SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
SEKISUI RIB LOC AUSTRALIA PTY LTD (ACN 008 040 800) v ROCLA PTY LTD (ACN 000 032 191) & ANOR
[2012] SASCFC 21
Judgment of The Full Court
(The Honourable Justice Sulan, The Honourable Justice David and The Honourable Justice Peek)
15 March 2012
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS
Parties entered into business sale agreement (BSA) for the purchase by the first respondent of the Caliber business - on this same date, parties entered into various ancillary agreements, attached as schedules to the BSA.
Whether trial Judge erred in failing to interpret the BSA and its schedules as one single transaction.
Held: The BSA included the Real Property Licence, the Supply Agreement and the Rocla Sub-licence - any variation made to one of the scheduled agreements required the consent of all parties to the BSA, in writing - no relevant application of merger arises.
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - FORMATION OF CONTRACTUAL RELATIONS - OFFER - OPTION FOR VALUABLE CONSIDERATION OR UNDER SEAL - EXERCISE OF OPTION
Whether the parties to the Rocla Sub-licence could unilaterally vary the time within which to exercise the option without the consent of SRLA - whether the option exercised was within time - whether a Complete Plastream Line was purchased.
Held: Purported extension of time within which to vary the option was invalid - strict compliance with the terms of the option was required.
EQUITY - GENERAL PRINCIPLES - MISTAKE - EQUITABLE REMEDIES - RECTIFICATION
Whether the trial Judge erred in declining to make an order for rectification of the Rocla Sub-licence and the Mirror Licence on the basis that no live issue existed between the parties.
Held: Rectification allowed to reinstate a comma between the words 'replacement' and 'lining' to conform with the subjective intention of the parties.
Appeal allowed - orders of the trial Judge set aside, rectification granted.
Trade Practices Act 1974 (Cth) s 51AA, referred to.
BP Refinery (Westernport) Pty Ltd v Shire of Hastings Council (1977) 180 CLR 266; Aussie Airlines Pty Ltd v Australian Airlines Limited & Others (1996) 68 FCR 406, applied.
Trident General Insurance Co Limited v McNiece Bros Proprietary Limited (1988) 165 CLR 107; Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales (1982) 149 CLR 337; Colliers Jardine (NSW) Pty Ltd v Balog Investments Pty Ltd & J Dan Pty Ltd [1996] ANZ Conv R 527; Leggott v Barrett (1880) 7 Ch D 306; Palmer v Johnson (1884) 13 QBD 351; Svanosio v McNamara (1956) 96 CLR 186; Players Pty Ltd & Ors v Clone Pty Ltd [2006] SASC 118; Hare v Nicoll [1966] 1 All ER 285; United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 All ER 104; Parriwi Road Pty Ltd v Raffan [1970] 2 NSW 431; United Scientific Holdings v Burnley Borough Council [1978] AC 904; Kim v Abbey Orchard Property Investments Pty Ltd [1981] NSW Conv R 55-039; Bressan v Squires [1974] 2 NSWLR 460; McLachlan-Troup v Peters [1983] 1 VR 53; Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; Quadling v Robinson & Anor (1976) 137 CLR 192; Carter v Hyde (1923) 33 CLR 115; Kavia Holdings Pty Limited v Suntrack Holdings Pty Ltd [2011] NSWSC 716; Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673; Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336; Australia Hotel Co Ltd v Moore (1899) 20 LR NSW (Eq) 155; Kenny v Sholl (1905) 7 WALR 197; Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; Yang v Lamb & Ors [2001] NSWCA 225, considered.
SEKISUI RIB LOC AUSTRALIA PTY LTD (ACN 008 040 800) v ROCLA PTY LTD (ACN 000 032 191) & ANOR
[2012] SASCFC 21Full Court: Sulan, David and Peek JJ
SULAN J:
Background
This is an appeal seeking to set aside declarations and a subsequent order of 12 May 2011 and 13 May 2011 respectively, made by a Judge of this Court.
The first respondent, Rocla Pty Ltd (‘Rocla’), is a manufacturer of pipes who sought to expand its business from the manufacture of concrete pipes to pipes made of PVC, and those made from steel reinforced profile (‘SRP’). The appellant, Sekisui Rib Loc Australia Pty Ltd (‘SRLA’), owns the technology used for the manufacture of SRP strips (‘the SRP technology’).
On or about 16 May 2008, SRLA granted to the second respondent, Plastream Pipe Technologies Pty Ltd (‘Plastream’) an exclusive, perpetual, worldwide licence (‘Master Licence’) to commercialise the SRP technology other than for the purpose of pipe rehabilitation. Plastream agreed that it would not engage in the business of pipe rehabilitation and that it would ensure any sub-licence it entered into imposed the same obligation. Pipe rehabilitation is defined in the Master Licence to include activities that fell within the scope of the rights granted by SRLA to Interflow Pty Ltd (‘Interflow’).
On 22 August 2008, Rocla entered into a business sale agreement with SRLA, Plastream and Caliber Australia Pty Ltd (‘Caliber’), for the purchase by Rocla of the Caliber business (‘the BSA’). The Caliber business had been a division of the overall SRLA business operation which comprised the pipe winding business. On this date, the parties entered into various ancillary agreements for the benefit of Rocla in carrying on the Caliber business including:
(a) a real property licence granted by SRLA to Rocla for the occupation of a portion of SRLA’s premises (‘Real Property Licence’);
(b) a supply agreement between SRLA and Rocla for the supply by SRLA of the SRP strip (‘Supply Agreement’); and
(c) a sub-licence granted by Plastream to Rocla to use SRP technology in Australia and New Zealand other than for the purpose of Pipe Rehabilitation (‘Rocla Sub-licence’).
It is a term of the BSA that SRLA enter into a conditional agreement with Rocla which provided that SRLA would licence to Rocla the SRP technology, on terms materially the same as the Rocla Sub-licence, in the event that the Master Licence was terminated (‘the Mirror Licence’). The parties to the Mirror Licence included Rib Loc Australia Pty Ltd and Rocla.
As a term of the Rocla sub-licence, Rocla was granted an option to purchase from Plastream what is defined as a ‘Complete Plastream Line’, being a Plastream pipe production line containing all the components necessary to produce Plastream pipe including SRP (‘the Option’). The Option was to be exercised by Rocla informing Plastream that it wished to purchase the Complete Plastream Line. The Rocla Sub-licence provided that Rocla could exercise the Option ‘at any time within the first 20 months of the Term’. ‘Term’ is defined in the agreement as the period commencing from 22 August 2008.
At trial it was contended by both Rocla and Plastream that, on 22 April 2010, both parties agreed to vary the terms of the Rocla Sub-licence to extend the period within which the option could be exercised, to 21 May 2010. It was put by Rocla and Plastream that the option was validly exercised via a mutual agreement made between themselves to extend the time. They claimed they were entitled to do so because they were the only parties to the Rocla Sub-licence.
This was denied by SRLA who contended at trial that they were never consulted in relation to the variation of the exercise period. It was submitted by SRLA that the various agreements entered into between Caliber, SRLA, Rocla and Plastream involved a single transaction comprising the BSA thereby rendering the need for the consent of each party to be given in writing, before any variation of the agreements could be made. It was put that it was either an express or implied term that the agreements, as attached as schedules to the BSA, formed part of the BSA. SRLA sought declarations to this effect. Namely, that Rocla was required to obtain consent from SRLA if there was any variation to the terms of the Rocla Sub-licence, and a declaration that the option was not validly exercised.
In its counterclaim, SRLA sought rectification of the BSA by the insertion of a comma between the words ‘replacement’ and ‘lining’ in clause 3.5(a) of both the Rocla Sub-licence and the Mirror Licence. A declaration was sought that on a proper construction of the Rocla sub-licence, Rocla is not able to use the technology for the ‘replacement’ of any culverts, pipelines, conduits, underground ducts, tunnels, bores or like structures.
SRLA further argued in its counterclaim to have suffered loss and damage as a result of its continuing obligation to supply Rocla. At trial Rocla sought an injunction requiring SRLA to supply SRP strip pursuant to the supply agreement. SRLA agreed to continue to supply Rocla until this litigation was resolved. The injunction therefore was not required. It was argued by SRLA that it had alternative markets which it could have supplied at a greater profit. SRLA sought a declaration that they no longer have any obligation to continue to supply the SRP strip.
The trial Judge’s findings
The trial Judge summarised the key issues raised by the parties as follows:
1. Whether Rocla validly exercised the option to buy a Complete Plastream Line as provided for in the Rocla Sub-licence. That raises the question of the standing of SRLA to seek relief in this Court. The question is whether the doctrine of privity of contract allows SRLA to seek such relief. SRLA claims that privity is not an issue because it is a party to the action in which Rocla seeks declarations and furthermore that there is one single transaction which encompasses all the separate agreements.
2. The construction of the Rocla Sub-licence involves determining the objective intention of the parties to the contract relating to the aspect of “pipe rehabilitation”. The question is what the parties intended by the restriction placed on Rocla from engaging in “pipe rehabilitation” using SRP technology. There is a question as to whether any issue of construction arises in any existing dispute between the parties or whether such an issue is merely hypothetical.
