SSABR Pty Ltd v AMA Group Ltd

[2023] NSWSC 1551

Supreme Court

New South Wales

Medium Neutral Citation:

SSABR Pty Ltd v AMA Group Ltd [2023] NSWSC 1551

Hearing dates:

16-18, 20 October 2023

Date of orders:

15 December 2023

Decision date:

15 December 2023

Jurisdiction:

Equity - Commercial List

Before:

Rees J

Decision:

Orders made for rectification; summons dismissed with costs.

Catchwords:

RECTIFICATION – plaintiffs sell smash repair businesses – sale agreement includes ‘earn out’ to be paid in 2 years time – ‘earn out’ based on earnings before interest and tax (EBIT) and multiplier – heads of agreement refers to average annual EBIT – sale agreement refers to ‘EBIT for the earn-out period’ – this meant aggregate EBIT for 2 years, not average annual EBIT – effectively doubled the multiplier – solicitor’s error – ‘rectificaton by construction’ not available – principles at [68], [72]-[76] – inferring actual intention where plaintiffs did not give evidence – inferring actual intention of corporation, principles at [85] - common mistake – contract rectified.

CONTRACTS – purchaser makes changes to businesses, said to impair ability to receive ‘earn out’ – implied term – duty to cooperate – principles at [128]-[130] – purchaser obliged to do all things necessary to ensure plaintiffs received benefits promised by the contract – does not extend to benefits that may occur – purchaser not obliged to operate businesses to ensure vendors receive earn out.

MISLEADING OR DECEPTIVE CONDUCT – plaintiffs allege purchaser made oral representation that the businesses’ contracts would not be altered post-completion – plaintiffs fail to establish representation made – any representation made at early stage of protracted negotiations not misleading when viewed with the whole of the purchaser’s conduct, including terms of contract excluding reliance on any such representations.

Legislation Cited:

Australian Consumer Law s 18

Cases Cited:

Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104

Beerens v Bluescope Distribution Pty Ltd [2012] VSCA 209; (2012) 30 VR 1

Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592

Chief Commissioner of State Revenue v Adams Bidco Pty Ltd [2019] NSWCA 34

Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544

Fabre v Arenales (1992) 27 NSWLR 437

Fonterra Brands (Aust) Pty Ltd v Bega Cheese Ltd [2021] VSC 75

Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603

Gulic v Boral Transport Ltd [2016] NSWSCA 269

Halkett v APG & Co Pty Ltd [2023] NSWSC 1058

Ireland v WG Riverview Pty Ltd [2019] NSWCA 307

Krakowski v Eurolnyx Properties Pty Ltd (1995) 183 CLR 563

Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6

Leibler v Air New Zealand Ltd [1999] 1 VR 1

Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd (2015) 237 FCR 534

Murray Holdings Ltd v Oscatello Investments Ltd [2018] EWHC 162 (Ch)

New Standard Energy Pel 570 Pty Ltd v Outback Energy Hunter Pty Ltd [2019] SASCFC 132; (2019) 135 SASR 469

Perpetual Ltd v Myer Pty Ltd [2018] VSC 2

Queenfield Pty Ltd v Gordon Finance Pty Ltd [2019] VSC 857; (2019) 60 VR 118

Secured Income Real Estate (Australia) Ltd v St Martins investments Pty Ltd (1979) 144 CLR 596

Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11; (2019) 99 NSWLR 317

Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2016) 260 CLR 85

Thiess Pty Ltd v Arup Pty Ltd [2012] QSC 185

Trentelman v The Owners - Strata Plan 76700 [2021] NSWSC 155

Viterra Malt Pty Ltd v Cargill Australia Limited [2023] VSCA 157

Watson v Foxman (1995) 49 NSWLR 315

Category:

Principal judgment

Parties:

SSABR Pty Ltd (First Plaintiff)
HAAPRC Pty Ltd (Second Plaintiff)
AMA Group Ltd (First Defendant)
AMA Group Solutions Pty Ltd (Second Defendant)

Representation:

Counsel:
Mr JA Redwood SC / Ms SK Hill (Plaintiffs)
Mr MA Robins KC / Mr S Fitzpatrick (Defendants)

Solicitors:
CBD Law (Plaintiffs)
K&L Gates (Defendants)

File Number(s):

2021/257009

JUDGMENT

1. HER HONOUR: The plaintiffs sold two smash repair businesses to the first defendant, AMA Group Ltd, for $4.8 million plus an “Earn-Out Amount” to be paid in two years’ time. The parties now seek declaratory relief in respect of the proper construction and application of the earn-out provisions in the Business Sale Agreement.

2. The starting point for calculating the Earn-Out Amount is Earnings Before Interest and Tax (EBIT) “for the Earn-Out Period.” The plaintiffs contend that this means total EBIT earned by the businesses over the two years, while AMA Group says that it means average annual EBIT. In the alternative, AMA Group seeks rectification to bring the contract into line with parties’ common intentions laid out in Binding Heads of Agreement executed a month earlier. In determining EBIT, the purchaser was obliged to “apply accounting treatment in accordance with Australian Accounting Standards.” The plaintiffs also contend that this required JobKeeper payments and rebates on paint supplies to be included as income in the calculation of EBIT.

3. The plaintiffs further contend that AMA Group breached the contract by reducing the rate charged by one of the businesses after completion, resulting in lower income for that business during the Earn-Out Period. This affected the plaintiffs’ ability to generate sufficient EBIT such that an Earn-Out Amount may be payable. AMA Group is also said to have engaged in misleading and deceptive conduct by representing, during negotiations, that no such changes would be made and failing to disclose its intention to reduce the rate.

4. Overall, the plaintiffs contend that they are entitled to some $4.57 million, where failure to take JobKeeper into account understated the Earn-Out Amount by $1.8 million, failure to account for the paint rebates understated the Earn-Out Amount by $1.5 million and the reduced rate suppressed the Earn-Out Amount by $800,000. Where AMA Group did not separately account for the performance of the businesses during the Earn-Out Period, it was said to be necessary to refer the proper calculation of the Earn-out to an accountant appointed by the Court.

5. AMA Group denied each of these claims, maintaining that it was the impact of the COVID-19 lockdown restrictions and work-from-home arrangements from March to October 2020 which depressed the profitability of the businesses in the period critical to the determination of the Earn-Out Amount. Any referral out was said to be unnecessary.

Witnesses

6. The plaintiffs relied on the evidence of director, Raffie Nercessian, and former Chief Commercial Officer of AMA Group, Peter Bubeck. Mr Bubeck was a straightforward person who gave evidence in a careful, fair and clear manner; no issues of credit arose. Mr Nercessian had a tendency to say what he thought would assist his case and did not seem to appreciate the possibility that it would appear odd or wrong, which it occasionally did. Paperwork was obviously not his ‘strong suit.’ I have approached his evidence with some caution.

7. The defendants relied on the evidence of Chief Executive Officer, Carl Bizon, and solicitor and former director of AMA Group, Leath Nicholson. No issues of credit arose.

8. The parties sought multiple Jones v Dunkel inferences. I would have been most interested to hear from the plaintiffs’ solicitor, Giles Finney, who negotiated the Heads of Agreement and Business Sale Agreement. Mr Finney also acted for the plaintiffs in these proceedings and was present throughout the hearing. I infer that his evidence would not have assisted the plaintiffs. Other witnesses were either unnecessary or their absence was explained. I have dealt with this further at [83]-[88].

9. Expert forensic accountant, Brian Morris, was retained by the plaintiffs. His reports were reviewed by expert forensic accountants, Andrew Archer and Darryn Hockley of Grant Thornton, for the defendants. All expert witnesses attended to their task with professionalism and skill. To be clear, I do not agree with the defendants’ trenchant criticism of Mr Morris.

The businesses

10. Mr Nercessian is a spray painter. He established a panel beating and spray-painting repair shop called “Simply Smashing Auto Body Repairs” (Simply Smashing) in Gosford, New South Wales. In 2006, the first plaintiff, SSABR Pty Ltd, was incorporated to operate the business.

11. In 2016, Mr Nercessian incorporated the second plaintiff, HAAPRC Pty Ltd, to buy a prestige car smash repair shop in Gosford called “Harris & Adams Prestige Auto Body Repairs” (Harris & Adams). Mr Nercessian became the general manager of both businesses.

12. Simply Smashing repaired ‘mid to low end’ motor vehicle models, while ‘high end’ and prestige vehicles were repaired at Harris & Adams. The businesses had arrangements with fleet management companies, insurers and car manufacturers to repair motor vehicles. The arrangements with the insurer, Suncorp, gained prominence in these proceedings; I will return to this at [100].

Negotiations begin

13. AMA Group operates in the collision repair industry and associated auto parts market. Today, it was some 180 sites or “shops.” At the time, Jim Timuss was the Acquisitions Director.

14. In March 2017, Mr Timuss and Mr Nercessian spoke, following which Mr Timuss emailed a non-disclosure agreement, together with a list of questions about the businesses. Mr Timuss requested profit and loss statements for the last three years.

15. Mr Nercessian forwarded the email to his accountant (and father-in-law) for consideration. The accountant advised Mr Nercessian that, although AMA Group had asked for profit and loss statements for the last three years, he should ask that only the last financial year be required, where the businesses had undergone substantial changes in the preceding years, “you need to advise them that 2017 was the first year in which the profit started to reflect the new business as it currently is, and that there would obviously be further increases in profit in 2018 and 2019 due to the consolidation and refining to the new business structure.” As such, the purchase price should be based “on your business as if it would be in 3 years’ time, or at least the average of the profit over the next 3 years.” Further:

They have indicated that they are willing to pay you multiple of 4.5 times of the net profit (EBITDA). Obviously this multiple should be negotiable to allow you to obtain a multiple greater than the 4.5 that they are suggesting. You should confirm with them whether they are open to that. Please note if they are a public company, their multiple that they would earn or get the benefit of from your profit would be somewhere between a minimum of 8 times to possible 12 times or more.

16. That is, the businesses had not been profitable until recently. Mr Nercessian was advised to negotiate a price based on recent and expected future performance, rather than past performance. Further, Mr Nercessian was encouraged to request a higher multiple to be applied to that performance, to calculate the price.

