SAS (Vic) Pty Ltd v Urban Ecological Systems Ltd
[2021] VSCA 335
•3 December 2021
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S EAPCI 2021 0036
| SAS (VIC) PTY LTD (ACN 606 188 541) | Applicant |
| v | |
| URBAN ECOLOGICAL SYSTEMS LTD (ACN 113 695 837) | Respondent |
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| JUDGES: | SIFRIS, KENNEDY JJA and MACAULAY AJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 15 November 2021 |
| DATE OF JUDGMENT: | 3 December 2021 |
| MEDIUM NEUTRAL CITATION: | [2021] VSCA 335 |
| JUDGMENT APPEALED FROM: | [2021] VCC 31 (Judge Cosgrave) |
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CONTRACT LAW – Agreement providing for grant of licence to use intellectual property in Australia upon achievement of milestones – Construction of contract – Whether payments made were ‘royalties’ – Whether royalties paid in respect of New Zealand licence sufficient to achieve milestone – Whether judge erred in identification and application of contract’s commercial purpose – Whether separate free-standing entitlement to grant of Australian licence on termination of existing licence regardless of achievement of milestones – Whether existing licence terminated – No entitlement to grant of Australian licence – No error established – Application for leave to appeal refused – Apple and Pear Australia Ltd v Pink Lady America LLC [2016] VSCA 280, Great Union Pty Ltd v Sportsgirl Pty Ltd [2021] VSCA 299, discussed – Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, Mount Bruce Mining Pty Ltd v Wright (2015) 256 CLR 104, applied.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr S W Stuckey QC | B2B Lawyers |
| For the Respondent | Ms K A O’Gorman with Ms S C B Brenker | Holding Redlich |
SIFRIS JA
KENNEDY JA
MACAULAY AJA:
The applicant (‘SAS’) claims an entitlement to a long term licence in respect of an aquaponic food production system (‘Blue Farm Technology’) belonging to the respondent (‘UESL’). SAS claims that its entitlement arises under a written agreement (‘the Principal Agreement’) made between SAS and UESL. More particularly, SAS claims that its entitlement arises by reason of the making of a ‘royalties’ payment (under cl 2(b) of the Principal Agreement), and/or by reason of UESL’s termination of an existing licence with another entity (under cl 2(d) of the Principal Agreement).
The trial judge found that no such entitlement existed.[1]
[1]SAS (VIC) Pty Ltd v Urban Ecological Systems Ltd [2021] VCC 31 (‘Reasons’).
In this application, SAS seeks leave to appeal this decision. SAS claims that the trial judge erred in construing cls 2(b) and 2(d) of the Principal Agreement, in particular, by finding and applying a purpose of the agreement in a manner that failed to give proper consideration to the text itself.
For the reasons that follow, we have determined that the trial judge was correct, that the proposed grounds do not have any prospect of success, and that leave to appeal should be refused.
Background
Blue Farm Technology is an aquaponic food production system by which organic vegetables and fish are grown in a glasshouse at the same time. The fish are developed in a fish tank which is located beneath where the vegetables grow. Through special biotechnology processes, the waste produced by the fish is transformed into nutrients, which are then used to fertilise the vegetables.
In 2010, UESL and an investor, Steelco Developments Pty Ltd (‘Steelco’), established a joint venture called Urban Ecological Systems Australia Pty Ltd. This entity later changed its name to Green Camel Pty Ltd (‘Green Camel’).
In July 2010, UESL granted an exclusive licence to Green Camel to exploit the Blue Farm Technology in the ‘Territory’ (being Australia, with the exception of Christmas Island, and Europe) on a royalty-free basis for the term of 100 years (‘the Green Camel Licence’). UESL retained all rights to use and exploit the technology elsewhere in the world.
After 2010, Green Camel began developing the Blue Farm Technology at a facility located at Cobbity in New South Wales.
The principal persons associated with SAS are Mr Ben Meadows and Mr Oliver Draganovic. Mr Meadows and Mr Draganovic had commercial dealings with Green Camel from in or around 2011 (on behalf of Ediison Pty Ltd (‘Ediison’)). In the course of those dealings, Mr Meadows and Mr Draganovic became familiar with the Blue Farm Technology that was the subject of the Green Camel Licence.
By 2012, there was friction in the relationship between UESL and Steelco. In November 2012, representatives of the two companies signed an agreement about how the board of Green Camel would be configured, and the number of seats each company would have on the board (referred to as ‘the Letter Agreement’). It effectively gave UESL the ability to control Green Camel by allowing UESL to appoint a majority of directors. However, the agreement was of limited utility because Steelco reneged on its commitments. It called a shareholders’ meeting, and effectively took from UESL the board seats previously allocated to it. Though UESL remains a shareholder in Green Camel, it is excluded from access to the Cobbity facility, and is largely shut out of Green Camel and its activities.
Steelco and UESL are currently involved in a proceeding in the New South Wales Supreme Court. This Court was informed that the litigation is ongoing, and that the issue of whether the Green Camel Licence is still on foot is contested in that proceeding.
In about August 2015, following discussions between Mr Andrew Bodlovich (a representative of UESL) and Mr Meadows, SAS agreed to invest $100,000, by funding legal fees incurred by UESL in connection with its dispute with Green Camel. The trial judge described the situation at the time as follows:
Green Camel was a major obstacle which had to be removed. There were different possible ways to achieve this: UESL could obtain control of the Green Camel board of directors; another investor might take control of Green Camel; the Green Camel Licence could be terminated. SAS was keen to support UESL and promote its technology.[2]
[2]Ibid [14].
SAS sought legal advice from solicitors, Coulter Roache, to gauge the strength of UESL’s argument against Green Camel. After obtaining this legal advice, Ediison (along with Mr Meadows and Mr Draganovic) entered into a formal agreement with UESL (‘the 2016 Agreement’) which, among other things, made provision (upon the achievement of milestones) for the grant of a licence to Ediison that would be based on the terms of the Green Camel Licence.
The Principal Agreement
In June 2017, UESL and SAS then entered into the Principal Agreement, which is similar to the 2016 Agreement, save that the chosen vehicle is no longer Ediison, but SAS. Further, unlike the 2016 Agreement, cl 8 of the Principal Agreement provides for the grant of an additional ‘unconditional’ licence in respect of New Zealand, whereby Mr Meadows and Mr Draganovic can pursue commercial opportunities for the Blue Farm Technology in that country, unimpeded by concerns about the role and conduct of Green Camel (given that Green Camel has no rights in connection with the Blue Farm Technology in New Zealand). The Principal Agreement defines this New Zealand licence as the ‘Unconditional Licence’ (cl 1.1(v)), and the person to whom it is granted as the ‘Unconditional Licensee’ (cl 1.1(x)). For ease of reference, these reasons will instead refer to the ‘New Zealand Licence’ and the ‘New Zealand Licensee’, respectively.
The Principal Agreement is difficult to read, and contains obvious errors. The recitals record:
A.UESL is a shareholder in Green Camel. UESL has a right to representation on the board of Green Camel, and may seek to exercise its rights to control the board of Green Camel in accordance with the Letter Agreement, with an aim to return Green Camel to a sound commercial footing and prevent continued wastage of funds.
B. Alternatively or additionally, a change of ownership of Green Camel would achieve the same objective. SAS and UESL have reached agreement as to the manner in which SAS will undertake certain activities related to the ongoing commercial viability of Green Camel. As consideration for the funds and activities, SAS will be granted shares in UESL if certain Milestones are met.
C. The Parties wish to record their agreement in writing.
The recitals therefore focus attention on issues surrounding Green Camel, and record that a ‘change of ownership of Green Camel’ will achieve an objective of dealing with those issues (at recital B).
A critical clause, the subject of this application, is cl 2. This clause makes provision for the grant of two licences in respect of Australia, and the termination of the ‘Current Licence Agreement’[3] (which, as recorded above, will be referred to as the ‘Green Camel Licence’). More particularly, cl 2 provides for the grant of an ‘interim Licence’[4] for 36 months if SAS achieves ‘Milestone 1’, and a ‘conversion’ to a ‘full licence’ if SAS achieves one or both of ‘Milestones 2 and 3’. The full terms of cl 2 read:
[3]‘Current Licence Agreement’ means ‘the Licence Agreement between [Green Camel (also known as UESA)] and UESL dated 2 July 2010’ (ie the ‘Green Camel Licence’): Principal Agreement, cl 1.1(f).
[4]‘Interim Licence’ means ‘the licence granted pursuant to Clause 2(a) of [the Principal Agreement]’: Principal Agreement, cl 1.1(i).
2. Granting of Licence
(a)Subject to achievement of Milestone 1, UESL agrees to grant SAS an interim Licence for the Australian Territory currently granted to Green Camel with such Licence to commence on the Licence Commencement Date and to continue as an interim licence for a period of thirty six (36) months from the Licence Commencement Date.[5]
(b)The Interim Licence for a term of thirty six (36) months from the Licence Commencement Date will be converted to a full licence upon SAS achieving one or both of Milestones 2 and 3.