3. SRLA seeks rectification of the BSA essentially because of a missing comma in the Rocla Sub-licence which, although included in some earlier drafts, did not appear in the final document signed by Rocla and Plastream. There is both an executed copy of the agreement with the missing comma and an unexecuted copy attached as a schedule to the BSA. As with 2 above, there is a question as to whether the rectification is sought as an academic or hypothetical exercise unrelated to any existing factual dispute between the parties.
4. The question of whether SRLA has suffered any loss and damage as a result of having to supply Rocla rather than supplying product to alternate markets at a better price. That only becomes relevant if Rocla is found not to have validly exercised the option.
Expiry of the option
The trial Judge considered whether SRLA had standing to be heard on the issue of the exercise of the option, though not a party to the Rocla Sub-licence. Counsel for Rocla, and Plastream, both argued that SRLA could not seek rectification of a document to which it is not a party, relying on the established doctrine of privity.[1]
The trial Judge found that the exercise of the option was a live issue between Rocla and SRLA, and Rocla had made it so. He was of the view that SRLA, having been made a party to the proceedings by Rocla, was merely responding to the pleaded issues and clearly had standing. He said that the principles of privity of contract would only later become relevant in respect of the declarations sought as to the proper construction of the Rocla Sub-licence and the orders sought for rectification.
Rocla and Plastream contended at trial that both parties agreed to vary the terms of the Rocla Sub-licence by extending the time in which the option could be exercised from 22 April 2010 to 21 May 2010. This was said to be then exercised on 21 May 2010 by a letter transmitted by email from Rocla to Plastream.
SRLA argued that, pursuant to clause 11.1 of the Rocla Sub-licence, the time for the exercise of the option expired at midnight on 21 April 2010, or in the alternative, at midnight on 22 April 2010. In any case, it was put that the option was not exercised within the specified period in the contract, resulting in its lapse, as the agreement to extend the time for exercising the option was reached after its expiry.
Counsel for Rocla submitted that clause 11 of the Rocla Sub-licence was varied orally during a telephone conversation on 22 April 2010, with an email being sent later that day confirming such agreement. Though the trial Judge considered the email of 22 April 2010 to be equivocal, he was of the view that the parties to the Rocla Sub-licence, Rocla and Plastream, had the ability to vary by agreement the time for the exercise of the option in any way they chose, whether or not the time for exercising the option had already expired. He considered that the authorities relied upon by counsel for SRLA could be distinguished, in that those cases related to disputes by the parties to the contract as to whether an option was effectively exercised. There was no such dispute here. In this case, both parties agreed to the variation.
Though acknowledging that the exercise of the option impacts SRLA’s obligation to supply Rocla with SRP strip, the trial Judge considered it an insurmountable problem to SRLA’s argument that they were not a party to the Rocla Sub-licence. It is these findings which are the subject of appeal ground 9.
The ‘single transaction’ argument
It was argued by SRLA at trial that neither Rocla nor Plastream were able to vary the time for the exercise of the option without the consent of SRLA and Caliber. This was founded on the proposition that this was an express term of the BSA by virtue of Clause 37. Further, that given an unexecuted copy of the Rocla Sub-licence was annexed to the BSA, it must form part of the BSA itself. SRLA’s overarching argument in this respect was that the parties intended to proceed with the acquisition of the Caliber business and all other necessary agreements as a single transaction. Counsel for SRLA pointed to a number of clauses, schedules and defined terms of the BSA which evidence a single transaction involving a number of ancillary steps in pre-agreed form, the variation of which can only be achieved by all parties consenting in writing.
Counsel for Plastream distinguished between the executed and unexecuted copy of the Rocla Sub-licence attached to the BSA as Schedule 8. Counsel contended that the unexecuted copy has no contractual force, merely defining other obligations, rather than creating obligations itself.
Counsel for Rocla canvassed the prior negotiations which took place where, each party, separately advised, chose to document their respective arrangements in a series of agreements. He said that the fact that SRLA was not a party to the Rocla Sub-licence was a deliberate choice, and that it would be contrary to sound commercial commonsense for any minor variation of the individual agreements between any two parties to be subject to consent of all of the four parties to the BSA.
The trial Judge found there was no express term agreed between the parties requiring the consent of all parties to the BSA for any variation in the terms of the Rocla Sub-licence. He considered that the parties had chosen to have separate agreements covering respective rights and interests vis-à-vis each other. He agreed with Counsel for Plastream’s characterisation of the unexecuted copy of the agreement as merely a means of identifying other obligations between the parties, without any contractual force. He found that clause 37 did no more than ensure that any variation to the agreement was to be made in writing. It is these findings which form the basis of appeal ground 7.
In the alternative, it was submitted by SRLA that it was an implied term of the agreement that Rocla and Plastream could not vary the terms of the Rocla Sub-licence without the consent of all parties to the BSA. This was founded on the basis that it is (a) reasonable and equitable, (b) necessary to give the BSA business efficacy, (c) so obvious that it goes without saying, (d) capable of clear expression, (e) consistent with the express terms of the BSA, and (f) necessary to protect the interest of those parties who, although parties to the BSA, would not be parties to the agreements annexed in the schedules to the BSA once those agreements were executed in accordance with the requirements of the BSA. These factors arise from the principles enumerated in Codelfa Construction Proprietary Limited v State Rail Authority of New South Wales.[2] The trial Judge, relying on the principles in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council[3] and endorsed by the High Court in Codelfa, agreed with counsel for Rocla, who submitted that except for the fact that the suggested implied term is capable of clear expression, the other requirements are not made out. He was of the view that the implication of the term was not necessary to give the BSA business efficacy, it was not so obvious that it goes without saying, and was not consistent with the express terms of the contract. This forms the basis for appeal ground 9.2A.
[2] (1982) 149 CLR 337.
[3] (1977) 180 CLR 266.
Finally, in respect of the single transaction argument, it was put by SRLA in the further alternative, that an estoppel arises from the mutual adoption by the parties to the BSA of an assumed state of fact that the parties would adhere to the terms of the various ancillary agreements, and that no party would vary the terms of these, without the consent of all parties. SRLA sought to evidence this by the answers given in the cross-examination of Mr Modesto Lukban, who is the Business Development Manager for Rocla Pipeline Products. The trial Judge concluded that Mr Lukban’s views were not relevant. He saw no valid argument for the operation of an estoppel as contended by SRLA.
Terms upon which option exercised
It was contended by SRLA that if the time for exercising the option was validly extended, it was nevertheless not properly exercised in accordance with clause 11 of the Rocla Sub-licence. The option in clause 11.1 relates to the purchase of a Complete Plastream Line (as defined), on the terms set out in clause 11. Counsel for SRLA argued that the option in this case could be characterised as a conditional contract. That is, that performance of all conditions is required before the option can be exercised. He said that Rocla did not comply with the requirements of clause 11, rendering the exercise invalid. First, it was put that the form of the notice itself was inconsistent with clause 11, and that a deposit was not paid in accordance with clause 11.2. Second, it was put that Rocla did not purchase from Plastream a full or Complete Plastream Line as defined in the Rocla Sub-licence.
The trial Judge dealt with each of these submissions separately. In respect of the form of the notice, it was Rocla’s case that valid notice had been given to Plastream to exercise the option, via the letter of 21 May 2010, whether or not it strictly complied with the notice regime prescribed by clause 11. Counsel relied on various authorities to support the proposition that a purported exercise of an option should be fairly and not pedantically construed.
It was contended by SRLA that the 21 May 2010 letter contained terms contrary to clause 11.2, and was not in compliance with clause 11.1. Counsel submitted that there were two consequences which flow from this non-compliance: first, that the Rocla Sub-licence was terminated on 21 August 2010, and second, that SRLA’s obligation to continue to supply strip came to an end on that same date.
The trial Judge considered that the interpretation proffered by SRLA as to the form of the notice required by clause 11 was pedantic and technical. He preferred a more liberal approach to construction, finding that there existed sufficient evidence to illustrate an intention on the part of Rocla to exercise the option. Though he noted that there was not strict compliance with the precise words of clause 11, there was, in his view, a clear intention to exercise the option.
The trial Judge then considered SRLA’s submission that the exercise of the option could not have been valid as a ‘Complete Plastream Line’ was not acquired by Rocla. ‘Complete Plastream Line’ comprises all of the components identified in Schedule 5. Counsel for SRLA, relying on a quotation for the Complete Plastream Line dated 29 July 2010, contended that specific items were expressly removed from Schedule 5 of the Rocla Sub-licence in order to save on costs. It was further submitted that Rocla did not comply with the payment terms applying to the option.
Counsel for Rocla submitted that though a defined term, the ‘Complete Plastream Line’ was not a concrete concept as at 22 August 2008, and commercial commonsense dictates that the Rocla Sub-licence contemplated that there would be changes and modifications to this definition. The trial Judge agreed. It is this finding which is the subject of appeal ground 10.
As a further alternative, it was argued by SRLA that by amending the terms of the Rocla Sub-licence, Rocla had acted unconscionably contrary to s51AA of the Trade Practices Act 1974 (Cth). Having found that the BSA together with the other contracts did not constitute a single transaction, the trial Judge considered that there was no basis for a finding that Rocla had acted unconscionably, nor was there room for a finding that SRLA had been affected in its ability to make judgments in its own best interest.