17. On 7 April 2017, Mr Nercessian met Mr Timuss in Melbourne to discuss the matter further. In October 2017, Mr Nercessian signed and returned the non-disclosure agreement. Mr Nercessian and Mr Timuss met again on 23 January 2018 in Sydney. Mr Nercessian said he wanted $8 million for both businesses. On 29 January 2018, Mr Timuss emailed an offer for discussion:

•   4.5 X [net profit before tax]

•   2 mill Average [net profit before tax]

•   4 mill up front balance in 3 years …

•   Capped at 10 mill

BASF paint

…

Sub[ject] to:

[Due diligence]

Board approval …

18. Mr Nercessian called Mr Timuss to discuss the offer. Mr Timuss said “the only way I can get you the money you are after is via an earn out.” Mr Nercessian did not like this idea. Mr Timuss sent Mr Nercessian a revised offer:

•   4.0 X [net profit before tax]

•   2 mill Average [net profit before tax]

•   $4.8 mill up front (60% of $8 mill.) balance in 2 years …

•   Capped at 10 mill

•   We will work on a growth plan for your area, so you as the business in your area grows you get some of the up side.

That is, the multiple was lower but the upfront cash payment was higher and the balance was payable sooner.

19. On 31 January 2018, Mr Nercessian and Mr Timuss spoke again. Mr Nercessian said he did not like the idea of an earn-out, as he would not be in control anymore and AMA Group would be making all the decisions about the businesses. According to Mr Nercessian, Mr Timuss described the benefits of AMA Group acquiring the business as it got paint cheap and, with rebates, consumables and parts were cheaper. Further, “We don’t need to change your business to increase the margin. Nothing will change. We want the business to make money. Why would we change a business that is making money?” Mr Timuss said the only change would be that Mr Nercessian would need to purchase the paint from BASF but, as AMA Group received rebates, this meant that Mr Nercessian would save money, “We get a big rebate which you will get.”

20. According to Mr Nercessian, they spoke again in early February 2018. Mr Nercessian sought assurances that, if he was working on an earn-out, anything that happened needed to be discussed with him, “Any contracts or issues with contracts need to be run past me.” Mr Timuss assured him that nothing would change, “If there are any changes we will discuss with you first.”

21. On 19 February 2018, Mr Nercessian sent a text message to Mr Timuss, asking if he had any thoughts, “on the paperwork.” Mr Timuss replied, “For us to do a deal at that money it will have to be on an earn out …”

22. On 20 March 2018, Mr Timuss emailed a draft Binding Heads of Agreement to Mr Nercessian in respect of the purchase of both businesses. Item 4, entitled “Purchase Price and Adjustments,” relevantly provided:

(a)   The Purchase Price for the Businesses and the Assets is $4,800,000 plus the Deferred Settlement Components conditional upon the requirements of sub-clause 4(b)(ii) below …;

(b)   The Purchase Price shall comprise of:

i)   Completion Balance Amount … of $4,800,000 on Completion Date; and

ii)   Deferred Settlement Components of the values listed below:

(A)   For the second year anniversary period: if the Businesses generate $4,000,000 EBIT in the period 1 to 24 months post Completion (i.e. an average of $2,000,000 EBIT per year), the Purchaser will pay to the Vendors $3,200,000 within 90 days of the expiry of the second year anniversary. This equates to an earn out of 4 times EBIT (Completion Balance Amount of $4,800,000 plus Deferred Settlement Component of $3,200,000). If the EBIT is less than $4,000,000, the Vendors will be entitled to a pro-rata payment;

…

(C)   The total Deferred Settlement Component the Vendors can receive … is capped at $10,000,000. …

That is, the purchase price was an initial payment of $4.8 million with a further payment to be made two years later to bring the amount paid up to four times average annual EBIT.

23. Mr Nercessian prepared a letter to Mr Timuss. (Although the ‘document properties’ of the soft copy file state that the document was created on 13 February 2018, the contents of the letter suggest that the version of the letter in evidence was finalised at about this time). Mr Nercessian said he hand-delivered the letter to Mr Timuss. In his letter, Mr Nercessian referred to the heads of agreement forwarded by Mr Timuss for completion and return, “As there are numerous issues in the Heads of Agreement that need time and attention, before responding to the finer detail in the Heads of Agreement, we need to reach agreement on the substantive terms, particularly purchase price.” Mr Nercessian further advised:

Purchase price – I don’t wish to structure the acquisition costs under the “earn out” regime. That regime has too many variables and is liable to lead to argument. Rather than the ‘earn out’, I need a price, based on the value of the business as at today to be determined and set. I am prepared for part of the purchase price to be paid over a period of two (2) years, but the figure must be fixed. In relation to the figure, I am confident that the sum of $8,000,000.00 represents value for the business as at today. I am prepared to accept $5,000,000.00 on settlement of the business sale Contract and $1,500,000.00 per year for the next two (2) years.

24. That is, Mr Nercessian did not want an earn-out but to be paid $8 million by instalments. There is no evidence of any response to the letter. Presumably, as Mr Timuss had earlier advised, “For us to do a deal at that money it will have to be on an earn out …”: see [21].

25. Mr Nercessian retained Mr Finney to review the Heads of Agreement. Mr Finney provided comments to Mr Nercessian and the accountant on 11 April 2018. Mr Nercessian provided a marked-up version of the Heads of Agreement to Mr Timuss on 13 April 2018. The proposed changes to Item 4 were extensive: (underlined)

(a)   The Purchase Price for the Businesses and the Assets is $5,000,000 plus the Deferred Settlement Components conditional upon the requirements of sub-clause 4(b)(ii) below …;

(b)   The Purchase Price shall comprise of:

i)   Completion Balance Amount … of $5,000,000 on Completion Date; and

ii)   Deferred Settlement Components of the values listed below:

(A)   For the third year anniversary periods: if the Businesses generate $6,000,000 EBITDA in the period 1 to 36 months post Completion (i.e. an average of $2,000,000 EBITDA per year), the Purchaser will pay to the Vendors $4,000,000 within 90 days of the expiry of the third year anniversary, less any amounts paid after the first and second anniversaries (see below). This equates to an earn out of 4.5 times EBITDA (Completion Balance Amount of $5,000,000 plus Deferred Settlement Component of $4,000,000). If the EBITDA is less than $6,000,000, the Vendors will be entitled to a pro-rata payment;

Note:

(i)   Interim payments to be made (based on EBITDA for that year) at the end of 12 months and 24 months with the final adjustment to occur after 36 months.

(ii)   No claw back. In the event that the formula results in an amount of less than $5,000,000 then the Purchase Price shall be the Completion Balance Amount, ie no amount of the Completion Balance Amount shall be repayable by the Vendor to the Purchaser.

(iii)   Purchaser to provide Vendor with a fixed and floating charge over the Businesses secured by PPSR until Deferred Settlement Component paid in full.

…

(C)   The total Deferred Settlement Component the Vendors can receive … is capped at $11,000,000. …

26. That is, the initial cash payment was higher, the earn-out period was longer, it was proposed to use EBITDA rather than EBIT, a higher multiple was proposed together with a higher cap. Interim earn-out payments would be made after the first and second years. There would be no ‘claw back’ in the event that the businesses’ performance proved that the initial payment of $5 million was too much. Importantly, however, the required EBITDA remained an average of $2 million per year.

27. On 16 April 2018, Mr Timuss replied, “at first glance there are a number of items added in here that we have not discussed nor agreed to.” On 29 April 2018, Mr Timuss provided a more fulsome response, copied to Stephen Harding-Smith, Chief Financial Officer of AMA Group, Panel Division, “we do not accept any of your chan[g]es in relation to the commercial changes … It was our understanding that commercial terms were agreed, so we issued the [heads of agreement] in line with these agreements. … Let me know if you would like to proce[ed] under the agreed terms, if not, no problem”.

28. On 30 April 2018, Mr Nercessian and Mr Timuss spoke. On 10 May 2018, Mr Nercessian sought an update. On 23 May 2018, Mr Timuss provided a revised heads of agreement. So far as Item 4 was concerned, none of the plaintiffs’ proposed amendments had been accepted. The drafting had returned to that reproduced at [22].

29. On 28 May 2018, Mr Finney provided his comments on the revised document to Mr Nercessian, including in respect of Item 4:

-   The purchase price has been adjusted to $4,800,000 with the Deferred Settlement period reduced back to 24months. Our inclusion of depreciation and amortisation making EBITDA has now been returned to EBIT. In my view, the formula should refer to EBITDA.

-   The purchaser has removed any entitlement to an interim payment. This means that it is under no obligation to make any payment for at least 2 years. I see no reason why a payment cannot be made after the end of 12 months if you are on target, perhaps with a discounted amount being paid to leave the purchaser with some padding in case your figures don’t stack up in the second year.

-   The provision that there be no clawback has been removed. That provision needs reinstating.

30. That is, Mr Finney observed that his earlier revisions had not been accepted and advised Mr Nercessian to press for some of those amendments, including using EBITDA rather than EBIT, an interim payment and no ‘claw back.’

31. On 29 May 2018, Mr Nercessian forwarded his solicitor’s advice directly to Mr Timuss, “As discussed with you, my 2 real issues are the no claw back, with the minimal sale price at 4.8m.” Mr Timuss replied, “All easy to take care of, We will make the changes at our end.”

32. On 4 June 2018, Mr Harding-Smith emailed Mr Finney, asking to discuss his comments on the heads of agreement. In evidence are Mr Finney’s file notes, apparently of this discussion. So far as the file note reveals, Mr Finney and Mr Harding-Smith went over the heads of agreement in detail. The file notes do not refer to discussion on the particular portion of Item 4 which is the subject of these proceedings. I infer that the drafting of Item 4, including the method of averaging EBIT each year, was then uncontentious.

33. On 19 June 2018, Mr Finney provided his client with a further draft of the heads of agreement for approval. In respect of Item 4, Mr Finney noted that the request for an interim payment was not pressed and made some minor amendments to Item 4(b), presumably intended to indicate that there could be no ‘claw back.’ Mr Finney also suggested that the Deferred Settlement Component be based on EBITDA. Mr Nercessian forwarded Mr Finney’s email directly to Mr Timuss. The following emails were exchanged:

TIMUSS:   I will read this tonight but at a glance it is EBIT not E[B]ITDA.

NERCESSIAN:   Apparently Stephen told us that your ama deal was 10.7b times the EBITDA, so thus we used it

TIMUSS:      That is not right.

34. Mr Timuss sought to clarify “a few things” with Mr Nercessian, noting “There are a few big one’s here so we might need another phone call tomorrow.” Whilst Mr Timuss was amenable to the drafting changes to Item 4(b), Mr Timuss noted: (where AMA Group’s query is italicised)

EBITDA This is EBIT

The Deferred Settlement Component is to be based on a EBITDA. This is EBIT

35. On 15 August 2018, Mr Harding-Smith provided Mr Nercessian with a further draft heads of agreement. Item 4 remained as initially drafted. Mr Finney’s minor amendments to paragraph (b) had not been incorporated (which proved to have been an oversight).