(c)Within fourteen (14) days of SAS satisfying either Milestone 2 or 3, UESL acknowledges and agrees to terminate the [Green Camel Licence] with Green Camel (UESA as noted in the [Green Camel Licence]) in accordance with Milestone 4.
(d)Subject to Clause 2(a), UESL will grant the Licence to SAS upon the termination of the [Green Camel Licence]. The fee payable by SAS to UESL for the Licence Agreement will be the sum of $1.00.
[5]‘Licence Commencement Date’ originally meant ‘a date to be determined on or about September 2018, subject to and conditional upon completion of the first Milestone in Appendix 1’: Principal Agreement, cl 1.1(p). The trial judge considered that although the parties had not stated the precise date, ‘it would be in about September 2018’ (Reasons [98]), however this was later amended by way of an agreement entitled ‘Amendment Agreement 1 to UESL Agreement’, dated in 2018, to mean ‘9 May 2018, subject to and conditional upon completion of the first Milestone in Appendix 1’.
The ‘Licence’ to be granted under cl 2(d), which also appears to be the undefined ‘full licence’ to be granted under cl 2(b),[6] is defined as the ‘licence granted by UESL to SAS pursuant to the provisions of the Licence Agreement for the Australian Territory’.[7] The ‘Licence Agreement’ is defined as the ‘licence agreement to be entered into between UESL and SAS, the terms of which will be mutually agreed based on the terms of the [Green Camel Licence]’ with additional provisions, including as to a number of rights stated in the definition.[8]
[6]See Reasons [99]
[7]Principal Agreement, cl 1.1(l).
[8]Principal Agreement, cl 1.1(n).
For ease of reference, in these reasons, the defined term ‘Licence’ will be referred to as the ‘Australian Licence’, and the ‘Licence Agreement’ will be referred to as the ‘Australian Licence Agreement’. The Interim Licence (and any reference to the (lower-case) interim Licence)[9] will be referred to as the ‘Interim Australian Licence’.[10]
[9]See Reasons [98].
[10]The parties, and the trial judge variously made reference to the ‘full licence’, the ‘Full Licence’ and the ‘full Licence’. Consistent with the view of the trial judge, and the way in which the case was argued in this Court, we understand each of these terms to make reference to the same licence, being the Australian Licence. Except where necessary, those terms will also be referred to as the ‘Australian Licence’, or as the ‘full Australian Licence’, in these reasons.
The ‘Milestones’ referred to in cl 2 are described in Appendix 1 (pursuant to cl 7(a)). That Appendix sets out the description, completion criteria, completion date, and shares to be issued in respect of each Milestone (to a total of 40 million shares). It also contains reference to applicable clauses of the Principal Agreement (under the ‘Description’ heading). For reasons that we set out below, it is convenient to set out each Milestone as it appears in Appendix 1, together with the applicable clause, in order of the (original) ‘completion date’, rather than in numerical order.
First, then, item 1 of Appendix 1 describes Milestone 1 as follows:
Milestone Description Completion criteria Completion date Shares to be issued 1 Completion of legal review (Clause 7)
Depositing $100,000.00 by SAS in a separate bank account to be used to fund Dispute and achievement of MilestonesBen and Oliver to join UESL Board
SAS to make available to UESL a range of marketing assets to be agreed.
Written confirmation from SAS lawyers to proceed with the Dispute
Confirmation of cleared funds receipted into a dedicated SAS bank account
15 March 2016
15 March 201630 April 2016
30 April 2016
10,000,000
Notwithstanding the reference to cl 7, above, SAS accepts that cl 6 constitutes the starting point of the relationship. Clause 6 makes provision for the initiation of a legal review ‘in respect of the Dispute’, where ‘Dispute’ is defined as the ‘alleged breach of the [Green Camel Licence] and/or Letter Agreement’[11] (by Green Camel). The full terms of cl 6 read:
[11]Principal Agreement, cl 1.1(g).
6. Initiation of Legal Review
(a) It is agreed that, at SAS’s sole expense, Coulter Roache will conduct a legal review in respect of the Dispute. In the event Coulter Roache advise SAS in writing to proceed with the Dispute, SAS will deposit $100,000.00 into an SAS bank account to be used for the funding of legal fees in respect of the Dispute and achievement of the Milestones, and UESL will issue ten million (10,000,000) shares to SAS. Such deposit and share issue is to occur within fourteen (14) days of SAS receiving written notification from Coulter Roache to proceed. The UESL board (of which Ben and Oliver will be directors) will discuss and agree in good faith on the most effective ways to use the available funds to achieve the Milestones. Ben and Oliver will retain final discretion on use of funds.
(b) In the event $100,000.00 is deposited by SAS into an SAS bank account and ten million (10,000,000) shares are issued to SAS, Oliver and Ben will be registered as non-executive directors of UESL on the date of the share issue.
(c) In the event Coulter Roache advise SAS in writing not to proceed, this Agreement will automatically terminate as at the date of Coulter Roache’s written advice. No payment or share issues will be made by either party.
As emphasised by SAS, cl 6(c) provides for automatic termination where Coulter Roache advises SAS not to proceed with the ‘Dispute’.[12] However, the issue does not arise, since the parties accept that Milestone 1 was achieved in this case, and that SAS was issued with 10 million shares in UESL, and was granted the Interim Australian Licence.
[12]SAS suggests that cl 6 contains a condition precedent to the operation of the Principal Agreement.
It is doubtful as to what rights were actually granted by way of the Interim Australian Licence, given the ongoing existence of the Green Camel Licence. As the trial judge said, SAS cannot, by reason of this Interim Australian Licence, exploit the Blue Farm Technology so as to generate income from which it can make royalty payments.[13] However, SAS claims that the Court should infer (from the fact that Coulter Roche must have advised SAS to proceed with the Dispute) that from the ‘outset’ UESL had a legal right to bring the existing relationship with Green Camel to an end.
[13]Reasons [78].
The next Milestone in order of (contemplated) completion is Milestone 3, which concerns the introduction of a new third party ‘Investor’ to take control of Green Camel,[14] and take an assignment of the Australian Licence Agreement. The relevant entry in item 3 of Appendix 1 reads:
[14]‘Investor’ means the investor ‘the parties obtained pursuant to Clause 4 of the [Principal Agreement]’: Principal Agreement, cl 1.1(j)).
Milestone Description Completion criteria Completion date Shares to be issued 3 Introduction of new investors (Clause 4) Completion of any sale or change of control of Green Camel (Confirmation of cleared funds receipted into UESL bank account) (Clause 4)
Or
Entry into binding MOU/NDA for express purpose of purchasing, whichever occurs first.
By 30 December 2018
[subsequently amended to 9 May 2021[15]]
15,000,000 [15]The completion date was amended by way of an agreement entitled ‘Amendment Agreement 1 to UESL Agreement’, dated in 2018. This agreement also added a note to Milestone 3 to the effect that, absent SAS’s agreement, UESL would not enter into separate discussions with the Investor without involving SAS. This note was not intended to affect any of the rights or obligations of the parties under the Principal Agreement.
The corresponding cl 4 provides as follows:
4. Control of Green Camel by Third Party Investor
(a) It is SAS’s responsibility to locate and retain an Investor who takes control of, and/or purchases a controlling interest in, Green Camel on or before 30 December 2018 [subsequently amended to 9 May 2021].[16] In consideration of SAS locating and retaining a third party Investor to take control of Green Camel, SAS will receive fifteen million (15,000,000) shares in UESL within fourteen (14) days of the completion date of the purchase of the controlling interest in Green Camel.
(b) The parties agree that UESL will not, prior to 30 December 2018 [subsequently amended to 9 May 2021],[17] enter into negotiations or enter any arrangement with a third party Investor. UESL will continue to independently seek investment for purposes outside of this Agreement. If a third party Investor, for the purpose of this Agreement, is sourced by UESL during this period, UESL will forward this Investor to SAS, and an investment from this Investor would be deemed fulfilment of the Milestones on behalf of SAS.
(c) Contemporaneously with SAS locating and retaining an Investor to take a controlling interest in Green Camel, SAS will assign the [Australian] Licence Agreement to the Investor for the Licence Fee. SAS will retain 100% of the Licence Fee paid by the Investor to SAS.
(d) The Investor will derive income from the use of the [Australian] Licence Agreement, and from this income the Investor will pay the Royalties to SAS. A proportion of the Royalties paid from the Investor to SAS will be on-paid by SAS to UESL in accordance with Clause 5(a)(i).
[16]As above, this date was amended by way of an agreement entitled ‘Amendment Agreement 1 to UESL Agreement’, dated in 2018.
[17]As above, this date was amended by way of an agreement entitled ‘Amendment Agreement 1 to UESL Agreement’, dated in 2018.