The missing comma
SRLA sought rectification of the BSA by the insertion of a comma between the words ‘replacement’ and ‘lining’ in clause 3.5(a) of both the Rocla Sub-licence and the Mirror Licence. It was argued by SRLA that Rocla knew from the Master Licence that Plastream had agreed that it would not engage in the business of pipe rehabilitation. This issue was raised in the context of Rocla allegedly being excluded from using the SRP technology in the ‘replacement’ of culverts, pipelines, conduits and the like and in carrying out pipe rehabilitation. It was alleged by SRLA that a comma was omitted in the final agreement between Rocla and Plastream. Rocla disputed this. Rocla denied in its reply that any comma was omitted from the document solely by reason of a word processing error. It contended that the agreement reflected the intention of the parties. The history of the exchanges between the parties was canvassed at trial. I will consider this evidence later in my reasons.
In the opinion of the trial Judge, nothing pleaded regarding the use by Rocla of SRP technology related to any allegation of breach of contract. He considered there to be no factual situation pleaded which raised any issue for determination by him. He did not find it necessary to determine the objective intention of the parties as, in his opinion, to do so would be an attempt to construe the agreement for theoretical or future possibilities. He noted there was no evidence before him as to what was meant by the terms ‘replacement’ or ‘replacement lining’, and that there was no factual basis for deciding whether any particular actions which might be taken by Rocla in the future would involve replacement and/or replacement lining. He concluded:
During final submissions it became apparent that SRLA is really seeking declarations and an order for rectification to protect it in the future against the possibility of Interflow taking action against SRLA should Rocla proceed to tender for projects similar to the Albert Priestly project. Mr O’Sullivan conceded that the question of what Rocla can actually tender for and whether it comes within the definition of replacement is not in issue in this matter. Mr Hoffmann, however, did not agree. The reason for this is clear from the understanding Mr Baker had regarding the importance of the word “replacement”. If replacement is an exclusion within clause 3.5(a) of the sub-licence then, as Mr Baker said, Rocla is likely prohibited from tending for projects such as the Albert Priestly project. If, however, the expression is “replacement lining” then that is something that Rocla always understood it could not do. Rocla wishes to argue that it is entitled to place new pipe in irrigation channels because it is not prevented from doing that by the exclusions in clause 3.5(a).
Therefore, although conceded by Mr O’Sullivan that the question of what is encompassed within the definition of “replacement” in this matter is not in issue, Mr Hoffmann wishes to have a ruling which enables his client to gain the comfort of being able to tender for projects such as the Albert Priestly project. It is simply a question of construction of the document in a vacuum. In my view it would need an actual set of facts and evidence as to the exact project involved, and possibly evidence as to the knowledge and understanding of specific terms used in the business before any meaningful conclusion could be drawn. I cannot therefore in this matter give Mr Hoffmann’s client the comfort it seeks to allow it to tender for like projects in the future. This likewise means that I can give no comfort to Mr O’Sullivan’s client. The Court should not be required to make a judgment solely for the purpose of giving comfort to either or both of the parties urging their respective interpretations.
It is these findings which are the subject of appeal ground 8.
The trial Judge did not find any basis for rectification of the Rocla Sub-licence. He considered the fact that SRLA was not a party to the document, and that he had concluded that the contractual relationships entered into by the parties did not amount to a single transaction, to be fatal to their claim. He was of the opinion that SRLA was seeking rectification of a document in respect of which there was no live dispute, rendering it a hypothetical or theoretical issue which might only arise in the future. He found that the Court would not involve itself in such circumstances.
Damages
The trial Judge indicated that even if he was mistaken in respect of the exercise of the option, and if it were the case that the option was not validly exercised, he would nevertheless decline to make an award of damages. He considered that SRLA had not established that they were operating at maximum capacity, or that the claimed loss from the potential sales to the US company were made out. The subject of damages was not raised upon appeal.
The appeal
The appellant appeals against the judgment of 12 May 2011 and the orders of the trial Judge of 13 May 2011. The trial Judge made the following declarations on 12 May 2011:
1. A declaration that clause 11.1 of the SRP Technology Licence Deed was varied such that the words “at any time within the first 20 months of the Term” were replaced by words to the effect of “on or before 21 May 2010”.
2. A declaration that the plaintiff gave notice to the first defendant in accordance with clause 16 of the SRP Technology Licence Deed on or before 21 May 2010 and consequently exercised the option in clause 11 of the SRP Technology Licence Deed.
On 13 May 2011 the following orders were made:
1. ‘the Termination Date’ in clause 2.26 of the Supply Agreement for Steel Reinforced Profile between the Plaintiff and the Second Defendant dated 22 August 2008 is the date that the Plaintiff completes the acquisition of a Complete Plastream Line in accordance with the option granted to it under the SRP Technology Licence Deed.
2. The Second Defendant supply SRP to the Plaintiff pursuant to the Supply Agreement until the Plaintiff completes the acquisition of a Complete Plastream Line in accordance with the option granted to it under the SRP Technology Licence Deed.
3. The Second Defendant pay the Plaintiff’s and the First Defendant’s costs of the proceedings including reserved costs, provided that the costs of the adjournment thrown away on 29 November 2010 shall be adjusted so that Rocla bears 30% of Plastream’s costs and has its own costs of the adjournment reduced by 30%.
Structure and characterisation of the BSA
The appellant contends that the trial Judge erred in holding that the form of agreements constituting Schedules 8 and 15 to the BSA were merely a means of identifying obligations of the parties and had no contractual force. This is appeal ground 7. Mr Shavin QC, for the appellant, submits that the trial Judge failed to reach the inevitable conclusion that the BSA and its schedules were an overarching transaction, comprising all the obligations of the parties including those obligations set out in the schedules and annexures to the BSA. He says the consequence of this is that the terms of each transaction recorded in the schedules formed an inextricable part of the terms of the BSA, rendering any variation to be made to these agreements subject to the consent in writing of all parties to the BSA. This argument is founded upon various clauses within the BSA. It is relevant to set out these clauses:
Clause 37:
37. This Agreement can only be varied by the parties in writing.
Clause 2.2:
2.2 “Agreement” means this agreement, including any schedule or annexure to it.
Clause 2.56:
2.56. “Transaction Documents” means this Agreement, the SRP Supply Agreement, the SRP Technology Licence Deed [the Rocla Sub-licence], the Stock Consignment Agreement, the Work-In-Progress Consignment Agreement and the Licence Agreement.
Clause 28:
28.This Agreement and the other Transaction Documents contain everything the parties have agreed in relation to the subject matter they deal with. No party can rely on an earlier written document or anything said or done by another party, or by a director, officer, agent or employee of that party, before this document or the other Transaction Documents were executed, save as permitted by law.
Clause 29:
29.Each party must do, sign, execute and deliver and must procure that each of its employees and agents does, signs, executes and delivers, all deeds, documents, instruments and acts reasonably required of it or them by notice from another party effectively to carry out and give full effect to this Agreement and the rights and obligations of the parties under it, both before and after Completion.
Mr Shavin argues that when one considers clause 37 in the context of the definition of Agreement, Transaction Documents, the entire agreement clause, and the further assurance clause, the BSA can only be varied by all parties to the BSA, in writing. He contends that the BSA included each of the subsidiary agreements which were essential for the sale of the business as agreed in the BSA, and which affected the rights and obligations of the parties to the BSA, whether or not those parties were parties to each of the subsidiary agreements. He contends that the above clauses contemplate the reach of the executed versions of the subsidiary agreements, the unexecuted versions of which are annexed to the BSA. He submits that it follows that no party could vary any part of the BSA, including any of the schedules, unless the variation was made in accordance with clause 37. That is, that it could not have been open to Rocla and Plastream to unilaterally vary the time for the exercise of the option. He says if the subsidiary transactions detailed in the schedules to the BSA did not form part of it, any of the parties to an individual subsidiary transaction could vary its terms orally or by separate written agreement, without the knowledge of a party not privy to the variation. Consequently, this would result in the parties not being ad idem and the BSA would fail. Further, he says that the position does not vary post execution, particularly in circumstances where a subsidiary agreement impacts upon a party to the BSA who is not named as a party to the subsidiary agreement such as the case with the Rocla Sub-licence and the Supply Agreement.
In the alternative, it is the submission of SRLA that the trial Judge ought to have found the implication of a term, requiring the consent of all parties to the BSA to any variation of the subsidiary transaction contained in a schedule to the BSA to promote business efficacy. Mr Shavin submits that it would otherwise be the case that, for example, Rocla and Plastream could unilaterally vary the time in which the option could be exercised under the Rocla Sub-licence without any limitations. Having then triggered the Supply Agreement, it would oblige SRLA to continue its supply obligations under the Supply Agreement, without being heard on the matter.
It is put that this submission, which touches on the interrelated obligations between the subsidiary agreements and the BSA, gives further weight to the submission that the parties entered into an overarching agreement for the sale of the business which includes the various subsidiary transactions. Mr Shavin says that an alternative interpretation other than the one he puts forth would be an affront to the principles in Codelfa, allowing two parties to change obligations indefinitely, where clear interlocking promises, burdens and benefits exist.