36. On 16 August 2018, Mr Finney emailed Mr Harding-Smith, complaining that his amendments to paragraph 4(b) had been agreed but not implemented, and expressing his clients’ frustration with the elongated sale process. Mr Nercessian required the Heads of Agreement to be signed by close of business the next day. Mr Harding-Smith forwarded the email to Mr Timuss, who apologised for not incorporating Mr Finney’s earlier amendments but was otherwise curt, “If Raffie wants to sell we are interest[ed] in buying if not no problems we have lots of other businesses to buy. Have a good day.”

37. On 21 August 2018, Mr Harding-Smith circulated an updated heads of agreement, having obtained input from AMA Group’s lawyers. Mr Finney’s proposed amendments to paragraph (b) were incorporated. Item 4 otherwise remained the same. On 22 August 2018, Mr Finney provided a revised heads of agreement to Mr Nercessian, who forwarded the document to Mr Timuss and Mr Harding-Smith. Apart from correcting a cross-reference, no amendment was proposed to Item 4. On 24 August 2018, Mr Finney provided Mr Harding-Smith with the Binding Heads of Agreement signed by the vendors.

38. A concern emerged at AMA Group, however, about the inability to ‘claw back.’ On 5 September 2018, Mr Harding-Smith emailed Mr Nercessian:

Given the concerns were raised by you and your lawyers about a “claw back” and the wording being changed to reflect this to be a “minimum”, the AMA Board and our lawyers have not agreed to this change unless there is less risk for them.

This risk can be mitigated by keeping the upfront payment as $4.8m, however we can add in a “minimum” of $2.4m

We know this is half the amount you are looking for as your protected earnings, however it the best outcome that can be achieved unfortunately.

We fully understand that this might be a deal breaker for you, however please keep in mind that all other items have been agreed to and it does not restrict your ability to achieve the Earn Out. The upfront payment of $4.8m should not really be of any concern to you given the businesses should achieve a minimum of $1.2m EBIT per year in any case.

39. That is, AMA Group proposed to be able to ‘claw back’ half of the initial cash payment. Mr Nercessian replied, “Send me the adjustment if you wish, one way or another I need to make a choice.” Mr Harding-Smith provided an alternative, with changes to Item 4 made in handwriting as follows: (Mr Finney’s accepted amendments are underlined; Mr Harding-Smith’s handwriting is italicised)

(a)   The Purchase Price for the Businesses and the Assets is $4,800,000 plus or minus the Deferred Settlement Components conditional upon the requirements of sub-clause 4(b)(ii) below …;

(b)   The Purchase Price shall comprise of:

i)   Completion Balance Amount … of $4,800,000 on Completion Date; plus or minus

ii)   Deferred Settlement Components of the values listed below:

(A)   For the second year anniversary period: if the Businesses generate $4,000,000 EBIT in the period 1 to 24 months post Completion (i.e. an average of $2,000,000 EBIT per year), the Purchaser will pay to the Vendors $3,200,000 within 90 days of the expiry of the second year anniversary. This equates to an earn out of 4 times EBIT (Completion Balance Amount of $4,800,000 plus Deferred Settlement Component of $3,200,000). If the EBIT is less than $4,000,000, the Vendors will be entitled to a pro-rata payment; If average EBIT is less than $1.2m there will be a pro rata refund of the $4.8m initial payment.

…

(C)   The total Deferred Settlement Component the Vendors can receive … is capped at $10,000,000. …

40. On 6 September 2018, Mr Harding-Smith sent a further email to Mr Nercessian, noting that he has spoken overnight with the Group Executive Officer of AMA Group, Andy Hopkins, “Unfortunately the best we can do is to change the minimum to be $3m. I know you asked me to get approval for $4m, but $3m is the best we are going to be able to offer.”

41. Mr Nercessian sent a text message to Mr Timuss, “Need to talk to you, unfortunately people are changing our agreement, need to sort out today or we move on.” Mr Nercessian received a telephone call from Mr Hopkins. Where AMA Group’s request for further amendments to enable it to ‘claw back’ half of the initial cash payment were dropped, presumably this is what these gentlemen discussed.

Heads of Agreement

42. On 7 September 2018, the Binding Heads of Agreement was signed. Mr Finney’s amendments remained whilst the handwritten proposal did not. That is, there would be no ‘claw back.’

43. Item 2 of the Binding Heads of Agreement provided that the parties agreed to enter into Business Sale Agreements “subject to the terms and conditions set out in this Heads of Agreement.”

44. The reader will now be familiar with Item 4: see [39] (ignoring the italicised portion). That is, the purchase price was an initial payment of $4.8 million with a further payment to be made two years later to bring the amount paid up to four times average annual EBIT. Item 4(b)(ii)(a) provided, effectively, a ‘worked example’ based on the amount of money which Mr Nercessian had said he wanted for the businesses, presumably to illustrate how he could achieve that result in an earn-out scenario: if the businesses generated average annual EBIT of $2 million, then the Deferred Settlement Component would be the difference between the $4.8 million already paid and $8 million. Applying the same methodology to a lower or higher average EBIT, the total purchase price would be lower or higher than $8 million.

Due diligence

45. A due diligence process commenced. The plaintiffs provided financial statements for the year ended 30 June 2018, which included the comparable results for the 2017 financial year. According to the financial statements, Simply Smashing enjoyed an operating profit before income tax of some $420,000 a year, while Harris & Adams had an operating loss in both years of $11,418 (for 2018) and $20,926 (for 2017).

46. It is difficult to see how the plaintiffs hoped to attain a total purchase price of $8 million based on these figures. Applying a multiplier of 4, the purchase price would be some $1.6 million. It is apparent why Mr Finney was concerned to ensure that AMA Group would not be entitled to ‘claw back’ the initial payment of $4.8 million in the event that the businesses did not perform adequately to justify that amount in the next two years.

47. In addition, however, the plaintiffs provided an adjusted profit and loss for management purposes. After adjustments, the combined net income of both businesses was $2,050,281 for the 2018 year. The adjustments made to reach this combined figure were various; the largest adjustment was on account of excessive wages and wages paid to Mrs Nercessian. If a multiple of four was applied to this figure, this would (just) achieve Mr Nercessian’s desired sale price of $8 million. The veracity of the adjustments is unknown.

Business Sale Agreement

48. On 20 September 2018, Mr Harding-Smith informed Mr Finney “I took delivery of the BSA from our lawyers last night. I am just checking the commercial terms to ensure it reflects the HOA and then you will have it.” That afternoon, Mr Harding-Smith provided the draft agreement to Mr Finney, copied to Ms Lefebvre, noting “I will be handing you over shortly to Sophie Lefebvre at our lawyer’s office, Nicholson Ryan Lawyers.” In the first draft of the document, clause 5.1 was in the same terms as it appears in the executed Business Sale Agreement: see [61].

49. On 27 September 2018, Ms Lefebvre provided a further draft to Mr Finney, “Many thanks for your emails.” No amendments were made to clause 5.1 or its defined terms. Mr Finney provided comments by email on 2 October 2018, none of which are relevant for present purposes. Ms Lefebvre responded to Mr Finney by email that evening, copied to Mr Nicholson. Clause 5.2 was amended, in a manner not presently relevant.

50. On 3 October 2018, Ms Lefebvre emailed an execution copy of the document to Mr Finney, copied to Mr Nicholson, incorporating all agreed changes. The Business Sale Agreement was executed with the plaintiffs (as Vendors) and AMA Group (as the Purchaser). Mr and Mrs Nercessian also executed the document as Covenantors. The Introduction to the agreement noted that the parties had entered into the Binding Heads of Agreement, further: (emphasis added)

C.   To give effect to the Binding Heads of Agreement, the Vendors agree to sell and the Purchaser agrees to purchase the Businesses and the Assets, free from all Encumbrances, subject to the terms and conditions of this Agreement.

D.   The parties agree that by execution and completion of this Agreement and the Binding Heads of Agreement is terminated.

That is, the Business Sale Agreement was intended to give effect to the Binding Heads of Agreement.

51. The Vendors agreed to sell the Businesses and the Assets for the Purchase Price and on the terms and conditions of the agreement: clause 3.1. Clause 4.1 provided:

4.1   Purchase Price

Unless otherwise agreed by the parties in writing, the Purchaser must pay the Purchase Price as follows:

(a)   by paying the Initial Cash Payment on the Completion Date …; and

(b)   by paying the Earn-Out Amount determined in accordance with clause 4.5(b)

52. The reference to clause 4.5(b) is an error and should have referred to clause 5.1. In any event, if the Purchase Price calculated in accordance with clause 4.1 and 5.1 was in excess of $10 million, then the amount payable to the vendors was capped at $10 million, together with an excess payment which is not presently relevant: clause 4.3. (Clause 4.5(a) also contained an apparent error, referring to the apportionment of the Purchase Price between the Vendors in the proportions set out in Schedule 8, where the proportions were, in fact, set out in Schedule 7). I will return to clause 5.1 at [61].

53. Clause 8 concerned employees and superannuation. The Purchaser would offer employment to “such Employees as it determines on terms and conditions no less favourable than their current terms of employment”: clause 8.1. On completion, the employees were hired by the second defendant, AMA Group Solutions Pty Ltd, which presumably explains its presence in these proceedings.

54. There were seven schedules to the agreement. Schedule 1 was a Due Diligence Checklist, listing the information requested by the Purchaser, and the Vendors’ response. In particular, the Purchaser had requested “a fully executed copy of any material agreements or contracts (e.g. management agreements, supply agreements, consulting agreements etc) in relation to the Business.” The Vendors’ response was “Nil.” Schedule 2 listed “Material Contracts” as QBE, Custom Fleet, Australian Fleet Services, Driver Care and Suncorp.

A small mistake

55. Correspondence followed between the parties’ solicitors in respect of leases for the two business premises. On 10 October 2018, Mr Finney sought evidence of “payment of the legal costs/disbursements” in respect of the two leases. Ms Lefebvre solicitor replied, “In terms of the legal costs … I refer to 2.1(b) of the Business Sale Agreement that the Vendor is responsible for all costs relating to the leases.” Mr Finney promptly replied: (emphasis added)

The Business sale agreement contains an error.

The payment of the legal costs on the leases was negotiated and agreed in the Heads of agreement, which was that the purchaser would pay – see heads of agreement attached.

56. Ms Lefebvre replied, “Thanks for the clarification. Please can you provide invoices for the leases at your earliest convenience and we will arrange payment.” That is, an error in the contract was encountered and dealt with on the basis that it was an error. The parties deferred to the agreement as recorded in the Binding Heads of Agreement.

