Shape Capital Pty Ltd v Powerhouse Ventures Limited (Ruling)
[2019] VCC 206
•6 March 2019
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-18-05135
| SHAPE CAPITAL PTY LTD (ACN 167 240 637) | Plaintiff |
| V | |
| POWERHOUSE VENTURES LIMITED (ARBN 612 076 169) | Defendant |
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JUDGE: | HER HONOUR JUDGE A RYAN | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 8 February 2019 | |
DATE OF RULING: | 6 March 2019 | |
CASE MAY BE CITED AS: | Shape Capital Pty Ltd v Powerhouse Ventures Limited (Ruling) | |
MEDIUM NEUTRAL CITATION: | [2019] VCC 206 | |
REASONS FOR RULING
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Subject: PRACTICE AND PROCEDURE – Stay of proceeding
Catchwords: Application by the defendant for a stay – whether clause in a consultancy agreement referring a dispute between the parties to an independent expert for determination triggered – application for stay refused
Legislation Cited: Civil Procedure Act 2010 (Vic)
County Court Civil Procedure Rules 2008 (Vic)
Cases Cited: Badgin Nominees Pty Ltd v Oneida Ltd & Anor [1998] VSC 188
Jones v Dunkel (1959) 101 CLR 298
Onslow Salt Pty Ltd v Buurabalayji Thalanyji Aboriginal Corp [2018] FCAFC 118
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Mitchell | Nicholson Ryan Lawyers |
| For the Defendant | Mr B Petrie | K&L Gates |
HER HONOUR:
1 The defendant (“Powerhouse”) seeks an order this proceeding be stayed pending the determination by an independent expert of a dispute between the parties. The dispute relates to the calculation of a success fee which the plaintiff (“Shape”) claims from Powerhouse.
2 The application for a stay is made by summons filed 17 December 2018. Powerhouse seeks relief under Rule 23.01 of the County Court Civil Procedure Rules, alternatively, s49 of the Civil Procedure Act 2010 (Vic).
3 The application is supported by the affidavit of Robert McEwan Russell Yardley, Chairman of Powerhouse, affirmed 17 December 2018.
4 Shape opposed the application for a stay. It relied upon the affidavits of Anooshirvan Manzoori, a director of Shape, affirmed 4 February 2019 and Suzie Rule, solicitor, affirmed 7 February 2019.
Background
5 This claim was commenced by writ on 16 November 2018. By its statement of claim, Shape seeks to recover a success fee in the sum of the AUD equivalent of US$300,000.
6 Powerhouse engaged Shape to provide financial and corporate advisory services to assist Powerhouse in relation to a trade sale of Motim Technologies Limited (“Motim NZ”) by an agreement dated 22 August 2017 (“consultancy agreement”). Powerhouse relies upon various terms of the consultancy agreement which are set out in the statement of claim.
7 The parties agreed to a mechanism for determining the consideration payable to Shape in the event of a successful sale or “transaction”. Page 6 of the consultancy agreement states:
“Shape Capital will be entitled to a fee if the Transaction completes (“Success Fee”). The percentage of the Success Fee is set out in the table below (exclusive of GST), and will be calculated based on the total amount of consideration paid under the Transaction, including cash and non-cash amounts (“Sale Consideration”).
Sale Consideration
Success Fee
(excl. GST)The first $10,000,000
6 %
Any amounts exceeding $10,000,001
8 %
The above fees are calculated on a GST exclusive basis. The Success Fee is only payable in respect of, and only to the extent of, non-refundable and cleared funds (or non-cash consideration) actually being received in respect of the Sales Consideration.”
8 Page 7 of the consultancy agreement sets out the basis for determining the value of the success fee where the sale consideration consisted of any non-cash portion. It provides as follows:
“Any non-cash portion of the Sale Consideration will be determined based on the fair market value of the non-cash component, as at the date of financial close of the Transaction……..in the case of unquoted securities the value will be the value agreed by Shape Capital, Motim and the Shareholders or, failing agreement within 14 days after financial close of the Transaction, the value determined by an independent expert jointly appointed by the parties (with each party to act reasonably and in good faith).”
9 The effect of clause 7 is to provide alternative methods for assessing the value of the unquoted securities, namely:
(1)by agreement within 14 days between Shape, Motim NZ and the shareholders (which includes Powerhouse); or failing agreement
(2)the value be determined by an independent expert jointly appointed by the parties.