Mr Parker SC, for the first respondent, submits that the parties intentionally adopted a structure in which the agreements appearing in the various schedules were drafted as stand-alone contracts. He contends they could have, had they wished, put the entire agreement in the one document. Instead, they opted to have separate schedules with the preparation, execution and exchange of four separate instruments, to be separately stamped.
Mr Parker contends that the single agreement approach would present problems. He says that to require each of the four parties to the BSA to be treated as a party to each separate agreement would be incongruous with the way in which the parties chose to structure the agreements, and to the specific provisions within each. It would enable a party to the BSA to become parties to each of the agreements, even if they had no commercial interest in the matters governed by that agreement.
The second respondent, Plastream, adopts the submissions of Rocla in relation to the single transaction argument. Mr Barnett, for Plastream, submits that the construction of the BSA favoured by SRLA is an attempt to avoid the doctrine of privity in relation to the Rocla Sub-licence. It is argued that the ancillary agreements to the BSA, including the Rocla Sub-licence, were deliberately structured to be separate contracts with discrete parties. Further, if it were truly the intention of the parties to the BSA, either expressly or by necessary implication, that none of the ancillary agreements could be varied without the consent of all parties, there would be no reason to have separate ancillary agreements. Plastream contends that clause 37 was not intended to refer to the ancillary agreements, notwithstanding the definition of ‘Agreement’ in clause 2.2, but rather to the form of any variation, that is, that any variation to the BSA and its schedules was to be in writing. It is put that the definition of ‘Agreement’ in clause 2.2 cannot encompass the executed Rocla Sub-licence or any of the other ancillary agreements, otherwise the definition of Transactional Documents in clause 2.56 would be redundant.
Plastream further contends that the unexecuted copy of the Rocla Sub-licence attached to Schedule 8 to the BSA has no contractual force of itself. Counsel says its purpose is to merely identify the content of the obligations of the parties to it, insofar as the subject matter of those obligations is referred to in the body of the BSA.
Conclusion – Structure
The parties entered into the BSA on 22 August 2008. On this same date they entered into various subsidiary transactions, including the Real Property Licence, the Supply Agreement, and the Rocla Sub-licence. These were separate instruments, but were annexed to the BSA.
Clause 12 of the Supply Agreement states that ‘This Agreement can only be varied by the parties in writing.’ This is identical to clause 11 of the Real Property Licence Agreement. Notably, there is no provision for amendment or variation of the Rocla Sub-licence. I agree with the submission of Mr Shavin that the only reason this is so would be to give protection to SRLA, ensuring that any purported variation to the Rocla Sub-licence would be made via the BSA, with the appropriate consent. When one considers the absence of any variation clause in the Rocla Sub-licence, in addition to the five clauses of the BSA referred to above, it would seem that a commonsense reading of these clauses support the view that the BSA included the Real Property Licence, the Supply Agreement, and the Rocla Sub-licence. Clause 2.2 unequivocally states that ‘Agreement’ means this agreement, that is the BSA, including any schedule or annexure to it. Moreover, in view of clause 2.56 it is clear that the entire agreement includes the transaction documents, which are the executed forms of the scheduled agreements. It must follow therefore, that any variation made to any one of these scheduled agreements, in this case the Rocla Sub-licence, would need to be agreed by the parties in writing, as per clause 37.
Implied term
If I am wrong as to my interpretation of the BSA, it would be necessary to consider whether a term ought to be implied, as suggested by Mr Shavin, requiring the consent by the parties to the BSA for any variation made to the Rocla Sub-licence.
The High Court has repeatedly adopted the following statement of principle, taken from the majority opinion of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings:[4]
For a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[4] (1977) 180 CLR 266, 283.
The necessity to give ‘business efficacy’ contemplates a term needed ‘in order to make the agreement work, or conversely, in order to avoid an unworkable situation.’[5] This is a consideration of what would make the contract workable in a business sense.[6] A term may be commercially necessary notwithstanding that the contract can operate without it.
[6] Colliers Jardine (NSW) Pty Ltd v Balog Investments Pty Ltd & J Dan Pty Ltd [1996] ANZ Conv R 527, 96.
I consider that this is a case where a term requiring the parties to the BSA to consent to any variation in the Rocla Sub-licence would promote business efficacy, by avoiding a situation where SRLA’s supply obligations continue for an indefinite period.
As to whether the term is so obvious as to go without saying, I consider that the parties would most likely have agreed to a term requiring the consent of SRLA, to any variation, had they considered the point.[7] There is no doubt that a term requiring the consent of any party to the BSA could be capable of clear expression. Further, there is no express term to the contrary.
[7] Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 346, 355, 374.
In my view, it is reasonable and equitable in the circumstances to imply a term requiring the consent of all parties to the BSA, for any variation made to the Rocla Sub-licence, to promote fairness and business efficacy.
Merger upon completion
It is submitted by Rocla that the parties’ obligations under the BSA, at least so far as the subject matter of the agreements appearing in the schedules were concerned, merged on completion. Counsel contends that this could only be displaced to the extent that the BSA provided for the parties’ obligations to survive completion. He accepts that there are particular clauses, as referred to by Mr Shavin, which are expressly intended to survive completion. He says that the very fact that some clauses expressly speak of continuing after completion and other clauses do not, indicate that these other clauses were not contemplated as extending after completion. He contends that there is nothing in the agreement which says that once the four contracts have been entered into there is an obligation to keep them in the same form, or to keep them at all.
Mr Parker submits that clause 37 of the BSA cannot be read as applying between the parties to the agreements appearing in the schedules after those agreements have been executed and exchanged. Further, that the purpose of clause 37 was to ensure that any amendment to the BSA between exchange and completion, including changes to the terms of the schedules, would be in writing. The clause contained no provision extending its operation after the completion date being 22 August 2008.
Mr Shavin asserts that this construction of clause 37 is untenable because there are multiple provisions in the BSA relating to post-completion obligations. He points to a number of these clauses to which I have had regard. He submits that if Rocla’s argument is accepted, clause 37 would never have had any operative force, as execution and completion occurred on the same day. He contends that where there exists, within the one agreement, obligations to be performed before completion, obligations to be performed on completion, and obligations to be performed after completion, one cannot impose a limitation into clause 37, which applies only to particular provisions of the BSA. Mr Shavin says that the doctrine of merger does not apply as the appellant is not seeking to enforce a term which may have merged.
Merger - Conclusion
The doctrine of merger was considered in Leggott v Barrett. James L.J commented:[8]
I think it is very important, according to my view of the law of contracts, both at Common Law and in Equity, that if parties have made an executory contract which is to be carried out by a deed afterwards executed, the real completed contract between the parties is to be found in the deed, and that you have no right whatever to look at the contract, although it is recited in the deed, except for the purpose of construing the deed itself. You have no right to look at the contract either for the purpose of enlarging or diminishing or modifying the contract which is to be found in the deed itself.
[8] (1880) 7 Ch D 306, 309. See also Palmer v Johnson (1884) 13 QBD 351, 356.
The High Court considered merger in Svanosio v McNamara and Another[9] (McTiernan, Williams and Webb JJ) and noted:
The peculiar nature of a contract for the sale of land, and in particular the opportunity given to the purchaser of investigating the title and his right to rescind the contract if the vendor fails to show a good title and his alternative right if he chooses to accept such title as the vendor has, and complete the contract either with or without compensation, places a contract for the sale of land in a special category. Upon the execution of the conveyance the rights and obligations of the parties under the contract are merged in the conveyance except in so far as the contract provides expressly or impliedly that merger shall not take place – for instance where it is intended that a right to compensation given by the contract may be exercised even after completion: Knight Sugar Co. Ltd. V. Alberta Railway & Irrigation Co.
[9] (1956) 96 CLR 186, 206.
Mr Shavin points to the above passage in light of the further assurance clause in the BSA which is not confined to a point prior to completion. He says this evidences that there was no objective intention of the parties for there to be merger.
In Players Pty Ltd & Ors v Clone Pty Ltd,[10] Doyle CJ considered merger in respect of an agreement to lease and executed memorandum of lease. He said:
Although the execution of the Lease was intended to be, and was the performance of the Agreement, a difference between the terms of the Lease and the terms of the Agreement would provide a basis for the Lease being made to accord with the Agreement. That would be the case unless the conduct of the relevant party, in this case Players, pointed to a conclusion that the party had so conducted itself as to indicate that it agreed to depart from the relevant provision of the Agreement, or had agreed in general terms that the Lease need not accord with the terms of the Agreement.
[10] [2006] SASC 118, 122.
I agree with Mr Shavin that there appears to be no relevant application of merger in this case. The BSA raises a number of interlocking obligations, arising both before and after completion. In my view, it was not the intention of the parties for these obligations to be carried out merely via the schedules. Further, I consider it to be an artificial exercise to purport to merge only those obligations of the BSA the subject matter of which appear in the schedules, as well as to distinguish between certain clauses which do and do not refer to pre and post completion obligations.
The Option:
The appellant submits that three issues arise in relation to the unilateral variation of clause 11 of the Rocla Sub-licence. First, whether Rocla and Plastream had the ability to unilaterally vary the time for exercising the option in clause 11. Second, the time within which such a variation of the option could occur. Third, whether SRLA has standing to argue the question of the exercise of the option.
Does SRLA have standing to argue the question of the exercise of the option?