Board approval

57. On 10 October 2018, AMA Group’s board approved the purchase by circular resolution signed by five directors: Ray Malone, Mr Hopkins, Ray Smith-Robert, Brian Austin and Mr Nicholson. The circular resolution began, “Management have requested approval of the Simply Smashing Group of Businesses as outlined below.” Mr Nicholson said management encompassed Mr Hopkins and Mr Harding-Smith. The resolution noted the consideration for the purchase as follows:

Initial Cash:   $4.8m at Completion/Signing

Earn-Out:   Cash Payment of 4xEBIT … minus Initial Cash to max of $10mil (CAP) over 2 year earnout period.

Cash payment of 50% of any earnout amount above CAP

Estimated Total Consideration: $10mil. No maximum.

…

Ratio: 4 x times earnings pre synergy

2017 turnover: $8.8mil

2018 turnover: $9.4mil

2019 (projected full year): $2.2mil EBITDA

58. Mr Nicholson explained that the board required the key commercial considerations for a transaction to be set out in such a document, including baseline profit, the multiplier on the profit, the cap on price or the estimated total price should the business fulfill its projected earning at that multiple.

59. It is not evident from the resolution whether the Business Sale Agreement (comprising some 130 pages) was attached to the resolution when circulated to the directors. Mr Nicholson said the sales agreement was not normally attached to the resolution, “The usual way would be to summarise the commercials, but not to give a copy of the document.”

60. The purchase was completed on 12 October 2018. An initial cash payment of $4.8 million was paid to the plaintiffs. Mr Nercessian began working as an employee for a subsidiary of AMA Group as Centre Manager for Simply Smashing and Harris & Adams.

CONSTRUCTION OF EARN-OUT CLAUSE

61. It is convenient at this juncture to construe the relevant provisions of the Business Sale Agreement. Clause 5.1 dealt with the Earn-Out Amount as follows:

5.1   Calculation of the Earn-Out Amount

(a)   The Vendors shall be entitled to the Earn-Out Amount calculated by the Purchaser as follows:

EBIT for the Businesses for the Earn-Out Period MULTIPLIED by 4 LESS the Initial Cash Payment (on an unadjusted basis).

(b)   For the purposes of determining the EBIT, the Purchaser shall apply accounting treatment in accordance with Australian Accounting Standards.

(c)   Within 30 days of the second year anniversary of the Completion Date (Earn Out Calculation Date) the Purchaser will determine the EBIT figure for the Earn-Out period and such figure will be detailed in a certificate to be delivered to the Vendors by the Chief Financial Officer of the Purchaser in such form as he may consider reasonably necessary from time to time.

62. Earn-Out Amount means the amounts (if any) paid to the Vendors in accordance with clause 5.1: clause 1.1(z). EBIT means Earnings Before Interest & Tax: clause 1.1(cc). Earn-Out Period means the period of two calendar years commencing on the Completion Date: clause 1.1(bb).

63. The plaintiffs contend that EBIT is Earnings Before Interest & Tax earned by the businesses over the whole Earn-Out Period. The plaintiffs submitted that “EBIT for the Businesses for the Earn-Out Period MULTIPLIED by 4” did not lend itself to any ambiguity or commercial absurdity.  The “Earn-Out Period” is defined as “two calendar years commencing on the Completion Date.” It is the EBIT of the Businesses “for” the Earn-Out Period that is to be multiplied by 4. The court had no mandate to rewrite agreements so as to depart from the clear language used by the parties merely to give a provision an operation which it perceives makes more commercial sense: J&P Marlow (No 2) Pty Ltd v Joseph Hayes & Andrew McCabe [2023] NSWCA 117. There was said to be no room here for “rectification by construction” as there was no obvious absurdity or inconsistency: Seymore Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liquidation) [2019] NSWCA 11. Further, the entire agreements clause (see [147]) left little or no room for the interpretation of the contract by reference to the Heads of Agreement. There were multiple differences between the Binding Heads of Agreement and the Business Sales Agreement, such that it could not be readily said that the later was to simply enact the former.

64. AMA Group says that EBIT in cause 5.1 is properly construed to mean “average annual EBIT.” AMA Group submitted that the text, context and purpose of clause 5.1 indicated that the clause required the calculation of the Earn-Out Amount to be multiplied the Businesses’ average annual EBIT. The surrounding circumstances made plain that the parties were employing a multiple of an average annual profit figure as the metric for determining the purchase price of the Businesses. The reference to EBIT in the formal transaction document should be read in the same way that that input was discussed from the outset of negotiations. Recital C noted that the contract was intended to give effect to the Binding Heads of Agreement; Item 4 of the Binding Heads of Agreement calculated the deferred payment on “an average of … EBIT per year.” ‘Earn-Out Period’ was defined as the “two calendar years commencing on the Completion.” This suggested a divisible period, in respect of which the EBIT would be considered in calendar year blocks and averaged. That was consistent with the use of ‘EBIT’ as a measure of profitability ordinarily used for accounting and reporting purposes on an annual basis. 

Consideration

65. The relevant principles are notorious, recently repeated in Laundy Hotels (Quarry) Pty Ltd v Dyco Hotels Pty Ltd [2023] HCA 6 at [27] (per Kiefel CJ, Gageler, Gordon, Gleeson and Jagot JJ), quoting Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at [16]:

It is well established that the terms of a commercial contract are to be understood objectively, by what a reasonable businessperson would have understood them to mean, rather than by reference to the subjectively stated intentions of the parties to the contract. In a practical sense, this requires that the reasonable businessperson be placed in the position of the parties. It is from that perspective that the court considers the circumstances surrounding the contract and the commercial purpose and objects to be achieved by it.

66. If, after considering the contract as a whole and the surrounding circumstances, the Court concludes that the language of a contract is unambiguous, then the Court must give effect to that language unless to do so would give the contract an absurd operation: Cherry v Steele-Park [2017] NSWCA 295; (2017) 96 NSWLR 548 at [73]-[75] (per Leeming JA).

67. Viewed objectively, that is, without regard to what the parties actually intended at the time, “EBIT for the Businesses for Earn-Out Period” means total EBIT for the two calendar years commencing on the completion date. It does not mean the annualised EBIT, or the average EBIT for each financial year comprising the Earn-Out Period. The drafting is not ambiguous.

68. It is apparent from the history of negotiations and drafting that this is not what the parties meant, but nor is this a case where ‘rectification by construction’ is appropriate. As Leeming JA explained in Seymour Whyte Constructions Pty Ltd v Ostwald Bros Pty Ltd (in liq) [2019] NSWCA 11; (2019) 99 NSWLR 317, two conditions are necessary to correct contractual language in this manner; the Court must be satisfied of both matters to a high level of conviction: at [8]-[10]. First, the literal meaning of the contractual words must be an absurdity. Second, it must be self-evident what the objective intention is to be taken to have been. Neither condition is satisfied here. The contractual words are not absurd. The objective intention of the parties for some other construction is not self-evident. This brings us to the next issue, rectification in equity.

RECTIFICATION

69. AMA Group sought rectification to accord with the parties’ agreement by adding the words “Average annual” to the beginning of the formula for the calculation of the Earn-Out Amount in clause 5.1(a) such that it reads: (changes underlined)

Average annual EBIT for the Businesses for the Earn-Out Period MULTIPLIED by 4 LESS the Initial Cash Payment (on an unadjusted basis).

70. AMA Group contends that the Binding Heads of Agreement recorded the parties’ mutual and continuing common intention and understanding that the earn-out payment was calculated on an average of EBIT per year in accordance with Item 4. At no stage during the drafting of the Business Sale Agreement did either party communicate any intention to alter or depart from that common intention. The parties entered into the contract in reliance on the common intention and in the belief and expectation that the Business Sale Agreement embodied and was in accord with that intention. AMA Group submitted that the documentary evidence of negotiations, the Binding Heads of Agreement and the evidence of Mr Nicholson comprised clear and convincing proof such that rectification should follow. 

71. The plaintiffs deny there was ever any common mistake in relation to calculation of the Purchase Price. The plaintiffs submitted that AMA Group failed to discharge its heavy onus. Rather, the Business Sale Agreement was read and absorbed by both parties and their lawyers, several drafts were exchanged and there was no time pressure. No-one suggested that there was a mistake in the document. It was said that the circular resolution was consistent with clause 5.1 as executed. In the absence of evidence to the contrary, it should be inferred that at least Mr Hopkins and Mr Harding-Smith reviewed the Business Sale Agreement and raised no issues in relation to the earn-out provisions. 

Principles

72. In Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603, Campbell JA considered the circumstances in which equity may rectify a written contract, at [444]:

… equity focuses on what it is unconscientious for a party to assert about the contract. The rationale is that it is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time that the written contract was entered. In other words, when a plaintiff succeeds in a claim for rectification, the plaintiff is found to have been justified in in effect saying to the defendant “you and I both knew, when we entered this contract, what our intention was concerning it, and you cannot in conscience now try to enforce the contract in accordance with its terms in a way that is inconsistent with our common intention.”

73. Rectification is granted only upon clear and convincing proof, being not only that the written document does not correctly record the common intention of the parties, but what the common intention of the parties actually was: Franklins v Metcash at [451]. As such, rectification in equity is a departure – albeit it one which is circumscribed by the insistence on cogent proof – from the objective theory of contract: Seymour Whyte Constructions at [15].

74. In establishing what the actual intentions of the parties were, there is no requirement of communication of that common intention by express statement, but it must at least be the parties’ actual intentions, viewed objectively from their words or actions, and must be correspondingly held by each party: Simic v New South Wales Land and Housing Corporation [2016] HCA 47; (2016) 260 CLR 85 at [104] (per Gageler, Nettle and Gordon JJ). As Kiefel J observed in Simic at [42]-[43]:

… A court, in determining whether the burden of proof is discharged, may be said to view the evidence of intention objectively, in the sense that it does not merely accept what a party says was in his or her mind, but instead considers and weighs admissible evidence probative of intention. ….

It is not to be expected that parties to contractual negotiations will express themselves in terms of their intentions. It is therefore to be expected that proof to the necessary standard will usually require some manifestation of the intention of each party by their words or conduct and that the requisite common intention will be a matter of inference for the court from that evidence. …

75. Where an agreement has been reduced to writing through a process of negotiation between solicitors over a period of months and is clearly a matter of great commercial significance to the parties, that situation is itself a factor that tends to make it less likely that the parties have recorded their common intention incorrectly: Franklin v Metcash at [460]. However, Campbell JA noted “we know that sometimes even experienced solicitors take or are given inadequate instructions, or misunderstand their instructions, and in consequence misrecord their client’s intention, so these matters are no more than reasons for caution in making the factual findings upon which a rectification order is based”: at [461].

76. Likewise, in Queenfield Pty Ltd v Gordon Finance Pty Ltd [2019] VSC 857; (2019) 60 VR 118, a case involving a drafting error by a solicitor, Riordan J observed, “It is the common mistake which enlivens the doctrine of rectification and to deprive the party of the remedy on the basis that it was party to the mistake, would be to substantially deny the remedy of utility”: at [85].