Milestone 2, then, concerns the payment of ‘Royalties’. ‘Royalties’ are defined as a ‘percentage of gross revenue as agreed between the Investor (or [the New Zealand Licensee]) and SAS calculated in respect of the ongoing use and production in conjunction with the granting of the [Australian] Licence (or [the New Zealand Licence])’ (cl 1.1((u)). As mentioned already, the New Zealand Licence is a separate licence granted in respect of the Blue Farm Technology for New Zealand (cl 1.1(v)), and is the subject of cl 8 (which will be extracted below).
The relevant entry in item 2 of Appendix 1 in respect of ‘Royalties’ reads:
Milestone Description Completion criteria Completion date Shares to be issued 2 Royalties payment (Clause 5) Confirmation of cleared funds receipted into UESL bank account By 1 April 2019
[subsequently amended to 9 May 2021[18]]
15,000,000 [18]The completion date was amended by way of an agreement entitled ‘Amendment Agreement 1 to UESL Agreement’, dated in 2018.
The clause referred to is cl 5, which reads as follows:
5. Royalties
(a) The Royalties paid are as follows:
(i) One-sixth (1/6) of the Royalties paid to SAS from the Investor in respect of the [Australian] Licence Agreement pursuant to Clause 4(d); plus
(ii) One-sixth (1/6) of the Royalties paid to SAS from the [New Zealand] Licensee in respect of the [New Zealand] Licence pursuant to Clause 8.
(b) Subject to Clause 8(f) the Royalties will be paid to UESL for the term of the [Australian] Licence Agreement and [New Zealand] Licence respectively.
(c) In consideration of SAS paying one-sixth (1/6) of the Royalties to UESL in respect of the [Australian] Licence Agreement, UESL will transfer fifteen million (15,000,000) shares in UESL to SAS or SAS’s nominee, such shares to be transferred within fourteen (14) days of the date of payment of the first Royalties payment from SAS to UESL.
(d)Payment of Royalties from SAS to UESL in accordance with Clause 5(a)(i) will be quarterly in arrears, with the first payment to commence within fourteen (14) days of receipt by SAS of the first Royalties payment from the Investor and quarterly thereafter unless otherwise mutually agreed by the parties.
Finally, Milestone 4 (which is referred to in cl 2(c), above) relates to termination, and is contained in item 4 of Appendix 1 as follows:
Milestone Description Completion criteria Completion date Shares to be issued 4 UESL termination of [Green Camel Licence] with Green Camel Written confirmation from UESL of termination Within fourteen (14) days of SAS satisfying either Milestone 2 or 3 Not applicable
The following ‘narrative’ also appears at the end of Appendix 1:
It is agreed Milestones 2 and 3 will be interpreted flexibly and in good faith by the parties.
The underlying intent of the Milestones is that SAS and UESL will work together to remove the current impediments to the business and set the business on a successful path in the Australian Territory and Additional Territory.[19] This may involve a change in control of Green Camel, a change in ownership or a combination of both of these.
It is acknowledged that the future licences in the Australian Territory and Additional Territory will be a collaborative and successful part of the overall roll-out of the Blue Farm technology. In the event SAS plays a crucial and fundamental role in successfully achieving this outcome, it is agreed UESL in good faith will allocate the total 40 million shares regardless of whether Milestones 2 and 3 are achieved within their strict definitions subject to the fact that the fundamental terms must be obtained.
The parties will in good faith periodically review their strategy and if necessary will redefine Milestones, so that each party can operate in an environment of clearly understanding the results they need to achieve, and clearly understand the rewards that will be paid upon achieving each Milestone.
[19]‘Additional Territory’ means ‘the territory of Europe as defined in the [Green Camel Licence]’: Principal Agreement, cl 1.1(b). Clause 3 of the Principal Agreement provides for a first right of refusal in respect of this territory.
As mentioned above, cl 8 of the Principal Agreement also makes provision for the grant of a separate New Zealand Licence[20] in relation to the use of the intellectual property in New Zealand, which was to be assigned to a New Zealand Licensee.[21] The New Zealand Licensee is to make a ‘One-off Payment’[22] and pay Royalties to SAS, which are to be shared with UESL. The grant of this licence is not conditional on the achievement of any Milestones.
[20]As above, this is referred to in the Principal Agreement, as the ‘Unconditional Licence’. ‘Unconditional Licence’ means ‘the licence for the use of Blue Farms technology, patents, trade secrets and other innovations described as “the production system” in respect of the New Zealand Territory’: Principal Agreement, cl 1.1(v).
[21]As above, this is referred to in the Principal Agreement, as the ‘Unconditional Licensee’ ‘Unconditional Licensee’ means ‘the person granted the New Zealand Territory Licence from SAS on terms and conditions as agreed between SAS and the Licensee’: Principal Agreement, cl 1.1(x).
[22]This is referred to as the ‘Unconditional Licensee One-off Payment’ which means ‘payment from the Unconditional Licensee to SAS for the granting of the Unconditional Licence in the amount as agreed between SAS and the Unconditional Licensee’: Principal Agreement, cl 1.1(y).
Clause 8 provides:
8. [New Zealand] Licence
(a) UESL agrees to grant the [New Zealand] Licence to SAS for a term of one-hundred (100) years (‘the Term’) from the Unconditional Licence Date and within three (3) months of the Unconditional Licence Date the parties will reach agreement as to the terms of the [New Zealand] Licence and a written document will be drafted to formalise these terms.
(b) UESL agrees to grant the [New Zealand] Licence to SAS for the sum of $1.00, receipt of which is acknowledged by UESL.
(c) UESL agrees the granting of the [New Zealand] Licence is not dependent on the Milestones.
(d)Upon the granting of the [New Zealand] Licence to SAS, SAS will, as soon as practically possible, assign the [New Zealand] Licence to [a New Zealand] Licensee. The [New Zealand] Licence will be granted to the [New Zealand] Licensee by SAS for the Unconditional Licensee One-Off Payment, with such payment to be shared equally by SAS and UESL. If either Milestones 2 or 3 are subsequently achieved, UESL will issue further shares (in addition to shares payable for achieving the Milestones) to SAS with the equivalent in value to UESL’s portion of the Unconditional Licensee One-Off Payment.
(e) The [New Zealand] Licensee will derive income from the use of the [New Zealand] Licence, and from this income the [New Zealand] Licensee will pay Royalties to SAS in an amount as agreed between SAS and the [New Zealand] Licensee from time to time.
(f) SAS will share the Royalties specified in Clause 8(e) with UESL equally until such time as SAS acquires the [Australian] Licence in accordance with Clause 2. Upon SAS being granted the [Australian] Licence specified in Clause 2, the proportion of Royalties paid to UESL from SAS will be reduced and paid in accordance with Clause 5(a)(i) and Clause 5(d).
(g) The [New Zealand] Licence will not be varied for the duration of the Term unless mutually agreed by SAS and UESL.
As SAS accepts, the references to cls 5(a)(i) and 5(d) in cl 8(f) appear to be misstated, given that they are concerned with Royalties paid from the Investor, rather than the New Zealand Licensee. In particular, the reference to cl 5(a)(i) is apparently intended to be a reference to cl 5(a)(ii), while cl 5(d) would need to apply to both sets of Royalties, or should not be cited in cl 8(f) at all.
Events subsequent to Principal Agreement
On 19 July 2019, a number of events occurred:
(a) UESL and SAS executed an Unconditional Intellectual Property Licence Agreement in respect of New Zealand (‘the New Zealand Licence Agreement’) — by which SAS was granted the New Zealand Licence in accordance with cl 8 of the Principal Agreement;
(b) SAS also entered into an Intellectual Property Sub-Licence Agreement in respect of New Zealand (‘the New Zealand Sub-licence Agreement’), with a related New Zealand company, SAS (NZ) Limited; and
(c) SAS deposited $5,001 into UESL’s bank account.
In relation to (a), above, cl 2 of the New Zealand Licence Agreement provides for the grant of the New Zealand Licence for a term of 100 years. Clause 5 of that agreement provides that no royalties are payable unless there is an assignment or sub-licence in which case the assignee/sub-licensee is to make a One-off payment (cl 5.1(a)) and pay royalties from ‘derive[d] income from the use of the [New Zealand] Licence’ as agreed from time to time (cl 5.1(b)). Insofar as UESL is concerned, cl 5.1(c) also mirrors cl 8(f) of the Principal Agreement.[23]
[23]Clause 5.1(c) of the New Zealand Licence Agreement provides: ‘The Licensee will share the royalties set out in clause 5.1(b) with the Licensor equally until such time as the Licensee’s existing [Interim Australian Licence] is converted into a full [Australian Licence] upon the Licensee achieving one or both of Milestones 2 and 3 as set out in the [Principal] Agreement, in particular clause 2(b) therein. Upon which the proportion of the royalties payable to the Licensor by the Licensee will be reduced from ½ to 1/6 of the royalties set out in clause 5.1(b) herein and pursuant to the terms of the [Principal] Agreement.’