The appellant contends that the trial Judge, having found that SRLA had standing to argue the question of the exercise of the option, erred in law in holding that despite SRLA having an interest in its exercise, it was fatal to their submission that they were not a party to the Rocla Sub-licence. Mr Shavin submits that this is not an issue of privity, but merely that as a party to the BSA, SRLA is entitled to ensure that there is compliance with the terms of the BSA and its subsidiary agreements.
Mr Parker submits that as a non-party, SRLA has no rights or obligations under the Rocla Sub-licence. He says that Rocla and Plastream, as parties to the Sub-licence merely proceeded in accordance with their agreement. He contends that the disagreement with SRLA in respect to the variation does not give rise to any justiciable issue which would found the declaration they seek. Further, that the effect on SRLA was not shown to be and was not likely to be to SRLA’s detriment.
For a party to have sufficient standing to seek and obtain the grant of declaratory relief it must satisfy a number of tests. These are summarised in Aussie Airlines Pty Ltd v Australian Airlines Limited and Others:[11]
·The proceeding must involve the determination of a question that is not abstract or hypothetical. There must be a real question involved, and the declaratory relief must be directed to the determination of legal controversies. The answer to the question must produce some real consequences for the parties.
·The applicant for declaratory relief will not have sufficient status if relief is “claimed in relation to circumstances that [have] not occurred and might never happen: or if the Court’s declaration will produce no foreseeable consequences for the parties.
·The party seeking declaratory relief must have a real interest to raise it.
·Generally there must be a proper contradictor.
Citations omitted.
[11] (1996) 68 FCR 406, 414.
The questions for determination with respect to the variation of clause 11 are not made in the abstract. I consider SRLA to have a real interest in the declaration that it seeks with respect to the variation of the Rocla Sub-licence. There is little doubt that it affects their ongoing supply obligations. I can see no bar to SRLA having sufficient standing to make the arguments it puts forth with respect to the orders for rectification and declaratory relief sought.
The ability to vary unilaterally the time for exercising the option
Mr Shavin contends that the trial Judge erred in holding that the parties to the Rocla Sub-licence had the ability to vary, in any way they chose, the provision for the time for exercising the option in the Sub-licence, irrespective of whether the time for exercising the option had already expired. He submits that the unilateral variation of the option was contrary to clause 37, and alternatively, that it was contrary to an implied term that any variation of the BSA or the subsidiary agreements could only have been valid if all parties to the BSA had consented. He submits that the exercise of the option was a pre-requisite for SRLA to supply SRP under clause 2.26.2 of the Supply Agreement. Therefore, it follows that it is inconceivable that two parties, acting unilaterally, could alter obligations of a third party without their consent. He says that this would render uncertain the duration of the term for which those obligations are to be met.
Mr Shavin emphasises that there is no provision for variation of the Rocla Sub-licence in the Sub-licence instrument itself. He suggests that the only reason why this would be the case, was to provide protection to SRLA. He says that clause 28 and 29 of the BSA provides such assurance.
Ultimately, this submission is founded upon the same arguments put forth in respect of the single transaction submission.
Mr Parker argues that SRLA’s consent was not required to effect any variation. He says the parties were competent to vary the Rocla Sub-licence however and whenever they wished. That the variation affected SRLA’s rights or obligations were a consequence of the series of contracts that the various parties entered into. He contends that the effect on SRLA was not shown to be nor likely to be to SRLA’s detriment when one considers that SRLA maintained Rocla as a customer, and Rocla was required to continue purchasing SRP strip from SRLA.
Conclusion – Ability to vary the time in which the option could be exercised
SRLA’s key obligations are set out in clause 3 of the Supply Agreement:
3. On and from the Commencement Date:
Obligations of the Purchaser
3.1. in consideration of the undertakings of the Supplier expressed or implied in sub-clause 3.2, the Purchaser HEREBY AGREES with the Supplier for the Term to:
3.1.1.place orders with the Supplier for all quantities of SRP as the Purchaser may require from time to time; and
3.1.2. perform its other obligations under this Agreement; and
Obligations of the Supplier
3.2. in consideration of the undertakings of the Purchaser expressed or implied in sub-clause 3.1, the Supplier HEREBY AGREES with the Purchaser for the Term to:
3.2.1. supply all of the requirements of the Purchaser for SRP ordered in accordance with this Agreement; and
3.2.2.perform its other obligations under this Agreement.
This is however, subject to a slight qualification in clause 4:
4. The Purchaser HEREBY AGREES with the Supplier that:
Purchaser to Purchase All Requirements
4.1.during the Term, the Purchaser will ensure that all SRP required for the Business is purchased from the Supplier UNLESS the Supplier advises the Purchaser that the Supplier is unable to supply any particular SRP in accordance with the Purchaser’s order within a reasonable time of receipt of the order in which case the Purchaser may purchase elsewhere a replacement product performing the same or a similar function but for that occasion only.
It was put by Mr Parker that clause 4.1. provides SRLA with the comfort of knowing that Rocla, whilst continuing their business, would be obliged to purchase strip from them, so long as it could be supplied within a reasonable time. Having said that, it can also be said to provide protection for Rocla, in the event that SRLA is unable to continue supply.
The term of the Supply agreement is defined, in clause 2.25, to mean the period commencing on and including the Commencement Date and expiring at 5:00 pm on the Termination Date. It is relevant to further set out each of these definitions:
2.6.“the Commencement Date” means:
2.6.1the date on which Completion (as defined therein) occurs under the Business Sale Agreement; or
2.6.2any other date agreed in writing between the Supplier and the Purchaser,
as the case may be;
2.26“the Termination Date” means the later of the date:
2.26.1.on which:
2.26.1.1.the Purchaser ceases to carry on all, or a substantial part of the Business;
2.26.1.2.the parties mutually agree that this Agreement is to terminate;
2.26.1.3.a party terminates this Agreement pursuant to clause 10; or
2.26.1.4.that is the day before the second anniversary of the Commencement Date;
whichever first occurs; or
2.26.2.if the Purchaser has exercised the option granted to it under the SRP Technology Licence Agreement, the Purchaser completes the acquisition of a Complete Plastream Line in accordance with that option;
I consider that the Supply Agreement is for a term with an ascertainable end date. This must be the case to provide certainty and business efficacy to the agreement. On the assumption that the first date to occur under clause 2.26.1 is the day before the second anniversary of the Commencement Date (clause 2.26.1.4), then the termination date would be this date. However, if the Purchaser (Rocla) had exercised the option, which must have been exercised in the 20 month period, but had not yet completed the acquisition of the Complete Plastream Line, the end date would be the date upon which the purchase was completed. It follows that whichever event occurs first, the termination date is an identifiable date. Therefore, SRLA could not be required to continue supply indefinitely. In my view, it could not be the case that the parties would have intended the Supply Agreement to continue indefinitely. In the event that clause 11 of the Rocla Sub-licence is varied without consent, SRLA may be in the unsatisfactory position of having their supply obligations extended for an indefinite period.
I consider that the trial Judge erred in finding that the parties were free to unilaterally vary the provision for the time in which the option could be exercised.
In Hare v Nicoll, Willmer L.J. said:[12]
It is well established that an option for the purchase or re-purchase of property must in all cases be exercised strictly within the time limited for the purpose. The reason for this, as I understand it, is that an option is a species of privilege for the benefit of the party on whom it is conferred. That being so, it is for that party to comply strictly with the conditions stipulated for the exercise of the option.
[12] [1966] 1 All ER 285, 289.
In United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd[13] Lord Denning MR considered a provision requiring notice of default within seven days, in respect of the payment of hire rentals under a hire-purchase agreement. He said:
It has been shown, quite correctly, that the agreement to repurchase was not an ordinary bilateral contract. It was a unilateral contract of a kind which does not become binding on both sides until a condition precedent has been performed. It is like a lease in which the lessee is given an option to renew the lease for a further term. Such a lessee usually covenants to keep the premises in repair during the term; and he is given an option to renew if he gives notice six months before the end of the term and duly performs all the covenants to repair. In order to exercise the option, the lessee must give the notice in the specified time and he must fulfil the covenants to repair according to their terms. He is not entitled to excuse himself by saying that the want of repair is trifling.
...
In point of legal analysis, the grant of an option in such cases is an irrevocable offer (being supported by consideration so that it cannot be revoked). In order to be turned into a binding contract, the offer must be accepted in exact compliance with its terms. The acceptance must correspond with the offer.
[13] [1968] 1 All ER 104, 107.
In Parriwi Road Pty Ltd v Raffan[14] the plaintiff entered into a lease with an option to purchase exercisable by notification in writing, and followed by execution of a contract in the approved form, within one month. Upon considering the clause containing the option, Street J said:
The option contained in cl. 7 is expressed to be exercisable by notification in writing being given by the plaintiff of its desire to purchase the premises, followed within one month by the entry by the plaintiff into a contract in the form approved by the Real Estate Institute. The obligation to enter into the contract is one which appears to me to import probably mutual obligations on both parties to enter into the written document. But at the very least it imports as against the plaintiff the obligation of doing all required of the plaintiff to enter into such a contract. It was not in my view open to the plaintiff to sit back and await the submission to it by or on behalf of the defendants of a form of contract such as is specified in cl. 7. The requirement that the plaintiff enter into such a contract within one month is a step imported into the mode of exercise of the option, and is not simply a contractual obligation which arises inter partes after the option has been duly exercised and a contract of a bilateral nature brought into being. ... It may be that the true construction of cl. 7 is one which imposes upon the plaintiff simply an obligation to sign such a form of contract, and that the formal entry into a contract by exchange of signed counterparts is not what is referred to. But whether this be so or not, there is in my view a meaning to be derived from the specific provision that failure to enter into the contract within the time will bring about the lapse of the option: that meaning is that entry into a contract is a step in the exercise of the option; omission of which step will vacate any further contractual obligations. The situation, then, is that the option has not been exercised in accordance with the prescription of cl. 7 so as to result in any presently existing contract of sale.