10 In or around March 2018, Motim Technologies LLC (“Motim USA”) agreed to purchase all of the assets and business of Motim NZ on certain terms and conditions contained in an asset purchase agreement (“asset purchase agreement”).
11 Pursuant to the asset purchase agreement, Motim USA acquired certain assets of Motim NZ. The purchase price stated in clause 2.3 is US$5 million. The consideration payable under the asset purchase agreement consisted of a combination of cash and non-cash portions.
12 As part of the consideration, Motim NZ was to receive a number of shares in Motim USA in an amount equal to not less than 30 per cent of the issued and outstanding limited company interests of Motim USA, immediately after the closing of the transaction. Financial closing occurred in or about June 2018. In addition, Motim USA acquired the right to future payment of an amount in revenue not exceeding US$375,000.
13 Motim USA also agreed to assume certain liabilities associated with the assets it was to acquire from Motim NZ (see clause 2.2). Clause 2.5 defines the total consideration payable to be a combination of the purchase price and the liabilities to be assumed by Motim USA.
14 The asset purchase agreement was approved by Motim NZ and its shareholders at a special general meeting held on or about 28 May 2018. Powerhouse was a shareholder of Motim NZ at the time. As a result of the agreement by the shareholders to the purchase price of US$5 million, Shape issued an invoice for a success fee in the sum US$300,000.
15 In breach of the agreement, Shape alleges Powerhouse has not used its best endeavours to ensure that Motim NZ and the shareholders would agree to include the success fee in the asset purchase agreement. Further, Powerhouse did not direct Motim USA to pay the success fee to Shape at the time the sale consideration was paid by Motim USA. Shape has not received and Powerhouse has not paid the success fee, being US$300,000.
16 Powerhouse concedes Shape is entitled to a success fee but disputes Shape’s assertion that the quantum of the success fee has already been agreed by the parties. Powerhouse’s case is that the terms of the consultancy agreement requires the success fee to be determined by an independent expert jointly appointed by the parties because there was no agreement reached within the prescribed 14 day period.
17 Accordingly, this application is made by Powerhouse to stay the proceeding on the basis that clause 7 of the consultancy agreement requires the dispute to be referred to an independent expert for determination.
Powerhouse’s submissions
18 Powerhouse says there has been no agreement between Shape, Motim or the shareholders (which according to the definition in the consultancy agreement includes Powerhouse) regarding the value of the non-cash consideration payable under the asset purchase agreement.
19 Powerhouse sought to rely upon a report from Deloitte exhibited to the affidavit of Mr Yardley as Exhibit “RY-1”. This was objected to by counsel for Shape. Counsel for Powerhouse said he was not relying upon the report as expert or expert evidence but sought to rely upon it as evidence of the fact that agreement was not reached by the parties. I allowed the document to go into evidence but noted there was a real question about what weight it should be given. Having regard to the arguments advanced in the application, the report appeared to have little relevance to the issues for determination, in particular, the question of whether an enforceable and binding agreement to pay the success fee came into effect by the three parties described in the consultancy agreement.
20 On 28 May 2018, the shareholders of Motim NZ voted to approve the transaction between Motim NZ and Motim USA on the terms of the asset purchase agreement. Powerhouse submits the shareholders did not at the meeting consider or reach agreement upon the appropriate value of the non-cash component of the sale consideration payable by Motim USA. It was put that the resolution passed by the members of Motim NZ at the special meeting on 28 May 2018 did not constitute a resolution of any kind of the shareholders or directors of Powerhouse. As Powerhouse was not a signatory to the asset purchase agreement, that document could not be relied upon as evidence of any agreement by Powerhouse regarding the success fee payable.
21 Between July 2018 and October 2018, representatives of Powerhouse and Shape entered into correspondence regarding the success fee that would be payable to Shape. Despite this, the parties did not agree on the value of the non-cash component of the sale consideration payable by Motim USA. There was never any meeting of minds as was required. In the absence of agreement, Powerhouse’s case is that an independent valuer should be appointed in accordance with the terms of the consultancy agreement. Shape has declined to agree to the appointment of an independent expert.