In relation to (b), above, cl 4 of the New Zealand Sub-licence Agreement, in turn, provides for the payment of a sub-licence fee and royalties as follows:
4 Sub-Licence Fee and Royalty[24]
4.1 Sub-Licensee’s obligation to pay
In consideration for the grant of the Sub-Licence, the Sub-Licensee must pay to the Sub-Licensor:
(a) the Sub-Licence Fee on the date of this document; and
(b)subject to clause 4.2, royalty calculated at the Royalty Rate[25] monthly in arrears before the 15th day of each month (or at any other interval as agreed by the parties in writing from time to time).
[24]In the New Zealand Sub-licence Agreement, ‘Royalty’ means ‘any royalty payable by the Sub-Licensee to the Sub-Licensor under clause 4’ (see cl 1.1).
[25]In the New Zealand Sub-licence Agreement, ‘Royalty Rate’ means ‘4% of the net revenue of the Sub-Licensee derived from the use of the Sub-Licence, or any other rate as agreed by the parties in writing from time to time’ (see cl 1.1).
4.2 Advance payment of Royalty
(a)The Sub-Licensee must pay the Advance Royalty Amount to Sub-Licensor on the date of this document; and
(b)the parties acknowledge that the Advance Royalty Amount is paid by the Sub-Licensee to the Sub-Licensor under clause 4.2(a) by way of prepayment of any Royalty payable under clause 4.1(b), and will be set-off against any amount of Royalty payable by the Sub-Licensee to the Sub-Licensor after the date of this document.
In relation to (c), above, SAS contends that the sum of $5,001 is comprised of three parts:
(i) $2,500, said to be 50 per cent of the ‘One-Off Payment’ payable under cl 8(d) of the Principal Agreement;
(ii) $2,500, said to be 50 per cent of the Royalty payment payable under cl 8(f) of the Principal Agreement; and
(iii) $1.00, said to be a pre-payment of the fee payable for the Australian Licence Agreement under cl 2(d) of the Principal Agreement.
SAS contends (and contended in the proceeding below) that by remitting the sum of $2,500 to UESL on 19 July 2019 described in (ii), above, SAS meets the criteria of ‘Milestone 2’, namely, ‘Confirmation of cleared funds receipted into UESL bank account’ in respect of ‘Royalties payment’, and that SAS is thereby entitled to a full Australian Licence pursuant to cl 2(b) of the Principal Agreement. However, UESL does not accept that SAS has achieved Milestone 2.
In the period following July 2019, correspondence was exchanged regarding SAS’s alleged entitlement to a full Australian Licence.
On 20 December 2019, Mr Bodlovich sent an email that the trial judge summarised in the following way:
By email dated 20 December 2019 from [Mr] Bodlovich to [Mr] Meadows and [Mr] Draganovic, [Mr] Bodlovich:
·advised that UESL had informed Green Camel in writing that it accepted Green Camel’s repudiation of the intellectual property licence agreement between Green Camel and UESL made in July 2010;
·noted that Green Camel had not acknowledged this letter and thus, it might claim that the agreement remained on foot and/or allege that UESL had unlawfully terminated the agreement and thereby repudiated it;
·proposed that UESL and SAS should collaborate to draft, negotiate and execute a licence agreement as soon as possible. Such an agreement would include performance criteria requiring SAS to build and commission within three years of obtaining a full licence a Blue Farm in Australia at least one hectare in size; alternatively, the performance criteria would be deemed satisfied upon a merger of UESL and Green Camel; and
·advised that UESL consented to SAS beginning discussions with interested parties in Australia about the utilisation of the Blue Farm Technology in Australia.’[26]
[26]Reasons [25].
The email also contained the following statements, which are relied upon by SAS:
In accepting this repudiation, UESL considers the [Green Camel Licence] to be terminated. …
UESL considers that this notification to Green Camel constitutes achievement of Milestone 4 of the [Principal Agreement], and this email constitutes the Completion Criteria for Milestone 4.
SAS contends that this correspondence evidences that the Green Camel Licence was terminated for the purposes of cl 2(d) of the Principal Agreement, such that SAS is also entitled to an Australian Licence on this basis. UESL rejects this contention.
SAS commenced proceedings in the County Court of Victoria on 26 March 2020 seeking a declaration that the Interim Australian Licence had been converted to ‘the Full [Australian] Licence’, and an order for specific performance of the Principal Agreement by UESL entering into an Australian Licence Agreement with SAS.
UESL defended the proceeding. As well as denying the entitlement to an Australian Licence, UESL denied that the relief sought was available, given that the future Australian Licence Agreement would need to be negotiated, and the terms to be agreed were not certain or complete.
Following the trial, the trial judge made orders on 18 February 2021 dismissing the claim, and providing for SAS to pay UESL’s costs on the standard basis.
Judge’s reasons
After setting out the background, the trial judge identified the legal principles applicable to the construction of commercial contracts.[27] The parties generally accepted that his Honour correctly identified the applicable principles.
[27]Reasons [27]–[32].
His Honour then proceeded to consider three issues: first, whether SAS achieved Milestone 2 in July 2019; secondly, whether the Interim Australian Licence granted to SAS was converted into a full Australian Licence by the operation of cl 2(d); thirdly, whether SAS was entitled to an order that UESL enter into a full Australian Licence Agreement with it.
In terms of the first issue, the trial judge set out the applicable provisions concerning the achievement of the Milestones, and noted that:
The appendix to the Principal Agreement provided that Milestones 2 and 3 would be interpreted flexibly and in good faith by the parties. The underlying intent of the Milestones was expressed to be that UESL and SAS work together to remove the impediments to the business and set the business on a successful path in Australia and Europe. This could involve a change in control of Green Camel, a change in ownership of Green Camel or a combination of the two. The aim was to change the relationship between Green Camel and UESL so that Green Camel was no longer an obstacle to the development of UESL’s Blue Farm Technology business.[28]
[28]Ibid [56].
His Honour outlined the parties’ submissions. In particular, he identified that SAS submitted that the definition of ‘Royalties’ was disjunctive,[29] such that the payment of Royalties arising from the New Zealand Licence could have the same triggering effect as if they were Royalties paid by the Investor. UESL, on the other hand, submitted that Milestone 2 could be achieved only through the payment of Royalties arising from the employment and operation of its technology in Australia. In so saying, UESL included reference to cl 5(c) which provides that, in consideration of SAS paying one-sixth of the Royalties to UESL in respect of the [Australian] Licence Agreement, UESL will transfer 15 million shares (which matches the shares to be issued in item 2 of Appendix 1 in respect of Milestone 2).[30]
[29]‘Royalties’ means ‘a percentage of gross revenue as agreed between the Investor (or [New Zealand] Licensee) and SAS calculated in respect of the ongoing use and production in conjunction with the granting of the Licence (or [New Zealand] Licence)’: Principal Agreement, cl 1.1(u) (emphasis added by the trial judge at Reasons [66]).
[30]Reasons [68]–[72].
The trial judge concluded as follows:
In my opinion, the UESL construction of the Principal Agreement represents the better view. A reasonable business person, having considered the language used by the parties in the Principal Agreement, the circumstances addressed by the Principal Agreement and the commercial purpose or object to be secured by it, would conclude that the Principal Agreement:
(a) confirmed the existence of a problem with the commercial viability of Green Camel;
(b) set out the shares and licence benefits which would flow to SAS if it undertook various activities in connection with Green Camel and met particular milestones such as making royalty payments and introducing a new investor;
(c) granted SAS a separate New Zealand licence to use the patented UESL aquaponic food production system in New Zealand; and
(d) required SAS to assign the New Zealand licence to a sub-licensee in order to earn royalties which were to be divided between SAS and UESL.
In considering the scope and effect of the Principal Agreement, I have paid no regard to the subjective views of any witness. Rather, I have relied upon the Principal Agreement itself.[31]
[31]Ibid [73].
His Honour also made the following observations about the ‘Green Camel problem’:
It appears from the text of the agreement that:
(a) there is a commercial problem with Green Camel; and
(b) the parties have agreed that SAS will obtain a potentially beneficial licence together with shares in UESL if it can assist with the resolution of the problem.
One means of overcoming the Green Camel problem is to locate and retain an investor who takes a controlling interest in Green Camel. The investor would replace Steelco as the entity in control of Green Camel. Provided SAS can assist UESL by resolving the problem presented by Green Camel, then SAS can win the licence to exploit the Blue Farm Technology in Australia. SAS can achieve this objective by satisfying Milestone 2 or 3. If SAS can effect a beneficial change in the relationship between Green Camel and UESL such that Green Camel is no longer an impediment to UESL developing its business in Australia and elsewhere, that would constitute a resolution of the Green Camel problem. In that case, SAS would obtain the right to exploit the Blue Farm Technology in Australia and would pay royalties to UESL.[32]
[32]Ibid [74].