Consideration

77. Ascertaining the common intention of the parties is straightforward as at 7 September 2018, where that intention is documented in Item 4 of the Binding Heads of Agreement. As I have endeavoured to describe, AMA Group’s consistent position during the negotiation of the deal recorded in this document was that the earn-out amount would be the average annual EBIT during the earn-out period multiplied by four, less the initial payment of $4.8 million. At no point during negotiations did the plaintiffs cavil with the notion that EBIT would be calculated per annum. The plaintiffs never sought an earn-out based on EBIT over the total earn-out period. All drafts and negotiations of the Heads of Agreement provided for an earn-out calculation based on average annual EBIT multiplied by four.

78. The Binding Heads of Agreement recorded the common intention of the parties as at 7 September 2018. It is, thus, only necessary to focus on what the common intention of the parties was, or became, over the next month until the Business Sale Agreement was executed. There is no evidence that the parties or their lawyers spoke to their counterparts during this period; all communications were by email. While Mr Harding-Smith was a party to emails exchanged on 20 September 2018, when the first draft of the business sale agreement was circulated, subsequent emails were between the lawyers only, being Mr Finney and Ms Lefebvre, copied to Mr Nicholson.

79. Mr Nicholson has acted on behalf of AMA Group on over 45 acquisitions of smash repair businesses over some ten years. Mr Nicholson said that at no time between 7 and 20 September 2018, or between the exchange of the first draft of the Business Sale Agreement on 20 September 2018 and the execution of the document on 3 October 2018, did he receive instructions that the parties had agreed to alter the earn-out mechanism as set out in the Heads of Agreement to deviate from the worked example set out, nor did he see any written communications between the parties suggesting or agreeing to any such deviation. Mr Nicholson said he intended and understood that the Purchase Price recorded in the Business Sale Agreement, including any Deferred Settlement Components, was calculated on an average of EBIT as described in the worked example in the Heads of Agreement. He did not participate in any conversation or receive any communication with anyone acting for the plaintiffs or AMA Group which in any way conveyed to him that his intention or understanding was wrong or that the Purchase Price calculation mechanism had materially changed since the execution of the Heads of Agreement.

80. Mr Nicholson did not accept that he made a drafting mistake, “I think that’s a matter for others to decide. I mean, I had a view of what it meant. But if what it means is different to what I thought it meant, then that would be an error in the document.” I have concluded that the document contained an error; there were several: see [52]. One error was ‘picked up’ at the time, and the solicitors readily deferred to the deal as recorded in the Binding Heads of Agreement: see [55].

81. The plaintiff submitted that an adverse inference should be drawn from the defendants’ failure to call Ms Lefebvre. Mr Nicholson agreed that Ms Lefebvre was doing most of the work, which he oversaw. This is confirmed by the contemporaneous documents. But Mr Nicholson was the partner of the firm responsible for her work. He gave evidence and was cross-examined. A Jones v Dunkel inference does not arise from a failure to call merely cumulative evidence; if the party has more than one witness of equal significance, then it is sufficient to call one of them: Trentelman v The Owners - Strata Plan 76700 [2021] NSWSC 155 at [194]-[195]; relevantly affirmed on appeal: Trentelman v The Owners – Strata Plan No 76700 [2021] NSWCA 242 at [210]-[214] (per Leeming JA, Bell P agreeing at [170]). In that case, Parker J considered that the failure to call a witness appeared “to have been nothing more than a commendable attempt to save time,” there being no reason to think that the witness would have damaged the plaintiff’s case: at [196]. Whilst I do not suggest that AMA Group was merely trying to save time by not calling Ms Lefebvre, I do not consider that it was necessary to do so where her work is clearly recorded in contemporaneous documents and her supervising partner came to court.

82. The plaintiffs also submitted that a Jones v Dunkel inference should be drawn given the defendants’ failure to call Mr Harding-Smith. A subpoena to attend to give evidence was issued to Mr Harding-Smith at the request of the defendants on 21 September 2023. According to the subpoena, Mr Harding-Smith lives in Queensland. On 3 October 2023, the defendants’ solicitors provided a copy of the subpoena to the plaintiffs, who requested that an outline of evidence be provided. On 10 October 2023, the defendants’ solicitor advised that their attempts to confer with Mr Harding-Smith to provide clarity as to his likely evidence had proved unsuccessful. As such, the defendants no longer intended to call him. There the matter lay. I was informed by the defendants’ senior counsel at the commencement of the trial, “At that stage, we could not access Mr Harding-Smith.” I was also informed that the defendants had “reached out” to Mr Harding-Smith’s solicitor and were waiting for a response. The defendants then believed that Mr Harding-Smith was in New South Wales as his solicitors were Sydney-based.

83. The plaintiffs tendered the subpoena and correspondence in respect of Mr Harding-Smith. These documents were admitted without limitation. Based on this material, it would appear that Mr Harding-Smith is no longer employed by the defendants. Further, the defendants’ efforts to confer with Mr Harding-Smith to find out what his evidence might be proved unsuccessful. Where a witness is not expected to co-operate by way of prior consultation or providing a proof of evidence, a party is not obliged to call the witness ‘blind’ in order to avoid the inference being drawn against them: Fabre v Arenales (1992) 27 NSWLR 437 at 449-450 (per Mahoney JA, Priestley and Sheller JJA agreeing). I decline to draw the inference.

84. The plaintiffs also submitted that, where the party to an alleged common mistake is a corporation, it is necessary to consider the rules related to the attribution of a company’s state of mind and to identify the relevant ‘decision-maker’ within the corporation: Perpetual Ltd v Myer Pty Ltd [2018] VSC 2. Where AMA Group failed to adduce evidence from Mr Hopkins, Mr Timuss, Mr Harding-Smith or members of AMA Group’s board other than Mr Nicholson, the actual state of mind of the decision-maker was said not to have been established as it was unclear who the decision makers were in respect of the contract.

85. As Applegarth J observed in Thiess Pty Ltd v Arup Pty Ltd [2012] QSC 185, the test for when an employee or officer’s state of mind may be attributed to a company for the purpose of rectification has been variously described: at [198]; see for example the reference to a ‘directing mind and will’ in Perpetual v Myer at [105], or a person ‘so closely and relevantly connected with the company’ in Krakowski v Eurolnyx Properties Pty Ltd (1995) 183 CLR 563 at 582. Ultimately, however, the various expressions of the test are directed to the same question: what was the state of mind of the employee or employees to whom the company delegated authority to act on its behalf in relation to a particular transaction: Thiess at [198]. It is not necessary for a company alleging a mistake to call all or the majority of the members of its board: Leibler v Air New Zealand Ltd [1999] 1 VR 1 at [59] (per Kenny JA). It will suffice to consider the intention of the relevant decision maker or even a negotiator, where the decision maker has simply adopted the decision of the person authorised to negotiate the deal on the company’s behalf: Murray Holdings Ltd v Oscatello Investments Ltd [2018] EWHC 162 (Ch) at [198], cited with approval in Fonterra Brands (Aust) Pty Ltd v Bega Cheese Ltd [2021] VSC 75 at [85].

86. The evidence in this case is tolerably clear. AMA Group employee, Mr Timuss did the initial negotiations with Mr Nercessian. After the draft heads of agreement was circulated, Mr Harding-Smith progressed these negotiations with Mr Finney. Mr Hopkins became involved the day before the Binding Heads of Agreement was signed to negotiate the last ‘sticking point’ with Mr Nercessian in respect of any ‘claw back’. The intention of each of these negotiators can be seen in the product of their labours: the Binding Heads of Agreement. Going forward, Mr Harding-Smith informed Mr Finney that he was “handing you over” to AMA Group’s lawyers. AMA Group’s broad approved the deal as negotiated by management. Where AMA Group’s lawyer and one its directors, Mr Nicholson, gave evidence of both the drafting the Business Sale Agreement and the board’s decision-making process, I consider that his intention can be attributed to the corporation as to what AMA Group intended to approve. It was unnecessary for AMA Group to call all, or even the majority of the members of its board, to establish the company’s state of mind. In these circumstances, it cannot be said that AMA Group failed to adequately prove the company’s actual state of mind. 

87. There is no contemporaneous evidence that anyone else at AMA Group reviewed the Business Sale Agreement, in particular, to check that it gave effect to the earn-out arrangements documented in the Binding Heads of Agreement. The board of directors, save for Mr Nicholson, were not provided with either document, but a circular resolution which set out the key commercial terms.

88. The circular resolution itself evidences an understanding by AMA Group management that the Earn-Out Amount would be derived from the EBIT per annum multiplied by four less the initial cash payment. AMA Group’s management appear to have proceeded on the basis that the financial performance of the Businesses would improve slightly from some $2 million in 2018 (in the adjusted profit and loss for management purposes) to $2.2 million in 2019. The estimated total consideration of $10 million is roughly 4 times the projected earnings for 2019. That is, the estimated total consideration was not based on the aggregate of earnings over the two year earn-out period, but rather the annual average figure.

89. Turning then to the evidence of the plaintiffs’ intention, the plaintiffs’ solicitor, Mr Finney, did not give evidence and I infer that his evidence would not have assisted the plaintiffs. Mr Nercessian gave instructions to Mr Finney. His evidence was silent on this point. Where the plaintiffs did not give evidence of their common intention, their common intention is a matter of inference from their words or actions, viewed objectively: Simic at [43], [104].

90. As the defendants submitted, given the protracted and closely documented negotiation of Item 4 of the Binding Heads of Agreement, it beggars belief that there would be no contemporaneous record of a major change to the parties’ bargain, effectively doubling the agreed multiple from four to eight. Rather, on receipt of the draft Business Sale Agreement, Mr Finney emailed comments and suggested amendments but made no comment on, and sought no amendment to, clause 5.1. Two possibilities present themselves. Either Mr Finney did not notice that clause 5.1 did not accord with Item 4 of the Binding Heads of Agreement, or he noticed and said nothing. I consider it unlikely that a solicitor would have taken the latter course, at least not without express instructions from their client. The more likely of these possibilities is that Mr Finney and his client did not notice the error either. I infer that the plaintiffs’ actual intentions remained as documented in Item 4 of the Binding Heads of Agreement.

91. Having regard to the contemporaneous documents, the evidence of Mr Nicholson and the absence of any evidence to the contrary from the plaintiffs, I am comfortably satisfied that AMA Group has discharged its burden of proof. The drafting in clause 5.1 is an error, which was not detected at the time. I have no doubt that, had the error been pointed out at the time, AMA Group would have insisted upon and Mr Nercessian would have readily acceded to an amendment to the Business Sale Agreement to accord with the deal recorded in the Binding Heads of Agreement.  AMA Group would not have executed the contract in the absence of correction.