22 Powerhouse also submits that if the dispute resolution proceeding is enforced it will likely result in a binding determination of the dispute. This is because the dispute between the parties will not presently exceed beyond the question of the value of the non-cash consideration. In those circumstances, Powerhouse argues the clause should be enforced and the proceeding be stayed, pending completion of the referral to the independent expert.
23 Powerhouse relied upon the decision of Badgin Nominees Pty Ltd v Oneida Ltd & Anor [1998] VSC 188 per Gillard J at [26] to [46], [65] to [69] and [105]. In that case, there was a dispute about the quantum to be paid concerning the valuation of stock. The clause in question provided that if there was a dispute, then the matter would be referred to an independent valuer whose determination would be conclusive and binding upon the parties. Gillard J noted that:
“[36] In my opinion the court clearly has a jurisdiction to stay a court proceeding on the simple basis that ‘a contract is a contract’ and the parties should abide by it.
24 Gillard J noted the exercise of the discretion to grant a stay will take into account:
(1)whether the parties have expressly and unequivocally agreed to refer to the dispute to an expert (at [46]); and
(2)where there are a number of issues involving questions of law and fact and, where the dispute involves something more than a valuation, it may be inappropriate to grant a stay (see [65] – [69]).
25 Powerhouse also relied upon the decision of Onslow Salt Pty Ltd v Buurabalayji Thalanyji Aboriginal Corp [2018] FCAFC 118. In that case, the Full Court of the Federal Court observed at [21] that a stay of a proceeding may be granted until an agreed process of conciliation, mediation or good faith negotiation has been completed even if the outcome will not be a binding determination of the dispute.
26 Powerhouse contends there is clearly a dispute about the quantum of the success fee payable. Consequently, the proceeding should be stayed pending that matter being referred to an independent expert in accordance with the terms of the consultancy agreement. It was put there are no substantial questions of law or fact beyond the matters surrounding the quantum of the success fee that would mitigate against the proceeding being stayed.
27 The central issue identified by Powerhouse is whether Shape, Powerhouse and the remaining shareholders of Motim NZ agreed on the value of the non-cash consideration under the asset purchase agreement. If the Court finds there is no agreement, then the quantum of the success fee can only be determined by referring the matter to an independent expert. Whether such agreement has been reached is a question of fact for the Court to determine objectively.
Shape’s submissions
28 On Shape’s case, it was said that the parties did agree the market value of the sale consideration as a whole was US$5 million and therefore, it is not now permissible to seek an expert valuation.
29 Shape agrees that the purchase price was US$5 million.[1] It issued invoices accordingly. It was not until more than 14 days after settlement on 20 August 2018 that Powerhouse asserted the valuation of the consideration was less than US$5 million.[2] Accordingly, the window period in which to raise a dispute had already closed by operation of the consultancy agreement. It was noted the independent expert process is only triggered upon the failure to agree within 14 days after financial close.
[1]Affidavit of Robert Yardley at paragraph [20] affirmed 17 December 2018
[2]Affidavit of Robert Yardley at paragraph [40] affirmed 17 December 2018
30 A criticism was made that Powerhouse has led no direct evidence from the protagonists in the dealing. Instead it led evidence from Mr Yardley based on the books and records of Powerhouse. It was submitted the Court may infer that Mr Mathieson’s evidence would not have assisted Powerhouse.[3]
[3]Jones v Dunkel (1959) 101 CLR 298 at 308 per Kitto J
31 Counsel for Shape noted that in the event a decision was made on the question of whether there was a binding agreement or not in an application of this sort, self-evidently, it would not resolve the matter completely or be binding in the event that the matter went to trial and further evidence was heard including cross-examination of the relevant witnesses. It could well be that upon a full hearing of the matter, a different conclusion might be reached.
32 Shape submitted there were principally four issues to be considered, namely:
(1) The question of whether a stay should be granted turned on the central question in the proceeding and should not be determined on an interlocutory basis now. In this case, the matter should be brought promptly to trial and if Powerhouse was correct, the Court could then order the matter be referred to an independent valuer for valuation. The process of recovering Shape’s unpaid commission should not be held in abeyance on the assumption that Powerhouse’s argument will succeed at final hearing. This would amount to requiring expenditure of the time and cost of an interim expert determination in circumstances where the efficacy of that determination will still be an issue at trial.