His Honour analysed the ‘Royalties’ definition which is calculated in respect of ongoing use and production in conjunction with the grant of a licence. This means that the party paying Royalties must have the requisite licence to utilise to earn revenue and pay royalty income. This approach was confirmed by cl 4 which addresses how an Investor who takes control of Green Camel can then obtain a licence and exploit it to generate revenue.[33]
[33]Ibid [76]–[78].
His Honour continued:
In New Zealand, neither SAS nor its related entity SAS (NZ) has constructed any farms using Blue Farm Technology. Because there are no farms in New Zealand, neither SAS nor SAS (NZ) has generated any revenue from using the Blue Farm Technology to produce food. In effect, all that has happened is that SAS has established a related company in New Zealand and arranged the transfer of funds from one entity to the other. Hence, even though SAS (NZ) has purported to make a royalty payment to SAS (which the latter then shared with UESL), the payment was artificial or contrived in that it did not emanate (sic) revenue generated as a result of producing food from using the Blue Farm Technology.
If SAS is correct to interpret the Principal Agreement in the manner it contends for, then it is (arguably) entitled to a full [Australian Licence] from UESL even though:
(a) the problem with Green Camel is continuing and there remains ongoing litigation in the New South Wales Supreme Court between Green Camel and UESL;
(b) neither SAS nor any related company is actually using the Blue Farm Technology to produce food in Australia (or New Zealand); and
(c) UESL would not receive any ongoing benefit in the form of royalties which arose from the implementation and operation of its aquaponic food production system.
I regard this outcome as working a commercial nonsense. The Principal Agreement should not be construed in a way which gives rise to this result.
I consider that Milestones 2 and 3 were specified in such a way that, when either was satisfied, it signified the end of the problem with Green Camel. Either SAS found an investor who took control of Green Camel or, through another means, UESL received royalties from the ongoing use of the its aquaponic food system and the production generated therefrom. The former directly removed the Steelco influence on Green Camel from the challenges which UESL faced. The latter could not occur without the resolution of the dispute with Green Camel. Whichever option was realised, the outcome was that UESL was now positioned to work with SAS to make full use of its expertise and industry connections and to reward SAS for its assistance in removing a major stumbling block to the future development and expansion of the Blue Farm Technology in Australia and overseas.
I note that a criticism which SAS made of UESL’s position on this point was that Milestone 2 could not be achieved without SAS having first achieved Milestone 3. It argued that this was inconsistent with the terms of the Principal Agreement which require SAS to achieve only one of Milestones 2 or 3. While I agree that clause 2(b) of the Principal Agreement contains disjunctive terms, my view is that the proposed SAS interpretation results in greater inconsistency with the objects of the Principal Agreement as disclosed by its terms than the alleged problem with the Milestones. Even if the SAS criticism is correct, I prefer the UESL interpretation of the Principal Agreement.[34]
[34]Ibid [79]–[82].
The trial judge then went on to consider SAS’s contention that cl 2(d) provides a separate source of obligation upon UESL to grant an Australian Licence to SAS, and said:
Several things are clear if the SAS argument is correct. First, UESL would be obliged to grant the [Australian] Licence (as defined) to SAS even though the problem caused by Green Camel has not been finally resolved. Significant issues between Green Camel and UESL still persist and the litigation in the New South Wales Supreme Court remains unfinished.
Secondly, it would be an odd outcome for SAS to obtain a full [Australian Licence] in circumstances where the grant of the [Australian] Licence was to be a reward for SAS in ridding UESL of the Green Camel problem. These problems are substantial: although still a shareholder in Green Camel, UESL no longer has any representation on the board, it is excluded from the farming site at Cobbitty and it is engaged in major litigation with Green Camel. These matters are an unwarranted distraction which impedes the development and commercial exploitation of UESL’s aquaponic food production system. The problems remain unresolved.
Thirdly, there is substantial potential for confusion, dispute and delay if UESL grants SAS a full licence for Australia in relation to the Blue Farm Technology because it would cover the same intellectual property rights and the Australian component of the territory licensed to Green Camel. The litigation between them remains on foot. UESL has raised in its counter-claim the issue of the validity of its termination of the Green Camel Licence. As [Mr] Bodlovich observed in his email on 20 December 2019, Green Camel has not acknowledged the UESL letter of termination and may claim that the licence is still on foot or that UESL has wrongfully terminated the licence.[35]
[35]Ibid [94]–[96].
His Honour noted that the interpretation of cl 2 was central to this issue, and made the following observations:
Clause 2(b) emphasises that the [Interim Australian Licence] is for a term of 36 months. The licence will be converted to a full [Australian Licence] upon SAS achieving one or both of Milestone 2 or 3. I infer that, for the conversion to occur, SAS must achieve Milestone 2 or 3 within the 36 month period for which the [Interim Australian Licence] runs. It seems to me that the full [Australian] licence appears to be the licence which flows from the [Australian] Licence Agreement to be entered by SAS and UESL.
UESL agrees in clause 2(c) that, within 14 days of SAS satisfying Milestone 2 or 3, it will terminate the [Green Camel Licence] with Green Camel in accordance with Milestone 4. Milestone 4 states that the completion criteria for that Milestone is a written confirmation from UESL of the termination. What is clear is that, before UESL can enter the [Australian] Licence Agreement with SAS, the latter must satisfy Milestone 2 or 3.
Clause 2(d) then repeats that, after Milestone 1 is satisfied, and SAS obtains an [Interim Australian Licence], UESL will grant SAS the full [Australian Licence] for a fee of $1 after the termination of the [Green Camel Licence] with Green Camel.[36]
[36]Ibid [99]–[101].
His Honour concluded as follows:
When read as a whole in the broader context of the Principal Agreement generally, the termination of the [Green Camel Licence] assumes that SAS has satisfied Milestone 2 or 3. In my opinion, if UESL seeks to terminate its agreement with Green Camel, in reliance upon general common law doctrine but independently of the terms of the Principal Agreement, then it can do so. However, in that eventuality, clause 2(d) does not then operate to require UESL to grant SAS a full [Australian Licence] as a result. In short, I consider clause 2 should be read so that UESL is obliged to grant SAS a full [Australian Licence] upon the termination of the [Green Camel Licence] only if SAS satisfied Milestones 2 or 3. Because no relevant pre-condition was met, I find that SAS is not entitled to a full [Australian Licence] under clause 2(d) of the Principal Agreement.[37]
[37]Ibid [102].
His Honour therefore found that SAS was not entitled to an order that UESL was obliged to grant the full Australian Licence.[38]
[38]Ibid [103].
Although unnecessary, the trial judge also went on to consider the question of relief. He rejected the submission of UESL that the obligation to grant the full Australian Licence would be unenforceable,[39] and indicated that he would have granted specific performance.[40]
[39]Instead, the trial judge found that it would fall within the fourth category of Masters v Cameron (1954) 91 CLR 353: Reasons [116].
[40]Reasons [104]–[127].
Proposed grounds of appeal
The application is made on the following two proposed grounds:
1.The trial judge erred in construction of clause 2(b) of the [Principal Agreement], and its operation by reference to the provision for ‘Milestone 2’ in Appendix 1 and ‘Royalties’ in cl 1.1(u), in finding and applying a purpose of the Principal Agreement in a manner which governed its construction, having regard to extraneous context and without adequate or proper consideration of the text, and thereby in deciding that the applicant did not achieve Milestone 2 by payment in July 2019: [Reasons], [73]–[82].
2.The trial judge erred in construction of clause 2(d) of the Principal Agreement, in finding and applying a purpose of the Principal Agreement in a manner which governed its construction, having regard to extraneous context and without adequate or proper consideration of the text, and thereby in deciding that the respondent was obliged to grant the applicant a full licence only if the applicant satisfied Milestones 2 or 3: [Reasons], [94]–[102].
Principles
As identified by the trial judge, it is appropriate to adopt an objective approach when construing a commercial contract. Thus, the meaning of the terms of a contractual document is to be determined by what a reasonable business person would have understood those terms to mean. This requires 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.[41]
[41]Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, 656–7 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7 (‘Electricity Generation’). See also Rinehart v Hancock (2019) 267 CLR 514, 534 [44] (Kiefel CJ, Gageler, Nettle and Gordon JJ); [2019] HCA 13; Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544, 551 [16] (Kiefel, Bell and Gordon JJ); [2017] HCA 12 (‘Ecosse’); Mount Bruce Mining Pty Ltd v Wright (2015) 256 CLR 104, 116 [46] (French CJ, Nettle and Gordon JJ); [2015] HCA 37 (‘Mount Bruce’).
The trial judge considered that ‘an ongoing source of controversy is the regard which can properly be had to surrounding circumstances when interpreting a contract’.[42] However, as the trial judge also highlighted, in Apple and Pear Australia Ltd v Pink Lady America LLC[43] (‘Apple and Pear’), this Court noted that it was apparent from the High Court’s decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[44] (‘Mount Bruce’), (if it was not already) that the circumstances which the contract addresses and the commercial purpose or objects to be secured by it are ordinarily able to be identified by reference to the contract alone.[45] That is true in the present case.