[14] [1970] 2 NSWR 431, 432.
Without the consent of SRLA to vary clause 11, I consider that strict compliance with the time limit in which to exercise the option was required. It must follow that the purported extension of the time within which the option was to be exercised was invalid.
Was the Rocla Sub-licence varied after expiry of the Option?
If I am wrong in respect of whether the parties could unilaterally vary the option, and this should have been answered in the positive, the question that then arises is whether the option was varied within time. The trial Judge found that the time for the exercise of the option did not expire until 22 April 2010. He went onto find that the time for concluding the agreement to vary the time for the exercise of the Option and the notification of it does not matter.
Mr Shavin contends that the option was extended on 23 April 2010, the day after it could have been validly extended. He says that where an option specifies that it can only be exercised within a specified period, if it is not exercised within that period, it will lapse. He says that this is otherwise contrary to clause 11 of the Rocla Sub-licence. He relies on United Scientific Holdings v Burnley Borough Council;[15] a case which was distinguished by the trial Judge.
[15] [1978] 2 AC 904, 929.
I agree that the Rocla Sub-licence could not be validly varied by the parties after the time in which to exercise the option had passed. Where an option specifies that it can only be exercised within a specified period, if the option is not exercised within that period, it will lapse.[16] The foundation for the rule was explained by Lord Diplock in United Scientific Holdings Ltd v Burnley Borough Council:[17]
A more practical business explanation why stipulation as to the time by which an option to acquire an interest in property should be exercised by the grantee must be punctually observed, is that the grantor, so long as the option remains open, thereby submits to being disabled from disposing of his proprietary interest to anyone other than the grantee, and this without any guarantee that it will be disposed of to the grantee. In accepting such a fetter upon his powers of disposition of his property, the grantor needs to know with certainty the moment when it has come to an end.
[16] Kim v Abbey Orchard Property Investments Pty Ltd [1981] NSW Conv R 55-039; Bressan v Squires [1974] 2 NSWLR 460; McLachlan-Troup v Peters [1983] 1 VR 53.
[17] [1978] AC 904, 929.
However, Mr Parker disputes the submission that the Rocla Sub-licence was varied only on 23 April 2010. He says that the evidence before the trial Judge demonstrates that an agreement to extend the option was concluded on 22 April 2010.
It is necessary to determine whether, as a matter of law, the option period was varied after its expiry.
Clause 11.1 of the Rocla Sub-licence provides:
11.1Rocla may, at any time within the first 20 months of the Term, by giving notice to RLP in accordance with clause 16 inform RLP that Rocla wishes to purchase a Complete Plastream Line.
The ‘Term’ is defined in clause 2.20 as:
...subject to clause 11, the period commencing from the Commencement Date...
The commencement date is 22 August 2008. I consider therefore that the time in which the option could be exercised did not expire until midnight on 22 April 2010.
Mr Shavin contends that relevant emails between the parties as to the variation of the option period demonstrates that no agreement had been reached on 22 April 2010. He refers to the email of Mr Stephen Baker of Rocla to Mr Peter Buttery of Plastream on 22 April 2010 at 5:24pm stating:
In our phone conversation this afternoon I advised you that we are still keen to take up the Option to give you Notice that Rocla wishes to purchase a Complete Plastream Line as per clause 11.1 of the SRP Technology Licence Deed between Rib Loc Pty Ltd (now changed to Plastream Pty Ltd) and Rocla Pty Ltd (Rocla).
As we discussed and agreed we will provide a deposit of A$200,000:
·on the basis that this is refundable subject to Fletcher Building Board approval expected on 18th May 2010 for the purchase of the Line
·you have agreed to extend the deadline date for exercising the Option of 22nd April 2010 recognising this approval timeframe – I suggest to the Friday following the Board meeting, i.e. 21st May.
This deposit of A$200,000 is refundable to Rocla should we not receive Board Approval for this investment.
We both agree that this manner of communication is acceptable.
Please reply by email your confirmation of agreement following which we will arrange for the transfer of the deposit tomorrow 23rd April 2010. Please also advise bank account details for the deposit.
Mr Shavin submits that there was only ever an oral discussion of variation subject to confirmation by email. He contends that it is plain that this does not reflect any agreement, and further, that Mr Buttery goes on to seek instructions. He points to the further chain of emails following from the above, asserting that the agreement to extend the time for the exercise of the option only occurred on 23 April 2010 after an email from Mr Buttery was sent to Mr Baker. I have had regard to these emails. In the email of Friday 23 April 2010 at 11:52am sent from Mr Buttery to Mr Baker, Mr Buttery states:
Hi Steve
Thank you for your email.
Plastream confirms the agreement reached by telephone on Thursday 22 April.
As noted we both agreed that email was an acceptable method for communication.
The deposit of A$200,000 will be refunded should the Board not approve the investment in the Plastream line.
The deadline to receive the final purchase order and the balance of the deposit has been extended to the Friday following the board meeting namely 21 May 2010, provided that any order will be subject to Plastream’s acceptance, based on acceptable terms relating to price, delivery, product specification and terms of sale.
...
Peter
I consider that it must be the case that an oral agreement was reached by the parties to vary the option period on 22 April 2010. This is supported by reference to the phone conversation, in which the agreement was reached, in the email of 22 April 2010 at 5:24pm and the email of 23 April 2010 at 11:52am. In my opinion, the email of 22 April 2010 between Mr Baker and Mr Buttery merely recorded the details of the agreement already reached between the parties, with consideration in the form of the deposit in the amount of $200,000. I reject the appellant’s argument that the agreement was only reached the following day. I consider the emails to evidence an objective intention of the parties to form an agreement as at 22 April 2010.[18]
Was the exercise of the option consistent with clause 11?
The answer to this question, although raised, need only be answered if I am wrong about whether the parties were able to unilaterally vary the Rocla Sub-licence.
The appellant disputes that the letter of 21 May 2010 repeated by the trial Judge purporting to exercise the option, complied with the requirements of clause 11 of the Rocla Sub-licence.
Clause 11.2 of the Rocla Sub-licence states:
11.2If Rocla gives notice under clause 11.1 then RLP must sell to Rocla, and Rocla must purchase from RLP a Complete Plastream Line on the terms set out in this clause and in the General Terms, except that the terms of this Deed will apply to the extent of any inconsistency.
The letter of 21 May 2010 from Mr Mike Lukban of Rocla to Mr Gysin-Webster of Plastream states:
The purpose of this letter is to confirm that Rocla has today, paid a 30% deposit into Plastream’s account as follows:
[Account details]
To be applied towards the acquisition of a Complete Plastream Line as contemplated under the SRP Technology Licence Deed dated 22 August 2008 between Rocla and Plastream and as varied between the parties by emails during the course of April and May 2010. Please note the 30% deposit (being $1,260,000) paid today includes the $200,000 previously paid into Plastream’s account on 23 April 2010 and that the deposit is based on the assumption that the cost of the Complete Plastream Line is $4,200,000. I note that we are awaiting finalisation of the quote from you as to the cost of the Complete Plastream Line.
Also, the deposit has been paid to Plastream only on the following basis:
- the deposit is to be held on trust for Rocla and may only be released to Plastream on the direction from Rocla; and
- the deposit be fully refundable if, for any reason, the order does not proceed.
In addition, and in accordance with our email of 20 May 2010, we request the following:
- a letter from Contech which assures Rocla that, if the circumstances require, Contech will enter into an identical agreement to the SRP Technology Deed between Rocla and Plastream dated 22 August 2008; and
- Plastream allows Rocla a two week period from today’s date to explore the various issues raised by Sekisui.
(Emphasis added).
Mr Shavin argues that as the option is a conditional contract, performance of all conditions is necessary before the contract becomes complete, including strict compliance with the form of the exercise expressed in the option. He submits that the offer was conditional, by reference to the deposit being ‘refundable’ which contemplates a situation where the transaction does not proceed. He says this would be inconsistent with clause 11.2 which contains a ‘must buy-must sell’ requirement, which is absolute. Reliance is placed on the decision of Quadling v Robinson & Anor.[19] In Quadling, an issue arose as to whether an option was validly exercised, where a letter was not an unqualified acceptance of the rights and liabilities specified in the option agreement. Gibbs J stated:[20]
In Laybutt v. Amoco Australia Pty. Ltd. I discussed the nature of an option, but whether (as I think) the option in the present case was a conditional contract of sale, or whether it was merely an irrevocable offer to sell, it is clear that the exercise of the option, to be valid, must have been absolute and unqualified and must have bound the respondents to perform the very terms set out in the option. ...