(2) The second matter relied upon was that Shape’s claims also included contractual breaches which would not be resolved by the expert determination process. It was submitted the breach of contract claims raised in paragraphs 11(a) and (b) of the statement of claim had to be determined by the Court and not by an expert.
(3) The third matter was that the expert determination applies only to the value of unquoted securities. In consideration for its assets, Motim received three things:
(a) a 30 per cent interest in the new company;
(b) the benefit of transferring liabilities to the purchaser (to the extent that Powerhouse suggested that this consideration is not relevant because it was not actually received, it ignores that relief from a liability is a valuable benefit); and
(c) the right to an amount of up to US$375,000 from future revenue. It was submitted by Shape that Powerhouse has paid nothing on account of the second and third benefits, even though they do not fall within the ambit of the expert determination clause. Non-cash consideration which is not in the form of unquoted securities is required to be assessed on a fair market value basis, but only in the case of unquoted securities may a dispute result in expert rather than curial determination. Powerhouse seeks to hold Shape out of its own income on all fronts because it contends that one aspect must be expertly determined.
(4) The fourth matter relied upon was that Powerhouse had recently announced it had NZ$827,000 in cash and cash equivalents at the end of 31 December 2018 quarter, and expects to expend cash of NZ$2,925,000 in the current quarter.[4] It was submitted that the precarious financial position of Powerhouse is a further reason why the Court should not delay the conduct of this proceeding. Shape contends the application should be dismissed and orders made to progress the matter quickly to trial.
[4]Affidavit of Suzie Rule made 7 February 2019, Exhibit SR-1
Consideration
33 As noted in Onslow, the power to stay proceedings is discretionary and the discretion is a wide one. Each case will turn on its own facts. Unless good reason is shown to the contrary, ordinarily parties will be held to their bargain. The evidence of an enforceable agreement to submit to a dispute resolution process is a weighty consideration against the refusal of a stay. The onus rests upon the party opposing the stay, which in this case is Shape. One of the factors to take into account is whether the agreed process will deal with only part of the dispute.[5]
[5]Onslow at [15] to [19]
34 Shape’s case essentially is that the preliminary question of whether there is an enforceable agreement should be determined first. Consequent upon that, the need to refer the matter to an independent expert can then be assessed by the Court.
35 Powerhouse’s case is the other way round. It seeks a stay on the basis the matter should now go to an independent valuer on the assumption it has proved there was no agreement reached.
36 In my view, the antecedent question of whether there was a binding agreement reached within the relevant 14 day period needs to be determined by the Court. It is only once that question is decided, that a need for referral to an independent expert arises.
37 As was noted by Gillard J in Badgin, if there is a real issue as to whether the procedure which the defendant seeks to invoke can properly be invoked then a stay may not be ordered. It seems to me there are real issues in dispute, both of fact and law, as to whether a binding agreement came into effect, which are not capable of being resolved in an interlocutory application of this nature. There are legal issues raised about the construction of the relevant contractual documents and also competing factual issues about whether agreement was reached and if so, by whom and when. In my view, the preferable course is that these issues should be determined at trial.
38 It is also undesirable that if findings are made now on an interlocutory basis, those findings may differ from the findings ultimately made by a trial judge who would have the benefit of hearing all the evidence, including cross-examination of the relevant witnesses. This is a further factor militating against a stay when these issues have yet to be determined.
39 There is also the other persuasive argument raised by Shape; namely, that not all of the issues in this case can be resolved by the independent expert. Therefore even if this expert process is embarked upon, and leaving aside any review or challenges made to the enforceability of the expert’s decision, the matter would still have to come back before the Court for determination on the other contractual issues still outstanding. In my view, it is preferable that all issues should be dealt with at the same time so as to avoid additional costs and delay.
40 For the reasons stated, I am satisfied Shape has discharged its onus of persuading the Court that the application for a stay should be refused. I will order that the summons filed by Powerhouse dated 17 December 2018 be dismissed.
41 Unless any submissions are made to the contrary, I propose ordering Powerhouse pay Shape’s costs of and incidental to this application on a standard basis, to be taxed in default of agreement.
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Certificate
I certify that these 11 pages are a true copy of the Reasons for Ruling of Her Honour Judge A Ryan delivered on 6 March 2019.
Dated: 6 March 2019
Associate to Her Honour Judge A Ryan
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