[42]Reasons [27].
[43][2016] VSCA 280.
[44](2015) 256 CLR 104; [2015] HCA 37.
[45]Apple and Pear [2016] VSCA 280, [230]–[231] (Ferguson and McLeish JJA). See also PCCEF Pty Ltd v Geelong Football Club Ltd [2019] VSCA 144, [27] (Whelan, McLeish and Emerton JJA) (‘PCCEF’).
A related issue is the extent to which the Court can permissibly interpret a contract in a way that will produce a commercial result for the parties, or to avoid the contract making commercial nonsense. In Mount Bruce, the High Court stated:
Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[46]
[46]Mount Bruce (2015) 256 CLR 104, 117 [51] (French CJ, Nettle and Gordon JJ); [2015] HCA 37. See also, Electricity Generation (2014) 251 CLR 640, 657 [35] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7.
There are limitations to this concept. As this Court recently stated in Great Union Pty Ltd v Sportsgirl Pty Ltd:
[W]hile a court may approach the task of construction on the basis that the parties intended to produce a commercial result, this does not constitute a licence to alter the meaning of a term to achieve a result the court may think to be reasonable.[47]
[47][2021] VSCA 299, [32] (McLeish and Kennedy JJA and Macaulay AJA), citing Amcor Ltd v Barnes [2021] VSCA 6, [648] (Ferguson CJ, Beach and Whelan JJA). See also Ecosse (2017) 261 CLR 544, 579–81 [98] (Nettle J); [2017] HCA 12.
Further, in Apple and Pear, Tate JA stated:
[W]hile a court should construe a commercial contract to avoid absurdity it is not part of its role to construe an agreement that otherwise has an explicable commercial result in a manner that increases the commercial benefits to one party to the agreement.[48]
[48][2016] VSCA 280, [152], approved in PCCEF [2019] VSCA 144, [55] (Whelan, McLeish and Emerton JJA).
These cases underline the obvious importance of the contractual text to the contract’s construction. The inquiry remains what a reasonable business person would understand the actual terms to mean, not what a reasonable business person would consider the most appropriate commercial terms to be.
However, the proper approach, in determining what the terms used do mean, involves a consideration of the commercial purpose or objects to be secured by the contract. UESL’s submission, that the inquiry into the meaning of the terms of the contract cannot readily be separated from the inquiry into the commercial purpose of the contract, is thereby correct.[49]
Proposed ground 1[50]
[49]See, eg, Electricity Generation (2014) 251 CLR 640, 660-2 [44]–[50] (French CJ, Hayne, Crennan and Kiefel JJ); [2014] HCA 7.
[50]Although, in oral submissions, SAS placed primary weight on proposed ground 2, it is convenient to deal with the proposed grounds in numerical order.
As identified by UESL, the question of whether the trial judge erred in deciding that SAS did not achieve Milestone 2 by the payment of the sum of $2,500 raises two issues; first, a construction issue as to whether the trial judge erred in the way he construed cl 2(b); secondly, a factual issue as to whether the payment (derived from a transfer of funds between related companies) properly constitutes the payment of ‘Royalties’ in any event.
It is convenient to deal with the factual issue at the outset.
Whether transfer of $2,500 constitutes a Royalty
As indicated already, SAS asserts that the remission of the ‘Royalties payment’ of $2,500 satisfies Milestone 2. This is despite the fact that the trial judge found at para 79 that this payment was ‘artificial or contrived’, since it did not emanate from revenue generated as a result of producing food from using the Blue Farm Technology. SAS makes no challenge to this finding in its proposed grounds of appeal. However, given this finding, the payment made could not constitute a Royalty payment, even if SAS was correct about its construction (ie even if the remission of a Royalty payment under the New Zealand Licence gives rise to an entitlement to the Australian Licence).
The trial judge’s finding was also clearly open. Although, as SAS highlights, Royalties under cl 8 are to be ‘as agreed’, the definition of ‘Royalties’ contained in the Principal Agreement means they must be calculated in respect of ‘the ongoing use and production’ of the technology.[51] Further, cl 8(e) expressly provides that the Royalties are to be paid ‘from … income’ the licensee will ‘derive’ from the use of the New Zealand Licence.
[51]Principal Agreement, cl 1.1(u).
The payment of the sum of $2,500 (made under the New Zealand Sub-licence Agreement) is not a ‘Royalty’ for the purposes of cl 1.1(u) and cl 8(e) of the Principal Agreement. Critically, it was not paid from income ‘derived’, or received, from the actual use of the Blue Farm Technology. Rather, it was paid by way of ‘prepayment’ in respect of ‘any’ Royalty to be paid in the future (under cl 4.2(b) of the New –Zealand Sub-licence Agreement).
The trial judge was therefore correct to find that the transfer of the $2,500 between the related companies was ‘artificial or contrived’ and hence, does not amount to the payment of a Royalty that entitles SAS to the Australian Licence under cl 2(d). He also did not err in deciding that SAS did not achieve Milestone 2 by the making of this payment.
It follows that proposed ground 1 cannot succeed.
However, we will nevertheless also consider the construction issue.
Construction of cl 2(b)
Submissions
The key submission of SAS in respect of both proposed grounds is that the trial judge erred in his construction by finding and applying an insufficiently precise purpose of the Principal Agreement, contrary to the text of that agreement.
SAS criticises various statements made by the trial judge to the effect that there was a ‘problem’ with Green Camel, and that the parties had agreed that SAS would obtain a potentially beneficial licence, together with shares in UESL, if SAS could assist with the resolution of ‘the problem’. SAS submits that there is no precision in the ‘problem with Green Camel’, or in its ‘end’, and that the trial judge failed to consider any other commercial purpose. SAS submits that consideration of the entirety of the Principal Agreement reveals a wider purpose and operation of cl 2(b) (in particular). Significant provisions include the provision for the immediate, unconditional New Zealand Licence (in cl 8); the fact that the Milestone 2 designation of ‘Royalties’ embraces payments under the New Zealand Licence (cls 1.1(u) and 5); and the payment by SAS of $100,000 and provision by SAS of marketing assets (pursuant to cl 6 and Milestone 1).
SAS also makes particular challenge to the trial judge’s reasoning (in para 80) to the effect that its construction would work a ‘commercial nonsense’. SAS submits that the Court should not permit assumptions concerning the commercial purpose to result in a departure from the natural meaning of the text.[52] Further, that it is not part of the Court’s role to construe an agreement that otherwise has an explicable commercial result so as to increase the commercial benefits to one party to the agreement.[53] The trial judge’s approach, influenced by the ascertained singular contractual purpose, led to error.
[52]Citing PCCEF [2019] VSCA 144, [55] (Whelan, McLeish and Emerton JJA).
[53]Citing Apple and Pear [2016] VSCA 280, [152] (Tate JA), [228]–[230] (Ferguson and McLeish JJA).
In oral submissions, counsel emphasised that the suggestion that the location and retention of a new Investor would have solved the ‘Green Camel problem’ was somewhat optimistic, since that person was likely to insist upon enforcement of the rights under the Green Camel Licence (namely, the right to use the intellectual property in perpetuity for no royalties).
SAS also submits that the trial judge’s construction would mean that Milestone 3 had inevitably been achieved already, such that provision for Milestone 2 would be redundant. The trial judge sought to deal with this by suggesting simply that SAS’s contentions would result in ‘greater inconsistency with the objects of the Principal Agreement’.
In oral submissions, counsel also submitted that the operation of the agreement under the trial judge’s construction is circular. Thus, on the trial judge’s construction, the only way of satisfying Milestone 2, and obtaining the Australian Licence, is to earn Australian Royalties. However, the only way to earn such Royalties is through using (and hence, already having) an Australian Licence. Therefore, in order to give cl 5 some operation, and provide for a ‘trigger’, Milestone 2 must apply to the Royalties received under the New Zealand Licence.
Analysis
As identified above, it is important to identify the commercial purpose as part of the process of construction of a commercial agreement. This is particularly important given the lack of clarity, and apparent errors, contained in the text of the Principal Agreement.
The trial judge did not ignore the grant of the ‘separate’ New Zealand Licence.[54] However, he (correctly) focused on three aspects of the situation concerning Green Camel as identified in the Principal Agreement. First, that there was a ‘Green Camel problem’, which needed to be addressed.[55] Secondly, that SAS would obtain a reward (constituted by the Australian Licence together with shares) if it assisted with the resolution of this problem.[56] Finally, that the parties considered that one of the means of overcoming this problem was to locate and retain an investor who was to take a controlling interest in Green Camel, so that it was no longer an impediment to UESL developing its business.[57]
[54]See, in particular, Reasons [73(c)–(d)].
[55]Ibid [14], [74].
[56]Ibid [74].