77. The equitable remedy of rectification is “one that would seek to undo, so far as in practice possible, the departure, that the litigation has shown to exist, from equity’s standards of conscientious behaviour”; the contract is rewritten “to the maximum extent necessary for it to no longer fail to express the common subjective intention the parties had when the contract was entered”: Franklins v Metcash at [446]-[447]. The changes to the clause which are suggested by AMA Group are appropriate to ensure that the Business Sale Agreement accurately records the parties’ bargain.

Application of Australian Accounting Standards

93. The plaintiffs’ primary contention is that AMA Group breached clause 5.1 of the Business Sale Agreement when it determined EBIT for the Earn-Out Period by calculating the average of EBIT for the two 12-month periods rather than the EBIT for the full Earn-Out Period. As clause 5.1 will now be rectified, this breach is not established.

94. The plaintiffs also contended that AMA Group was in breach of clause 5.1 as it failed to calculate the EBIT for the Businesses by “apply[ing] accounting treatment in accordance with Australian Accounting Standards” in two respects. First, AMA Group failed to include payments received from the Commonwealth of Australia by way of JobKeeper payments and other COVID-19 government grants within the meaning of AASB 120. Second, AMA Group failed to include payments received by way of ‘rebates and/or market incentives’ from BASF. The plaintiffs acknowledged, however, that if AMA Group were entitled to rectification, then it did not matter if the plaintiffs ‘won’ on these accounting issues; there would be no Earn-Out Payment.

95. It is thus not strictly necessary to consider these accounting issues. I am mindful that a judge ought consider each of a party's claims, including in the event that the judge may be wrong on other conclusions, to assist the appeal process and obviate recourse to a new trial: Chief Commissioner of State Revenue v Adams Bidco Pty Ltd [2019] NSWCA 34 at [3] (per Leeming JA). If there is good reason not to take this course, the reason should be identified in the judgment: Gulic v Boral Transport Ltd [2016] NSWSCA 269 at [7] (per Macfarlan JA, Gleeson JA and Garling J agreeing).

96. I have not made contingent findings in respect of accounting issues in this case as it is no small task. The plaintiffs’ expert, Mr Morris, produced three reports. AMA Group’s experts, Mr Archer and Mr Hockley, produced two reports. The experts together produced a joint report. As Mr Archer and Mr Hockley addressed different aspects of Mr Morris’ work, two expert conclaves were held: between Mr Morris and Mr Archer, followed by a conclave between Mr Morris and Mr Hockley. Undertaking this task ‘in the alternative’ will substantially increase the length of, and delay in the delivery of, this (and other) judgments. The scope of this task may be seen, for example, Halkett v APG & Co Pty Ltd [2023] NSWSC 1058 at [76]-[88].

97. Further, resolution of the issues between the experts requires consideration of five Australian Accounting Standards. I am reluctant to embark upon this task in the event that I am wrong about the conclusions already expressed, where the meaning and application of Australian Accounting Standards is a matter of some complexity, the standards are applied widely, case law on the meaning of the standards is sparse and where the views I express will be obiter. Accordingly, I will move to the plaintiffs’ remaining claims which concern changes made to the businesses following AMA Group’s purchase.

Post-purchase changes

98. Before the purchase, Simply Smashing had a cost agreement with Suncorp for “driveable” claims, where the vehicle was able to arrive at the body shop by its own means (as opposed to a “non-driveable” claim, which required a tow truck). Under the cost agreement, Simply Smashing was obliged to repair 25 driveable claims a week at an average repair cost of $1,900. Mr Nercessian explained that when vehicles were driven into the shop, quotes to repair the vehicles were entered onto Suncorp’s “Audanet” system, which allowed a set rate of $54 an hour. Mr Nercessian said “as a preferred repairer you have to give Suncorp a discount because they are giving you the volume of work.” Quotes would be submitted to Suncorp in a “batch.” Suncorp’s system automatically calculated the average repair cost. The average for each batch had to be $1,900, “where we couldn’t make the batch work, there would be discounts applied. We would have to discount the actual jobs, so then it would make the batch work. So, if our average cost of repair in that area was $2,100, then we would have to give a discount on our batch back to Suncorp.”

99. The same did not apply for Harris & Adams’ work, where repairs were independently quoted and sent for assessment and authorised with negotiation. Harris & Adams jobs were submitted to Suncorp using a different computer system called “PNet.” If Suncorp approved a vehicle going to Harris & Adams, then a specific price was negotiated for that repair. Harris & Adams was not locked into any particular charge out rate for these jobs with Suncorp. Nor did Harris & Adams have a contract with Suncorp.

100. Mr Nercessian said he had an oral agreement with Lawson Pratt, an area manager of Suncorp, to repair prestige vehicles for $75 an hour with no paint discounts, rather than the usual Suncorp rate of $54 an hour. The contemporaneous documents provide little corroboration of such an agreement. At the time, Mr Nercessian asserted that Harris & Adams’ pre-acquisition rate was $70 an hour: see [113]. There are only nine Harris & Adams invoices in evidence which were issued before, or shortly after, the Business Sale Agreement was executed. According to these invoices, Harris & Adams charged different insurers between $1 an hour and $100 an hour for its work. Only one of these invoices was issued to Suncorp – for the repair of a Mercedes – when $1 an hour was charged. The contemporaneous documents suggest that Harris & Adams did not do work of any volume for Suncorp, or that the rate was $75 an hour.

101. In any event, after completion of the sale to AMA Group, Mr Nercessian met with Paul Wellington, NSW Operations Manager of AMA Group, on 15 October 2018. According to Mr Nercessian, Mr Wellington informed him that Suncorp driveable claims would be increased immediately from 25 to 50 cars. AMA Group had a national agreement with Suncorp, where all shops were on the same price and conditions. Mr Nercessian said that his contract with Suncorp had several exclusions, “This will affect my ability to make the money I require for my earn-out. I was told nothing will change. If they knew it was different, why didn’t they tell me.” Mr Wellington advised that the pricing for Harris & Adams for Suncorp would be $54 an hour rather than $75. Mr Nercessian was not happy.

102. Mr Nercessian was not a particularly accurate historian in this regard. Rather, on 6 November 2018, Suncorp informed Mr Nercessian that “Your shop has moved under the AMA Group ownership and under the broader [AMA] contract. … K claims are required to be batched …”. Mr Nercessian sought clarification from AMA Group, “I was under the understanding that nothing in my business contracts changed. This is not what our shop has been doing, K claims were excluded because we do a lot of them with our fleet partners that charge us fees, and thus we made an agreement in our last contract with Suncorp that they would be excluded, It would not be worth it to do K claims that are batched, discounting for batching and then paying Fleet allocation fees. Can you clarify this for me moving forward we need to be selective doing K claims if batched.” Mr Bubeck confirmed that the existing Suncorp contract for Simply Smashing and Harris & Adams remained in place, “If/when a contract assignment comes up, before any decision is made I’ll engage you so we can together decide which direction to take.” That is, Mr Bubeck confirmed with Mr Nercessian that, at that stage, there was no new Suncorp contract for Simply Smashing and Harris & Adams.

103. On 16 November 2018, Mr Bubeck emailed Mr Nercessian, copied to Dave Calder (Chief Operations Officer, Panel Division, AMA Group), Mr Timuss, Mr Hopkins and Mr Harding-Smith, advising:

… we have a deal with Suncorp for non-drives.

It starts December 1^st and the volume is 15 repairable claims per week, price $5400. In order to repair 15 you will receive 20 per week to allow for write offs.

Brett Wallace and I have agreed to hold of[f] adding this deal to our master agreement as the starting volume is very conservative and could be as high as 30 per week. I’ve suggested we see what’s available in the 1^st Qtr of 2019 and then reassess if we actually need another facility should the volumes allow it. I’m assured that if Suncorp have the confidence that they can sustain an average of 30 per week, then their all ours. Then we can add the deal with the known volumes to the Master agreement which will be for 3 years.

104. Mr Bubeck reported to Mr Nercessian and Mr Timuss that the additional volume would be added to the existing Suncorp agreement with Simply Smashing. On 19 December 2018, Suncorp provided Mr Bubeck with its agreement with Simply Smashing. Mr Bubeck enquired of Suncorp as to whether the agreement should be novated or added to the AMA Group’s master agreement.

105. Mr Bubeck explained that AMA had a master agreement with Suncorp. As further body shops were acquired, the master agreement was amended to add an addendum to include the acquired shop, its address, hourly rates and volumes. Suncorp paid a standard hourly rate of $54 for non-prestige body repair shops under this agreement. Once the Simply Smashing and Harris & Adams businesses were acquired, they were added to the master agreement. Mr Nercessian had no control over this.

106. Based on Harris & Adams’ invoices, it does not appear that Harris & Adams was added to the master agreement between AMA Group and Suncorp in about December 2018. One invoice was rendered to Suncorp in October 2018. Nine invoices were rendered to Suncorp in November 2018. A further eight invoices were rendered in December 2018. By and large, these invoices do not refer to an hourly rate at all. It is not until 20 December 2018 that Harris & Adams’ invoices began to refer to a charge-out rate of $54 an hour. Harris & Adams’ invoices rendered to Suncorp continued to apply this rate until December 2020, when the hourly rate was increased to $60.

107. On 30 October 2019, Mr Nercessian emailed Mr Bubeck with points for discussion with Suncorp. Mr Nercessian requested that the rate for Harris & Adams be increased from $54 to $85 for specialist prestige repairs and tooling. On 14 November 2019, Mr Bubeck advised Mr Nercessian that their proposed rate of $2,100 was not accepted by Suncorp, which had offered $2,000, “They have repairers in the area on less than this and their position, should we stand firm, is that we will lose the work. Both AMA and Suncorp don’t want this to happen.”

108. On 9 January 2020, Harris & Adams entered into a Suncorp Panel Repairer Agreement with Suncorp. The agreement does not reveal Harris & Adams’ hourly rate. Harris & Adams continued to render invoices with a charge-out rate of $54 an hour.

109. On 31 March 2020, Mr Nercessian again sought AMA Group’s assistance to confirm the rate of $85 for Harris & Adams with Suncorp. Mr Nercessian advised that “Currently 40% of the work at HA is Suncorp directed PRESTIGE REPAIRS @ $60.00, we are currently giving them a 30% discount plus material allowances???.” On 1 April 2020, Mr Bubeck reported to Mr Nercessian that he had met with Suncorp, but there was “still no outcome on this one.” Mr Bubeck had asked for an extensive report to be prepared on Harris & Adams “BMW and Tesla mix” which he hoped would support their position but “Suncorp are holding firm [at the moment].” On 2 April 2020, the report was to hand.