However, it is not always easy to determine whether the purported exercise of an option should be understood as attempting to vary the terms of the option or as intending to accept its terms without modification, notwithstanding that they may have been misdescribed, or notwithstanding that the grantee of the option may have indicated that he intends to perform the contract in a manner for which the terms of the option do not provide.
[19] (1976) 137 CLR 192.
[20] (1976) 137 CLR 192, 200-201.
Rocla submits that clause 11 of the Rocla Sub-licence contains no requirement as to the form of notice for exercise of the option. Consequently, it is contended that the Court’s task is to determine whether a reasonable person in the position of the grantor of the option would conclude that the grantee had intended to exercise the option.[21]
The starting point is that the option must be exercised in accordance with its terms. Rocla needed to, pursuant to clause 11.1, inform RLP that they wished to purchase a Complete Plastream Line. Once such notice has been given, the obligations in clause 11.2, that is the ‘must sell-must buy’ obligation, is triggered.
Clause 11.1 and 11.2 requires that the purchase is done on the terms set out in this clause and in the general terms. The general terms are set out in Schedule 4. Clause 4.2 of Schedule 4 states that ‘The Buyer shall make a down payment of 30% of the sales price within 7 days of receiving the Offer Acceptance’. I consider, therefore, that the correct procedure would be to put in the order for the Complete Plastream Line. Next, having received acceptance of the order, a deposit of 30% would then be paid. It would appear, however, that this 30% was paid prior to the order being confirmed. The issue that arises, however, is whether the refundable deposit contemplates the order not proceeding, which might be inconsistent with the terms of clause 11.2.
In Prudential Assurance Co Ltd v Health Minders Pty Ltd[22] Kirby P summarised the applicable principles with respect to the exercise of an option. These were referred to by the New South Wales Court of Appeal in Young v Lamb & Ors[23]
First, the purported exercise must clearly and unequivocally express the fact that it is intended to exercise the option, Ballas v Theophilos (No 2) (1957) 98 CLR 193 at 196.
Next, it is unnecessary that the words used conform precisely to the terms of the option, Ballas at 205.
Thirdly, the appropriate question to ask is what anybody who received the letter would fairly have understood to be the meaning of it, in all the circumstances of its receipt, Carter v Hyde (1923) 33 CLR 116 at 126 adapting Jones v Daniel [1894] 2 Ch 332.
Fourthly, a notice which mis-states the terms of the option may nevertheless amount to an unqualified and unconditional exercise, Quadling v Robinson (1976) 137 CLR 192 at 201.
Lastly, every case ultimately depends on its own facts and upon the proper construction of the document in dispute.
[22] (1987) 9 NSWLR 673, 677.
[23] [2001] NSWCA 225, [21].
I reject the argument of the appellant that the refundable deposit renders the exercise of the option invalid, due to a lack of strict compliance. I consider that objectively, a reasonable person in the position of Plastream would conclude that Rocla intended to exercise the option. In my view, that the letter provided for a refundable deposit is not so far from the terms of the option to render the exercise invalid. I agree with the trial Judge that though Rocla did not conform with the precise words of clause 11, it nevertheless manifested its intention to exercise the option.
A further point is raised by the appellant in respect of compliance with clause 11.
It is submitted by SRLA that the exercise of the option was invalid, as a ‘Complete Plastream Line’ was not acquired, as required by clause 11.2 of the Rocla Sub-licence. Clause 11.2 states:
If Rocla gives notice under clause 11.1 then RLP must sell to Rocla, and Rocla must purchase from RLP a Complete Plastream Line on the terms set out in this clause and in the General Terms, except that the terms of this Deed will apply to the extent of any inconsistency.
“Complete Plastream Line” is defined in clause 2.4:
“Complete Plastream Line” means a production line including all components needed to produce Plastream Pipe, as described in Schedule 5 and as that production line or those components are modified, improved or superseded from time to time by RLP.
The items comprising the Complete Plastream Line are listed in Schedule 5.
Mr Shavin points to Quotation AUS 270710-1A of 27 July 2010. He notes that the quote refers to less than that which is set out in Schedule 5 and refers to items which have been eliminated. These items include a pipe transfer station, multiple winding cages and a cutoff table and butt welder from a drainage joint manufacturing station. He says that these had been eliminated in order to reduce Rocla’s costs. It is submitted that having purchased less than a Complete Plastream Line, as defined by the Rocla Sub-licence, the purported exercise of the option was invalid. It is contended that the trial Judge erred in accepting Rocla’s submission that it would not be good commercial practice to restrict any modifications to Schedule 5.
Mr Parker submits that the definition of Complete Plastream Line in clause 2.4 expressly contemplates the potential for variations to be made to the items listed in Schedule 5. He says that though the line purchased is not in the exact terms as stipulated in Schedule 5, it is a production line including all components needed to produce Plastream Pipe as ‘modified, improved or superseded from time to time by [Plastream]’.
I agree with the submission of Mr Parker. I consider that the definition of Complete Plastream Line is not a static concept, and would be subject to variation according to the requirements of Rocla. Further, I agree with the trial Judge that it would not be good commercial commonsense for the parties to have intended to be bound precisely by the definition in the contract.
The missing comma
SRLA seeks an order for rectification. First, it seeks an order rectifying the Rocla Sub-licence, to which it is not a party. Second, it seeks an order rectifying the Mirror Licence, of which it is a party. It seeks rectification in the form of an insertion of a comma between the words ‘replacement’ and ‘lining’ in clause 3.5(a) of each licence. Clause 3.5(a) states:
3.5In exercising its rights under clause 3.1(a), Rocla must not:
(a) supply any products or services resulting from the SRP Technology for, or otherwise employ the SRP Technology in, the repair, renovation, replacement lining, relining, rehabilitation or renewal of culverts, pipelines, conduits, underground ducts, tunnels, bores or like structures;
...
The trial Judge was of the view that a typographical or word processing error had occurred in the process of the preparation and settling of the documents, and that the comma in clause 3.5(a) was omitted as a result.
It is the submission of SRLA that the trial Judge, having found that the comma was omitted by a typographical or word processing mistake, erred in four respects.
First, the appellant submits that the trial Judge erred as a matter of law, in determining that an order for rectification of a document is analogous to the exercise by the Court of the power to grant a declaration. Second, that the trial Judge erred in concluding that an order for rectification should be declined unless there was a live issue in respect of the clause, between the parties. Third, that the trial Judge erred in finding against the weight of the evidence that the missing comma was not a live issue between the parties. Fourth, that the trial Judge erred in applying the authorities applicable to the grant of declaratory relief and holding that the Court should decline to grant rectification.
The Evidence
Evidence of Ms Gloria Porcelli
Prior to 15 July 2008, Ms Gloria Porcelli who is the Senior Financial Controller and Company Secretary of SRLA, instructed Mr Josh Simons of Minter Ellison to review the Rocla Sub-licence and to ensure its terms were consistent with the terms of the Rest of the World Licence. Mr Rees of Rankine Tucker was also engaged by SRLA to act in connection with the BSA and the other agreements, including the Rocla Sub-licence, for the purpose of achieving the sale of the Caliber business to Rocla.
On 15 July 2008, Ms Porcelli received an email from Mr Simons, copied also to Mr Buttery, attaching a draft of the Rocla Sub-licence. Clause 3.5(a) of the draft contained the words ‘replacement, lining’. On 16 July 2008, Ms Porcelli received a further draft of the Rocla Sub-licence from Mr Simons, containing the same words in clause 3.5(a). On 16 July 2008 Ms Porcelli informed Mr Rees that the Plastream directors had approved the Rocla Sub-licence for release to Rocla.
Ms Porcelli referred in her affidavit evidence to a telephone conversation with Mr Lukban on 23 July 2008. She said he was concerned with the situation where Rocla removed an existing pipe and replaced it. He said that Rocla was in the business of replacing pipe with new concrete pipes.
Ms Porcelli raised the issue with her solicitors. Mr Simons explained that if Plastream licensed Rocla to use the SRP technology in the business of the ‘replacement’ of conduits, the rights which had been granted by SRLA to Interflow would be infringed.
Some time later on 1 August 2008 Ms Porcelli received from Mr Rees an email from Mr Atkins of Deacons attaching a revised version of the Rocla Sub-licence. This contained a number of tracked amendments which had been made to the document by Mr Atkins. In this draft, there was a change to clause 3.5(a) which deleted the word ‘replacement’ from that clause. Following this Ms Porcelli received on 4 August 2008 a further revised draft from Mr Rees, that had been the subject of further negotiations. She says she noted that the word ‘replacement’ had been put back in, in accordance with her instructions. She also noted that when ‘replacement’ was re-included in the document it was in red font and underlined; the entire clause was also highlighted in yellow. At the time of reviewing this, however, she did not notice that the comma which had immediately followed the word ‘replacement’ had not been reinstated.
Evidence of Mr Modesto Lukban
Mr Lukban says that on or about 6 August 2008 he reviewed the revised draft of the Rocla Sub-licence and noticed that the word ‘replacement’ had been inserted into clause 3.5(a) before the word ‘lining’, which read ‘replacement lining’.