[57]Ibid.
There is no error in the trial judge’s approach.
First, the text of the Principal Agreement makes it plain that the parties saw Green Camel as a ‘problem’ (as the trial judge suggested). Both recitals A and B, as well as the narrative to the Milestones, identify a desire to deal with perceived difficulties with Green Camel. Although the recitals are not operative provisions, they can be taken into account in construing the operative provisions.[58] Clause 2 itself also expressly contemplates that the ultimate goal (Milestone 4), involves a termination of the Green Camel Licence. Without such termination, neither SAS nor UESL could properly exploit the Blue Farm Technology. SAS’s reference to Milestone 1, as reflected in cl 6, also does not detract from the trial judge’s finding. Rather, as SAS highlighted, the ‘starting point’ of the Principal Agreement, represented by Milestone 1, involved a legal review, and consideration of whether to proceed with the ‘Dispute’ with Green Camel (under cl 6). This underscores the difficulties with Green Camel.
[58]See Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603, 695–8 [379]–[390] (Campbell JA); [2009] NSWCA 407 for reference to extensive authority for this proposition. Consistent with this position, both parties made reference to the recitals in this case.
It may well be that the parties had other objects and goals. The grant of the New Zealand Licence was certainly one of them. However, the trial judge expressly acknowledged this licence but described it as ‘separate’.[59] He made no error in doing so, given that, consistently with cl 8(c), it was clearly intended to be separate to, and independent of the Milestone process, which was to culminate in the termination of the Green Camel Licence to leave room for the grant of the Australian Licence to SAS.
[59]Reasons [73(c)].
Next, the parties clearly agreed that SAS would obtain a potentially beneficial Australian Licence, together with shares, if it could assist with the resolution of the Green Camel problem by finding an Investor, and making the requisite payment of Royalties derived from that Investor. Clause 2(b) expressly says so.
Finally, the trial judge also made no error in suggesting that the parties saw the retention of an Investor, who took control of Green Camel, as a way of managing the Green Camel problem. Recital B expressly says so, which is also consistent with cl 4, and a critical Milestone, Milestone 4. The parties appear to have intended that such an Investor would ‘allow’ (or at least not object to) the exercise of the right to terminate the Green Camel Licence in return for the assignment of the (new) Australian Licence. The Investor would also derive income from the use of the technology to be passed onto UESL by way of Royalties. It is not to the point whether this would have really solved the Green Camel problem (as SAS suggests). It was clearly the mutual intention of the parties that a commercial solution might be reached by this method.
There is, hence, no error in the trial judge’s identification of the primary purpose of the Principal Agreement.
SAS’s concerns as to the redundancy of Milestone 2, and circularity, appear, at first sight, to have more substance. Thus, it is difficult to see how Milestone 2 could be reached on its own prior to, and independently of, Milestone 3 on the trial judge’s construction given that, as the trial judge acknowledges,[60] the party paying Royalties must already have the requisite Australian Licence to earn such Royalties. The suggestion that Royalties might be received ‘through another means’ does not resolve the issue.[61]
[60]Ibid [76].
[61]Ibid [81].
However, there is no justification for fixing on the New Zealand Licence to address any issue of circularity. To the contrary, cl 8(f) makes it clear that Royalties derived from the New Zealand Licence are to be shared equally ‘until such time as SAS acquires the [Australian] Licence’ in accordance with cl 2. Further, that it is only upon SAS being ‘granted the [Australian] Licence’ specified in cl 2, that the proportion of Royalties will be reduced and paid in accordance with cl 5(a)(ii) (as corrected). Clause 8(f) therefore suggests that the equal sharing of Royalties under the New Zealand Licence is intended to take place prior to, and separate from, the grant of the Australian Licence. The language of cl 8(f) is directly inconsistent with the suggestion that the equal sharing of Royalties in respect of the New Zealand Licence ‘triggers’ an entitlement to the Australian Licence (as SAS suggests).
Rather, the issues of circularity and redundancy can be more readily accommodated. Thus, a reasonable business person would readily understand that the introduction of the Investor, pursuant to Milestone 3 and cl 4, is clearly intended to occur prior to, or at least, simultaneously with, the making of the first Royalty payment pursuant to Milestone 2 and cl 5. Neither Milestone 2, nor cl 5, is redundant, on this construction. Rather, both cl 5(c) and item 2 of Appendix 1 make provision for the content of Milestone 2. In particular, cl 5(c) provides that the transfer of the 15 million shares (the subject of Milestone 2) is ‘in consideration of’ SAS making the first Royalty payment. The other parts of cl 5 are not relevant to the reaching of a Milestone necessary for obtaining the Australian Licence. Rather, they make provision for the quantum (cl 5(a)), and frequency (cl 5(d)), of the Royalties to be paid in respect of licences, once already granted, ‘for the term of‘ those licences (as described in cl 5(b)).
The submissions made by SAS are hence, unpersuasive. Rather, for the following reasons, we are not satisfied that Milestone 2 is satisfied by reason of a (purported) Royalty payment made in respect of the New Zealand Licence (only).
First, as identified already, the terms of cl 5(c) mirror Milestone 2 in providing for the transfer of the 15 million shares within 14 days of the payment of the first Royalty payment. The clause expressly recites that the transfer is in consideration of the payment of the Royalties in respect of the ‘[Australian] Licence Agreement’ only. The absence of any reference to the New Zealand Licence supports the trial judge’s construction that only Royalties paid in respect of Australia are counted for the purpose of Milestone 2.
Secondly, pursuant to cl 8(c), the grant of the New Zealand Licence is ‘not dependent’ on the Milestones, underscoring its independent operation, separate from the operation of the Milestones.
Thirdly, for reasons given already, cl 8(f) provides a strong indication that the equal sharing of Royalties derived from the New Zealand Licensee is intended to take place prior to, and separate from, the grant of the Australian Licence. The language of cl 8(f) is incompatible with SAS’s suggestion that the equal sharing of New Zealand Royalties automatically entitles it to the Australian Licence.
Fourth, although we do not consider it to be necessary to find (as the trial judge did) that SAS’s construction would work a commercial ‘nonsense’, the evident purpose of the agreement (identified already) weighs against SAS’s construction. Thus, it would be contrary to the primary purpose of the Principal Agreement if SAS was to be given a full Australian Licence by purporting to make a Royalties payment in respect of the New Zealand Licence. Such a payment would not, and could not, address the Green Camel problem which related to Australia.
It is unnecessary to go further. However, even if SAS’s concerns cannot be accommodated as enunciated above,[62] SAS has provided no cohesive analysis of cl 5 which supports its contention that a Royalty payment in respect of the New Zealand Licence should be the sole ‘trigger’ for an Australian Licence. The key reference to the New Zealand Royalties payment is contained in cl 5(a)(ii). The view that we have expressed is that cl 5(a) only operates after the Australian Licence has been separately granted, and during the term of each licence. However, if cl 5(a) is to be given some different construction, the word ‘plus’ suggests that Royalty payments from both the Australian Licence and the New Zealand Licence are required in order to reach Milestone 2.
[62]Above, [92].
We are therefore not satisfied that the trial judge erred in finding that SAS did not achieve Milestone 2. Even if the (relevant) payment of $2,500 constitutes a ‘Royalty’, no error of construction was made.
Proposed ground 1 is therefore unsustainable.
Proposed ground 2
As indicated already, SAS alleges that the trial judge erred in construing cl 2(d). It submits that there was a termination of the Green Camel Licence by reason of the admission made by Mr Bodlovich in his email of 20 December 2019. It further submits that cl 2(d) was thereby activated to give an entitlement to the Australian Licence. This is because cl 2(d) provides for a free-standing entitlement to the grant of an Australian Licence, whenever there is a termination of the Green Camel Licence (and regardless of the achievement of Milestones).
It is, again, convenient to deal with the factual issue raised first, prior to considering the issue of construction.
Whether termination by admission
SAS alleges that UESL terminated the Green Camel Licence by reason of the email of 20 December 2019 from Mr Bodlovich, which email is addressed to representatives of both SAS and UESL. In written submissions, SAS relied on the trial judge’s finding at para 25 for the proposition that there had been an acceptance of Green Camel’s repudiation. However, in oral submissions SAS emphasised that the email includes the statement that, in accepting Green Camel’s repudiation, UESL ‘considers [the Green Camel Licence] to be terminated’. It submits that these words constitute an admission, and that if there is anything to cast doubt on their status as an admission, the onus lay on UESL to adduce that evidence. However, the only evidence about this issue was the fact that UESL had raised the issue of the validity of the termination in its counter-claim.[63]
[63]Reasons [96].
SAS’s submission is without merit.
First, as was ultimately conceded by counsel, the trial judge did not make a finding that there was a termination (although counsel suggested that such a finding was unnecessary). To the contrary, his Honour merely summarised the relevant email (at para 25), and suggested that the validity of the termination is disputed.[64]
[64]Ibid.