110. Mr Bubeck said there was a significant downturn in smash repair work during the COVID-19 lockdowns and work from home requirements in 2020. During that period, the workshops took whatever work they could get, when they could get it. On 21 April 2020, AMA Group emailed Mr Nercessian for his thoughts on site closures to cut costs and maximise profits, apparently in light of the COVID-19 pandemic and its effect on business. Whilst Harris & Adams appeared busy, Simply Smashing had “dropped off considerably from its normal volume and looks like it could absorb the work if [Harris & Adams] went into hibernation.”

111. On 28 April 2020, Mr Bubeck reported to Mr Nercessian on his negotiations with Suncorp, “Suncorp have been very clear … The most they will pay is $2,000 for driveable claims. … Should we not accept the $2,000, they will redirect all Simply Smashing’s volume to another non-AMA business in Gosford as we’re advised this reflects the market price for the Gosford region.” Mr Nercessian’s confirmation was sought that the $2,000 proposed by Suncorp was agreed to. Mr Nercessian replied that he was not in a position to comment either way as this was a matter for AMA Group to decide. Mr Nercessian complained, however, that he had been excluded from the negotiations and was concerned about the effect of this decision on his earn-out, “Harris & Adams were paid $70 as a Prestige repairer for Suncorp when I owned the business, and then went down to $54 once AMA took over?”

112. Mr Bubeck said he did his best for Mr Nercessian from late 2018 to 2020 to get the best result for his businesses from Suncorp. The ‘take it or leave it’ price that Suncorp left him with was the best price he could get for those businesses. On the upside, the arrangements with Suncorp achieved a significant volume of panel repair work for Simply Smashing and Harris & Adams sites.

113. On 3 June 2020, Mr Bubeck put forward the Simply Smashing site to AMA Group for support for the following reasons:

•   Primary insurer Suncorp has lost confidence

•   Over quoting

•   Little understanding of how to run a PCM

•   Way too much cost on site

114. Mr Bubeck explained that PCM was an acronym for a predictive cost model, such as Suncorp’s industry wide hourly rate of $54 for driveable claims. The price negotiated with an insurer for the PCM varied from shop to shop. By this email, Mr Bubeck was initiating a request for additional help to Mr Nercessian to better manage the Simply Smashing and Harris & Adams sites, to live up to Suncorp’s expectation.

115. On 6 July 2020, AMA Group confirmed with Mr Nercessian that Simply Smashing would return to ‘batching’ for Suncorp from 13 July 2020 at a batching rate of $2,000. Mr Nercessian replied “we are line to line at the moment, our average drive cost is $2,400.” Mr Nercessian said that the business was still suffering badly from COVID-19 lockdowns and the work-from-home rules at that time. On 12 July 2020, Mr Nercessian resigned.

116. The second anniversary of the completion of the Business Sale Agreement, and the end of the earn-out period, was 12 October 2020. On 10 November 2020, AMA Group provided its calculation of the EBIT figure in the amount of $646,808. Applying the multiplier of 4, the Earn-Out Amount was $2,589,230. Where this was less than the Initial Cash Payment of $4.8 million, no Earn-Out Amount was payable. Nor was AMA Group entitled to ‘claw-back’ the portion of the Initial Cash Payment, to the extent that it exceeded $2,589,230. These proceedings were commenced in September 2021.

BREACH OF CONTRACT

117. The plaintiffs relied on clause 23 of the Business Sale Agreement, which provides that each party will, from time to time, do all things necessary or desirable to give full effect to the agreement, and a term implied by law that each party do all such things as are necessary to enable the other to have the benefit of the contract: Secured Income Real Estate (Australia) Ltd v St Martins investments Pty Ltd (1979) 144 CLR 596. The plaintiffs contend that clause 23 and the implied term required AMA Group to do all things reasonably necessary within the Earn-Out Period to enable the plaintiffs to enjoy the full benefit of the Earn-Out and, unless reasonably necessary, to refrain from doing all things during that period that would be materially inconsistent with, or prejudicial to, the plaintiffs’ enjoyment of the full benefit of the Earn-Out. AMA Group was said to have breached these terms by entering into revised agreements with Suncorp and lowering the charge-out rate for Harris & Adams.

118. In the alternative, the plaintiffs contend that it was a term of the Business Sale Agreement, implied in fact, that AMA Group would act in good faith in making decisions within the Earn-Out Period as to the conduct and operation of the Businesses, including in respect of Material Contracts identified in Schedule 2 of the agreement, on which the financial performance of the Businesses had been substantially dependent: see [54]. This implied term required AMA Group to act honestly and reasonably in making decisions as to the post-sale conduct of the Businesses that could materially prejudice the plaintiffs’ entitlement under the Business Sale Agreement to the Earn-Out.

119. Prior to entry into the Business Sale Agreement, and during the course of negotiations, AMA Group was said to have known that it intended to enter into a revised agreement with Suncorp and lower the charge-out rates for Harris & Adams shortly after completion. This would materially adversely affect the EBIT of the Businesses within the Earn-Out. The plaintiffs would likely regard a revised agreement with Suncorp and the lower charge-out rate for Harris & Adams as material information bearing on the negotiation of the Purchase Price and the amount and calculation of the Earn-Out. Notwithstanding this, AMA Group failed to inform the plaintiffs of its intention to enter into revised agreements with Suncorp or to lower the charge-out rate for Harris & Adams, or to consult with or seek the consent of the plaintiffs before entering into such revised arrangements. As a consequence, AMA Group was said to have breached the implied term of good faith as it did not act honestly or reasonably when making these fundamental changes.

120. AMA Group says that the Business Sale Agreement did not in any material way restrict or limit its post-completion conduct of the Businesses save for the express terms of clauses 6.5 and 8. Further, AMA Group provided no warranties to the plaintiffs save for those contained in clause 11 and provided no warranties as to its post-completion conduct of the Businesses.

Duty of good faith

121. It is not necessary to consider the suggested implied term in fact, where there is no evidence that AMA Group knew, before entering into the Business Sale Agreement, that it intended to enter into a revised agreement with Suncorp and lower the Harris & Adams charge-out rates shortly after completion. Rather, the evidence reveals that Suncorp sought to add the Businesses to the master agreement a month after completion. This was resisted by Mr Bubeck, who confirmed with Mr Nercessian that the existing agreements with Suncorp remained in place, “If/when a contract assignment comes up, before any decision is made I’ll engage you so we can together decide which direction to take.” It was not until late December 2018 that it appears that the Businesses were added to the master agreement: see [108]. This sequence of events suggests that AMA Group did not have the knowledge or intention, before entering into the Business Sale Agreement, to enter into a revised agreement with Suncorp.

122. Nor is it clear how being added to the master agreement resulted in a revised agreement so far as Simply Smashing was concerned. Mr Nercessian agreed that AMA Group’s arrangements with Suncorp were “similar, but not exactly the same” as the agreement in place with Simply Smashing. Certainly, the standard hourly rate was the same. Any substantive difference between the contracts was not identified.

121. Nor can it be said that AMA Group intended to enter into a revised agreement with Suncorp vis a vis Harris & Adams, where Harris & Adams did not have an agreement with Suncorp at all. Nor is there any evidence that AMA Group knew, before entering into the Business Sale Agreement, that it intended to lower the Harris & Adams charge-out rate shortly after completion. There is no evidence that AMA Group knew what Harris & Adams’ charge-out rate with Suncorp was. Nor, for that matter, it there evidence, beyond Mr Nercessian’s assertion, that Harris & Adams’ charge-out rate with Suncorp was $75 an hour: see [102].

Duty to co-operate

124. Turning to the express term, clause 23 of the Business Sale Agreement provides:

23.   Further assurance

Each party will from time to time do all things (including executing all documents) necessary or desirable to give full effect to this Agreement.

125. The usual rules of contractual construction apply. The clause is towards the end of the contract, amidst other clauses dealing with matters such as dispute resolution, GST, service of notices, governing law, the execution of counterparties, an entire agreement clause and the like.

126. As I read it, clause 23 is a mechanical provision directed to ensuring that the contracting parties do what needs to be done to effect the sale of the two businesses to the purchaser, for example, paying the Initial Cash Payment on Completion Date, making adjustments to that payment in accordance with clause 4.2, attending to the multitude of tasks listed in clause 6.2 on completion (such as the delivery of business records and completion of forms), transferring employees and their entitlements, calculating the Earn-Out Amount in accordance with clause 5.1 including adjusting the EBIT in accordance with clause 5.2, paying the Earn-Out Amount in accordance with clause 4.1(b), and the list goes on.

127. Does clause 23 impose a wider obligation on the purchaser to run the acquired businesses in a particular way so as not to jeopardise the vendors’ chances of receiving an Earn-Out Amount? I consider that clause 23 was not intended to impose such a wide-ranging obligation on the future conduct of the businesses. Under the Business Sale Agreement, AMA Group was obliged to pay $4.8 million for the two businesses, plus potentially an Earn-Out Amount. Absent some express restriction on AMA Group’s ability to run the businesses thereby acquired, it was entitled to operate the businesses as it saw fit. Clause 23 imposed no such limit.

128. The term implied by law is not dissimilar. There is a term implied by law in all commercial contracts that each party will cooperate with the other by doing all such things as are necessary to enable the other party to have the benefit of the contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments at 607 (per Mason J); New Standard Energy Pel 570 Pty Ltd v Outback Energy Hunter Pty Ltd [2019] SASCFC 132; (2019) 135 SASR 469 at [239] (per Nicholson J, Kourakis CJ and Lovell J agreeing). The scope and application of such a term is not necessarily straightforward. As Mason J explained in Secured Income at 607-608:

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contacting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

129. That is, the term implied in law is circumscribed in its operation: New Standard Energy at [129]. As Nettle JA observed in Beerens v Bluescope Distribution Pty Ltd [2012] VSCA 209; (2012) 30 VR 1, “the duty is informed by the express terms of the contract. … It is … not a duty to act generally in the other party’s best interests. … the duty of co-operation does not extend to being nice”: at [54]. In Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104, the Court noted that the implication of a term in law depends upon the demonstration of “necessity”. Leaving aside fiduciary obligations “there cannot be a duty to co-operate in bringing about something which the contract does not require to happen. An “implication, arising as it does from necessity, must be limited by the extent of the need” … A contract may “contemplate” many benefits for the respective parties, but in each can only call on the other to provide, or co-operate in the providing of, benefits promised by that party”: at 124-5.

130. In sum, the authorities draw a distinction between benefits or outcomes of the contract that have been promised by a party and benefits or outcomes that may occur but which the contract does not require to occur; the implied duty to co-operate is confined to acts which are necessary to the performance by a party of fundamental obligations under the contract: New Standard Energy at [130], citing Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd (2015) 237 FCR 534.