It was put to him in cross-examination that when he saw the expression ‘replacement lining’ in the document, without the comma, he knew that it was in fact wrong. He denied this. He says he was satisfied with this as it was his understanding that this term referred to the circumstances where an existing pipe, of a similar or smaller size, is lined, in-situ, by having inserted into it a “Plastream” pipe. He says the purpose of this is repair, which he was comfortable with, as Rocla did not, and does not, engage in any pipe rehabilitation, including ‘replacement lining’. Conflicting with this evidence, however, were his concessions that what was agreed on the telephone between Mr Buttery and him was that the word ‘replacement’ and the comma, had to go back in.
Not long after Mr Lukban saw that the comma was missing, he wrote an email reproducing clause 3.5(a) and included the comma between the words ‘replacement’ and ‘lining’. This was the email from Mr Stephen Baker of Rocla to Mr Barry Taylor and Mr John Taylor of SRLA on 10 September 2009. When asked about this, Mr Lukban said this was a typographic error on his part. He denied that he wanted to take advantage of the missing comma in order to increase the scope of Rocla’s rights under the agreement.
Mr John Taylor in his evidence says that at no time following the email did Mr Baker, Mr Lukban or Mr David Allen of Rocla communicate any concern about Mr Baker’s statement that the Rocla Sub-Licence contained the expression ‘...replacement, lining...’ in clause 3.5.
Evidence of Mr John Taylor
Mr John Taylor, who is the manufacturing general manager of SRLA, gave evidence of discussions which took place between him and Mr Kurt Gysin-Webster, the manager of Plastream, about the term ‘replacement’. Mr Gysin-Webster was of the view that Plastream had the rights to do ‘replacement’ as the word ‘replacement’ does not appear in the definition of ‘Pipe Rehabilitation’ in the Master Licence. The term ‘pipe rehabilitation’ is defined in the Master Licence in clause 2.11 as:
“Pipe rehabilitation” means in situ manufacture of all kinds of shape of tubular objects, for the renovation, repair, lining, relining, renewal or rehabilitation of culverts, ducts, pipelines, conduits, tunnels, bores and like structures, including the provision of any service and the manufacture of any equipment in connection with those activities: and also includes for the territories of Australia and New Zealand, activities that fall within the scope of the rights granted by RLA to Interflow Pty Ltd for those territories prior to the commencement date.
Mr Gysin-Webster considered that Plastream could thereby undertake ‘replacement’ work, consequently enabling Rocla to do the same. Mr Taylor, however, was of the view that Rocla was prohibited from doing this work. He said that due to Interflow having the rights to do ‘replacement’ work, and Plastream being prohibited from undertaking the work that Interflow does, Rocla would thereby be similarly prohibited.
Evidence of Mr Stephen Baker
Mr Stephen Baker is the General Manager for Rocla Pipeline Products in Australia. He refers to the Albert Priestly project in his affidavit, noting that he asked Mr Lukban to keep him informed about the project.
In cross-examination Mr Baker said that the insertion of a comma between ‘replacement’ and ‘lining’ would be a problem for Rocla because it would prohibit Rocla from supplying pipe for any job which directly or indirectly replaced an existing pipe. This would mean that Rocla had no right to be involved in a project in which new pipe was placed in irrigation channels for projects like the Albert Priestly project. This was one of the reasons he did not agree to a comma being inserted at that time.
The trial Judge considered the evidence. He said:
For what it is worth, it seems clear to me that in the process of the preparation and settling of the documents a word processing or typographical error was made and the comma was omitted as a result. That error was not picked up by the solicitors. It may be that that becomes relevant in any future litigation but it is not relevant on the issues joined between these parties. It is sought to be made relevant by the seeking of a declaration which is entirely hypothetical. ...
It is noteworthy that only Mr Lukban claims to have noticed the missing comma. This is somewhat surprising as he did not even seek to examine the sub-licence when conducting due diligence procedures on behalf of Rocla. All other participants, including the solicitors and Ms Porcelli, who I found to be an astute accountant, missed the change. I do not believe that Mr Lukban did notice the comma was missing as he says. I believe he has sought to take advantage of the missing comma for what he perceives to be Rocla’s commercial advantage. Whether that was his intention all along I cannot say. I do not attribute any similar motive to Mr Baker. I thought he had a genuine belief of what Rocla was entitled to do and that it did not include pipe rehabilitation. He thought Rocla could replace pipe in a project such as the Albert Priestly project.
Rectification:
The appellant submits that it is clear on the evidence that the subjective intention of the parties was to insert the comma between the words ‘replacement’ and ‘lining’. The original form of the clause read ‘replacement, lining’ and was consistent with the terms of the Distributor Franchise Agreement (Interflow Agreement). The Interflow Agreement was made on 15 September 2003 between SRLA and Interflow. Recital A states:
Rib Loc has developed technology for application in the repair, replacement, lining and relining, renovation and rehabilitation of conduits and has the power to grant rights in respect of such technology.
‘Application’ is defined in clause 2.2:
‘Application’ means the employment of the technology in the repair, renovation, replacement, lining, relining, rehabilitation and renewal of culverts, pipelines, conduits, underground ducts, tunnels, bores and like structures, but subject to variation as outlined in Appendix 1 herein.
Mr Shavin submits that the trial Judge confused the principles of declaratory relief and rectification. It is submitted that the orders sought by SRLA, in its cross-claim, was for rectification of the Rocla Sub-licence and the Mirror Licence, and that no application for declaratory relief in relation to these issues was made. However, in the alternative, a declaration as to construction was sought.
Mr Parker submits that SRLA failed to prove an entitlement to rectification on the facts. He says that even if the evidence demonstrates a mistake on SRLA’s part, it did not demonstrate that Rocla had the same intention.
The purpose of rectification is to make the instrument conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately.[24] In proceedings for rectification, the most clear and strong evidence is required.[25] A court will require very strong proof, before ordering a deed to be rectified on the ground of a mistake.[26] The type of intention required is referred to as the subjection intention, also called actual intention, of the parties.[27]
[25] Australia Hotel Co Ltd v Moore (1899) 20 LR NSW (Eq) 155.
[26] Kenny v Sholl (1905) 7 WALR 197.
I have had regard to the evidence. I would not interfere with the finding of the trial Judge that in the preparation and settling of documents a typographical error was made and the comma was omitted as a result. However, I consider that the trial Judge then erred in determining first, that there was no live issue between the parties requiring intervention of the Court, and second, that this issue was relevant to the granting of a declaration.
In my view, all that was necessary in determining whether rectification should be granted was to establish whether the parties held a subjective intention that the Rocla Sub-licence and the Mirror Licence was to read ‘replacement, lining’ in clause 3.5(a). Having determined that a typographical error had occurred inadvertently omitting the comma, it would necessarily follow that it must have been the intention of the parties that the comma was to be reinstated.
I therefore consider that SRLA is entitled to the orders it seeks for rectification of the Rocla Sub-licence.
Order
I would allow the appeal. I would set aside the orders of the trial Judge, and order that clause 3.5(a) of the Rocla Sub-licence and the Mirror Licence are rectified, so to insert a comma in between the words ‘replacement’ and ‘lining’.
I would hear the parties as to the appropriate orders to be made.
DAVID J: For the reasons given by Sulan J, I would allow the appeal. I agree with the orders he proposes.
PEEK J: I would allow the appeal. I agree with the orders proposed by Sulan J and with his reasons.
- AGLC
- Sekisui Rib Loc Australia Pty Ltd (ACN 008 040 800) v Rocla Pty Ltd (ACN 000 032 191) [2012] SASCFC 21
- Case
- [2012] SASCFC 21
- Decision Date
CaseChat Overview and Summary
The primary legal issue before the court was the contractual interpretation of the Rocla Sub-licence, particularly the effect of the omission of a comma between the words "replacement" and "lining" in a specific clause. This omission was central to determining whether Rocla had the contractual right to engage in "replacement" work, as opposed to "lining" work, and whether this omission was a mistake that could be rectified or otherwise interpreted in favour of SRLA's construction. The court also considered whether the Rocla Sub-licence, as an annexure to a broader Business Sale Agreement (BSA), could be varied independently or if variations required adherence to the amendment provisions of the BSA.
The court reasoned that the Rocla Sub-licence, along with other subsidiary agreements, was annexed to the BSA and formed part of the overall "Agreement" as defined in the BSA. Clause 12 of the Supply Agreement, which was also annexed, stipulated that variations could only be made in writing, a principle that the court found implicitly extended to the Rocla Sub-licence given the structure of the overall transaction and the absence of a specific variation clause within the sub-licence itself. The court noted that the BSA defined "Agreement" to include its schedules and annexures, and that the transaction documents, including the executed forms of the scheduled agreements, were part of the entire agreement. Therefore, any variation to the Rocla Sub-licence would necessitate written agreement by the parties, as per clause 37 of the BSA. The court also considered the principles for implying a term into a contract, as established in *BP Refinery (Westernport) Pty Ltd v Shire of Hastings*, but found it unnecessary to imply a term given its interpretation of the express terms of the BSA and its annexures. The court found that the omission of the comma was not a matter that could be resolved by rectification in the context of the issues joined between the parties, and that the contractual documents, as executed, did not permit Rocla to undertake the "replacement" work in question.
Orders
Orders of the court
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Background
Background to the litigation
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Evidence
Evidence Before The Court
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
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