Secondly, the alleged ‘admission’ is an insufficient basis on which this Court could make a finding of a termination (even if it was appropriate for it to now do so). The subjective view of Mr Bodlovich does not establish that the alleged repudiation was accepted on 10 December 2019 (as he opines, and as SAS alleged in its Statement of Claim).[65] Rather, that matter would need to be considered, objectively, with the benefit of all relevant correspondence and evidence. Moreover, the character of the statements contained in the email of 20 December 2019 are in the nature of an invitation to negotiate, within the context of putting forward commercial positions. This is also consistent with SAS’s own description (contained in its Statement of Claim) that, by this email, UESL ‘proposed that UESL and SAS collaborate to draft, negotiate and execute the Licence Agreement’.[66] The pivotal statement relied upon wherein Mr Bodlovich ‘considers’ the Green Camel Licence to be terminated is consistent with this commercial flavour. It is an insufficient basis to make the serious finding that there was, in fact, a termination of a contract.
[65]See Statement of Claim, 26 March 2020, [10], [15].
[66]Ibid [11].
It follows that we cannot be satisfied that the trial judge erred in construing cl 2(d). In circumstances where no termination is established, the issue simply does not, and did not, arise for consideration.
The result is that SAS also cannot succeed in respect of proposed ground 2, such that leave to appeal should be refused.
However, we will also consider the issue of construction raised in respect of this proposed ground.
Construction of cl 2(d)
Submissions
SAS submits that it is evident that the construction of cl 2(d) adopted by the trial judge has its origins in the same single contractual purpose adopted in his Honour’s construction of cl 2(b) (relating to the ‘problem caused by Green Camel’). SAS submits that the trial judge did not examine the text and plain meaning of cl 2(d). It criticises the trial judge’s finding that cl 2 should be read so that UESL is obliged to grant SAS a full Australian Licence upon termination ‘only if SAS satisfied Milestones 2 or 3’.[67] It claims that cl 2(d) provides for a free-standing entitlement to the full Australian Licence whenever there is a termination of the Green Camel Licence (and regardless of the Milestones).
[67]Reasons [102].
SAS, again, focuses attention on the achievement of Milestone 1. It submits that achievement of Milestone 1 means, not only has there been an alleged breach of the Green Camel Licence, but that (it should be inferred) the breach is such that it would entitle UESL to bring that licence to an end. Hence, at the outset of the Principal Agreement, UESL already has a legal right to bring the existing relationship with Green Camel to an end whenever it chooses to do so. If this occurs, the impediment to the grant of the Australian Licence will be gone, and the Australian Licence may be granted in accordance with cl 2(d).
SAS points to two particular aspects of cl 2(d). First, that cl 2(d) is expressed to be ‘[s]ubject to clause 2(a)’ (only), and is not expressed to be subject to cl 2(b), or subject to cl 2(c) (which refers to the achievement of Milestones 2 or 3). By specifying one condition, the clause is to be read as excluding the others. Secondly, cl 2(d) does not contain a reference to Milestone 4. Thus, cl 2(d) may apply even where Milestone 4 is not satisfied, since Milestone 4 only applies where there is a termination pursuant to cl 2(c).
SAS submits that cl 2(d) has only two preconditions for the grant of the Australian Licence: first, that the Green Camel Licence is terminated; and secondly, given the expression, ‘[s]ubject to clause 2(a)’, that Milestone 1 only is satisfied.
SAS contends that other parts of cl 2 do not serve to impose restrictions on the operation of cl 2(d). While cl 2(c) imposes an obligation on UESL to terminate the Green Camel Licence following satisfaction of Milestones 2 or 3, cl 2(d) operates independently, whenever the Green Camel Licence is terminated for any reason. Thus, if either Milestone 2 or 3 is achieved, UESL must grant shares, and convert the Interim Australian Licence to a full Australian Licence. It must also ‘bite the bullet’, and terminate the Green Camel Licence. However, this is not exhaustive of the circumstances in which there is to be a termination, (and corresponding conversion to a full Australian Licence).
SAS submits that the ultimate outcome to be reached under the Principal Agreement is the grant of the Australian Licence, rather than the shares. UESL’s legal position vis-a-vis the Green Camel Licence is unaffected by the achievement of the Milestones,[68] which are intended to provide an incentive to take positive steps to introduce an Investor or generate Royalties from the New Zealand Licence as the licensee/licensor relationship is completed. Recital B supports this view, as it suggests that it is the payment of shares which are tied to the Milestones (as a reward), rather than the grant of the Australian Licence. The full Australian Licence is therefore intended to be given full effect upon termination of the Green Camel Licence. If such termination occurs under cl 2(d), SAS will obtain the Australian Licence (but not the shares).
[68]Counsel for SAS’s submission was that ‘the most that can be said is that the commercial landscape, as far as [UESL] is concerned, might be slightly different’.
Analysis
SAS overstates the significance of any legal right to terminate in circumstances where any such right was clearly the subject of dispute, and where the parties were concerned to achieve a commercial, and not just a legal, solution to the Green Camel problem. SAS did not point to any specific right of termination of the Green Camel Licence. Rather, as implied by the 20 December 2019 email, the available mechanism for termination was to accept an alleged repudiation, an inherently contestable and therefore uncertain ‘right’. Rightly or wrongly, the parties saw the solution to be the introduction of a ‘friendly’ Investor who would (presumably) acquiesce in the exercise of any right to terminate the Green Camel Licence, in return for an assignment of the (new) Australian Licence.
SAS also overstates the significance of the words ‘[s]ubject to cl 2(a)’. Those words merely refer to the limitation that the Australian Licence relates to Australia, and that there is 36 months to obtain it (as UESL correctly submits). The absence of an express reference to cls 2(b) and 2(c) does not mean that cl 2 should not be read as a whole, and in context.
It is also true that the ultimate award is a full Australian Licence. However, cl 2(b) expressly ties this goal to the achievement of Milestones 2 and 3. It cannot be contended in this context that the Milestones are solely about the issue of shares.
Ultimately, then, we consider that cl 2 provides for a sequenced process for the grant of the Australian Licence, where cl 2(d) constitutes the final stage of that process, and does not give rise to a free-standing entitlement. Our reasons for this conclusion, which follow, largely adopt the helpful submission of UESL.
First, there is cl 2 itself, when considered also with Appendix 1. Thus, the structure of the clause involves four sub-clauses which make reference to a series of Milestones, as also mirrored in Appendix 1. It is clear in this context that cl 2(d) is intended to ‘bookend’ the cumulative process towards the grant of the Australian Licence, and the 40,000 shares (which is also confirmed in the third paragraph of the narrative underneath the Milestones). Appendix 1 further specifically contemplates, consistently with cl 2(c), that termination of the Green Camel Licence is to take place ‘within 14 days of SAS satisfying either Milestone 2 or 3’. There is no place for some ‘satellite’ entitlement based on a termination outside the Milestone process.
The terms of cls 2(b) and 2(c) are also important. Thus, cl 2(b) provides that the Interim Australian Licence will be converted to a full Australian Licence (only) upon SAS achieving one or both of Milestones 2 and 3. It would effectively undermine the operation of this clause if SAS could obtain an Australian Licence without achieving those Milestones, and simply because of a termination of the Green Camel Licence (for any reason). Clause 2(c) also makes clear that cl 2(d) is describing the final stage of a process. Thus, while cl 2(c) refers to the circumstances in which UESL comes under an obligation to terminate in accordance with Milestone 4, cl 2(d) refers to the consequence of performing that obligation, (which is the grant of the Australian Licence). The clauses thereby operate conjointly, and in tandem (as UESL described). There is also no need for an express reference to Milestone 4 in cl 2(d) (as SAS suggests), given that cl 2(d) provides for the consequence of the achievement of that Milestone.
Next, there is cl 8(c), which expressly states that the granting of the New Zealand Licence ‘is not dependent on the Milestones’. The absence of such a statement in respect of the Australian Licence (in this clause, or elsewhere) tends to confirm that the Milestones are a key part of the process to obtain an Australian Licence.
Finally, there is the primary purpose identified already. A key part of that purpose is that SAS should assist UESL with its Green Camel problem through the achievement of Milestones 2 and 3 (via the location and retention of an Investor who will derive income and pay Royalties). Such purpose would be completely undermined if SAS was to be granted an Australian Licence without finding an Investor. The key provisions relating to Milestones 2 and 3 would also be effectively rendered redundant.
We are therefore not satisfied that the trial judge erred when he found that UESL was obliged to grant SAS a full Australian Licence upon termination of the Green Camel Licence, only if SAS had satisfied Milestones 2 or 3.
Proposed ground 2 cannot succeed.
Other matters
UESL makes further submissions to the effect that SAS would not be entitled to relief sought, even if a proposed ground was established.
However, given that neither proposed ground is sustainable, it is unnecessary to consider these further submissions.
Conclusion
Leave to appeal will be refused.
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