131. In this case, the Business Sale Agreement obliged AMA Group to do certain things which might be regarded as fundamental obligations, being first and foremost, to pay the Initial Cash Payment. The Business Sale Agreement also contemplated that the vendors might receive an additional benefit, being the Earn-Out Amount. But there was no promise that the vendors would be entitled to receive any particular earn-out amount, or any amount at all. Nor do I consider that the implied duty to cooperate required the purchaser to continue to operate the businesses for the next two years to ensure that the vendors received an earn-out.

132. That is, the express and implied obligation to cooperate did not constrain AMA Group from acting as it did in relation to the addition of Simply Smashing and Harris & Adams to its master agreement with Suncorp, nor reducing Harris & Adams’ charge-out rate if that was, in fact, the effect of adding Harris & Adams to that agreement.

133. If I am wrong about this, then the plaintiffs claimed damages said to be the difference between the Earn-Out with, or without, the changes to Harris & Adams’ hourly rate. Mr Morris calculated that as approximately $220,000 during the Earn-Out Period, albeit this calculation was for work done on both prestige and other vehicles. The effect on the Earn-Out was therefore more than $800,000. Including this amount makes no difference to the plaintiffs’ entitlement to an additional payment. In any event, I consider it more likely that, if AMA Group had maintained Harris & Adams’ higher charge-out rate, then Suncorp would have ceased to use the business as much or at all. That is, it does not follow that Harris & Adams would have received the same volume of work from this insurer, to which the higher charge-out rate has been applied to arrive at the figure of $800,000. This claim fails.

MISLEADING OR DECEPTIVE CONDUCT

134. Finally, the plaintiffs contend that, prior to entry into the Business Sale Agreement and during negotiation of the agreement, AMA Group represented that, after completion of the sale of the Businesses, the Businesses would continue to operate as they had prior to completion. Further, there would be no change to the material contracts and arrangements with large customers without first seeking the plaintiffs’ agreement, other than that the Businesses would need to purchase paint from BASF but would receive a rebate in respect of such purchases. The representations were said to be oral and comprised discussions between Mr Nercessian and Mr Timuss in about January and August 2018. I take this to be a reference to the conversations described at [19] and [20]. Mr Nercessian did not give evidence of a conversation with Mr Timuss in August 2018.

135. The plaintiffs contend that they agreed to enter into the Business Sale Agreement, including the terms as to Purchase Price and Earn-Out, in reliance on this representation. Immediately after completion of the contract, AMA Group made fundamental changes to the conduct of the Businesses without first seeking and obtaining the plaintiffs’ agreement and without attributing market incentive payments received from BASF to the Businesses. AMA Group was said to have engaged in misleading or deceptive conduct in contravention of section 18 of the Australian Consumer Law.

136. AMA Group was also said to have engaged in misleading or deceptive conduct by failing to disclose its intention to enter into a revised agreement with Suncorp and to lower the charge-out rates for Harris & Adams. For reasons already given, it is not necessary to consider this allegation further, where there is no evidence that AMA Group held such an intention before entry into the Business Sale Agreement. Whilst the plaintiffs submitted that the “gist” of their claim was that it was misleading or deceptive for AMA Group not to have informed Mr Nercessian of its arrangements with Suncorp and the likelihood that Harris & Adams would have to be brought within those arrangements after acquisition, and that this would result in significantly lower charge-out rates for Harris & Adams, this gentler proposition is not the case which was pleaded.

137. When determining whether conduct is misleading or deceptive, it is necessary to consider that conduct from the perspective of a reasonable person in the position complaining of it: Ireland v WG Riverview Pty Ltd [2019] NSWCA 307; (2019) 101 NSWLR 658 at [65], citing Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592. Further, the conduct of the person alleged to have engaged in misleading or deceptive conduct must be viewed as a whole; it invites error to look at isolated parts of a corporation’s conduct: Butcher at [109]; Ireland v WG Riverview at [66].

138. Further, as McClelland CJ in Eq explained in Watson v Foxman (1995) 49 NSWLR 315 at 318:

Where the [alleged misleading] conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases … the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition.

His Honour proceeded to note the fallibility of human memory of conversations given the passage of time and intervention of litigation, where “the processes of memory are overlaid, often subconsciously, by perceptions or self-interest”: at 319.

139. Here, Mr Nercessian was a businessperson with a keen eye to where his interests lay. Mr Timuss was an experienced commercial person representing a large corporation and endeavouring to buy Mr Nercessian’s businesses. Both could be considered as intelligent, shrewd and self-reliant: Butcher at [41].

140. Mr Timuss did not give evidence in these proceedings. His absence was explained and I draw no adverse inference. This had the consequence, however, that the only evidence of the conversations in which the representation was said to have been made came from Mr Nercessian. In the absence of any contemporaneous file note, and the fact that Mr Nercessian’s affidavit describing the conversations was made four years later, I have approached his description of what was said with caution.

141. The contemporaneous documents indicate that, at the time of their conversations, Mr Nercessian and Mr Timuss were negotiating the basic metrics of the deal: price and whether there would be an earn-out. Mr Nercessian’s recollection of the words spoken by Mr Timuss was general, rather than precise, consistent with the ‘to and fro’ of negotiations rather than a clear statement of what AMA Group would do if it acquired the businesses. I think it is unlikely that these gentlemen would have discussed the finer points of whether, if AMA Group proceeded to purchase the businesses, it was considering making any changes and, if so, whether it would first consult Mr Nercessian. Mr Timuss’ suggested assurance that he would make no changes is at odds with his revised offer (at [18]), where Mr Timuss pointed to change in the form of a ‘growth plan’ to, presumably, expand business operations.

142. The plaintiffs must prove each element of this cause of action to the reasonable satisfaction of the Court, which means that the Court must feel an actual persuasion of its occurrence or existence. I feel no actual persuasion that Mr Timuss said the words attributed to him.

143. Further, the conversations took place at the early stages of negotiations. A further eight months passed before those negotiations came to fruition, when the Business Sale Agreement was executed. During that period, other persons became involved in progressing negotiations and documenting the deal; Mr Nercessian used the services of Mr Finney, while Mr Timuss involved Mr Harding-Smith, who later engaged Mr Nicholson. Viewed as a whole, I do not consider that any statements made by Mr Timuss in January or February 2018 – which, even on Mr Nercessian’s account, were fairly non-specific – were misleading or deceptive in light of the surrounding facts and circumstances, in particular, what happened after those conversations.

144. Both the Binding Heads of Agreement and the Business Sale Agreement expressly excluded reliance on representations made in conversations such as those described by Mr Nercessian. Item 10 of the Binding Heads of Agreement dealt with Warranties, set out in Schedule 1 of the Heads of Agreement. Item 10(d) provided that no party relied on any warranty or representation unless specifically recorded in the Heads of Agreement or any subsequent Business Sale Agreement.

145. Clause 25 of the Business Sale Agreement was an entire agreements clause, superseding all oral and written communications by on behalf of any of the parties. Clause 26 provided:

26.   No reliance on warranties and representations

In entering into this Agreement, each party:

(a)   has not relied on any warranty or representation (whether oral or written) in relation to the subject matter of this Agreement made by any person; and

(b)   has relied entirely on its own enquiries in relation to the subject matter of this Agreement

This clause does not apply to warranties and representations that this Agreement expressly sets out.

146. Whilst such provisions cannot absolve a party from liability for misleading or deceptive conduct, such clauses “can have an evidentiary effect that negates an integer of liability in relation to misleading or deceptive conduct” by altering the character of a representation which was made, rendering it not misleading or deceptive, or leading to a conclusion that a claimant did not rely on the conduct or did not suffer loss because of that conduct: Viterra Malt Pty Ltd v Cargill Australia Limited [2023] VSCA 157 at [379] (Sifiris, Walker and Whelan JJA).

147. Mr Nercessian said that, when deciding whether to sell his businesses to AMA Group, he understood there would be no significant change to the operation of the businesses and, had he known otherwise, then he would not have gone ahead with the deal. It is not clear how Mr Nercessian would have had that understanding, where the terms of both the Binding Heads of Agreement and the Business Sale Agreement were clear in that regard and were doubtless explained to him by Mr Finney.

148. In any event, as I understand it, the businesses did receive the benefit of AMA Group’s purchasing arrangement with BASF. To that extent, any representation made by Mr Timuss could not be said to have been misleading or deceptive. To the extent that Mr Timuss could be said to have represented at, after completion of the purchase of the businesses, no changes would be made, the high point is Mr Timuss’ assurance in February 2018 that there would be no changes to contracts without discussing the matter with Mr Nercessian first: see [20]. Noteworthy, Mr Timuss did not say that AMA Group would not make any changes, but simply that it would discuss it with Mr Nercessian first. Where Harris & Adams had no contract with Suncorp, there was no need for AMA Group to discuss the matter with him.

149. If I am wrong about this, the plaintiffs sought damages under section 236 of the Australian Consumer Law said to be the diminished income of the Businesses arising from these changes, resulting in a reduced Earn-Out Amount being payable to the plaintiffs. The plaintiffs submitted that, had Mr Nercessian been told the true position, then he would have negotiated amendments to the earn-out provisions to protect the Earn-Out from any negative effect on the earnings of the Businesses from likely changes to the arrangements with Suncorp. AMA Group would, it is said, have readily agreed. The plaintiffs’ loss and damage was the diminished earnings to Harris & Adams arising from the change to the Suncorp arrangements. I repeat my observations at [135]. That is, even ‘adding back’ the diminished income of Harris & Adams said to arise from the lower charge-out rate does not result in the plaintiffs being entitled to payment of an additional Earn-Out Amount. This claim fails.

Orders

150. For these reasons, I make the following orders:

1. Order that the Business Sale Agreement between the plaintiffs and the first defendant dated 3 October 2018 be rectified to accord with the parties’ agreement by adding the words “Average annual” to the beginning of the formula for the calculation of the Earn-Out Amount in clause 5.1(a) such that it reads:

Average annual EBIT for the Businesses for the Earn-Out Period MULTIPLIED by 4 LESS the Initial Cash Payment (on an unadjusted basis).

2. Dismiss the summons filed on 8 September 2021.

3. Otherwise dismiss the cross-claim cross-summons filed on 22 October 2021.

4. Order the plaintiffs to pay the defendants’ costs of the proceedings.

5. In the event that any party seeks a special costs order:

1. the party seeking such an order is to notify the other parties and the associate to Rees J by 22 December 2023 of any orders sought, supported by any affidavits and submissions (limited to three pages);

2. any party against whom such an order is sought is to provide any affidavits and submissions in reply (limited to three pages) by 19 January 2024;

3. such application to be determined on the papers.

**********

Decision last updated: 15 December 2023