will accordingly invite the parties to make further submissions on these questions.
Depending on the conclusion which the Court ultimately reaches on those questions, it will be necessary for the Court to determine the Fair Market Price prevailing on 20 September 2007.
The parties agreed that if Fair Market Price needed to be determined, this should be done by the Court itself and not by way of remittal to the tribunal. They agreed that they should be given the opportunity to reach agreement and failing which, the Court should be asked to determine the matter with each party being given an opportunity to put on evidence.
In the interests of expedition, the directions which I propose to make will accommodate the parties being given this opportunity in the meantime.
I will hear the parties on the form of the appropriate directions.
It is apparent from what I have said earlier that those responsible for the form of the NACMA Rules should give consideration to appropriate amendments to facilitate clarity. In addition, although neither party took the point, I draw the attention of those concerned to the fact that Rule 17.7 does not make the definition of Fair Market Price expressly applicable to close out under Rule 17.6.2.
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Decision last updated: 10 July 2012
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