Tao Commodities Ltd v McFARLANE - [2018] WASC 39

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: TAO COMMODITIES LTD -v- McFARLANE [2018] WASC 39

CORAM: MASTER SANDERSON

HEARD: 2 FEBRUARY 2018

DELIVERED : 7 FEBRUARY 2018

FILE NO/S: CIV 1008 of 2018

BETWEEN: TAO COMMODITIES LTD
Plaintiff
AND
BRUCE JOHN McFARLANE
Defendant

Catchwords:

Contract - Construction of terms of contract between plaintiff and defendant - Turns on own facts

Legislation:

Nil

Result:

Plaintiff's interpretation accepted
Order for specific performance made

Category: B

Representation:

Counsel:

Plaintiff: Mr M D Cuerden SC
Defendant: Mr S Penglis & Mr S M Murphy

Solicitors:

Plaintiff: Nova Legal
Defendant: DLA Piper

Case(s) referred to in judgment(s):

Amcor Ltd v Construction, Forestry, Mining and Energy Union [2005] HCA 10; (2005) 222 CLR 241
Charter Reinsurance Co Ltd v Fagan [1997] AC 313
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181
Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025
Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689
Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54; (2012) 247 CLR 129

MASTER SANDERSON: The issue in this case is whether the defendant was entitled to terminate a share purchase agreement on one of a number of grounds. The defendant has issued a notice of termination of the agreement. By its statement of claim the plaintiff seeks specific performance of the agreement. The facts are not seriously in dispute. The outcome of the action is dependent upon the proper interpretation of the terms and conditions of the agreement.
The relevant facts can be briefly summarised. On or about 26 May 2017 the parties entered into the Share Purchase Agreement (the SPA). By the SPA the parties agreed that:
(a)by share sale the defendant would sell a mining project to the plaintiff;
(b)consideration for the purchase was:
(i)$15,000 payable immediately as Execution Consideration;
(ii)$50,000 in 'reimbursement funds' payable on completion; and
(iii)425,000 shares in the plaintiff to be issued on completion; and
(c)the plaintiff would undertake an initial public offering of 22,500,000 fully paid ordinary shares at an issue price of 20 cents each to raise $4,500,000 and obtain ASX confirmation that the plaintiff would be admitted to the official list of the ASX.
It was a condition precedent to the completion that the purchaser would 'raise the Minimum Subscription under the Offer'. Both 'Minimum Subscription' and 'Offer' were defined in the agreement. It was a further condition precedent that the Minimum Subscription condition must be satisfied or waived by the 'End Date'. That date was 31 August 2017. The agreement was amended on two occasions. On or about 10 August 2017 it was amended to extend the End Date to 31 October 2017, increase the 'reimbursement funds' payable on completion to $70,000 and increase the share consideration to be issued on completion to 500,000 shares in the plaintiff. On or about 30 October 2017 a further amendment extended the End Date to 22 December 2017.
In the period 24 November 2017 to 12 December 2017 the plaintiff requested that the defendant agree to the End Date being extended to January 2018. No agreement was reached.
The plaintiff lodged three prospectuses. The first prospectus which the parties referred to as the 'original prospectus' was lodged on 16 September 2017. It offered 23,000,000 fully paid ordinary shares at an issue price of 20 cents to raise $4,600,000. On 26 September 2017 a replacement prospectus was issued offering the same number of shares to raise the same amount of money. On 1 December 2017 a 'second replacement prospectus' was lodged. This prospectus offered 23,750,000 fully paid ordinary shares at 20 cents each to raise $4,750,000.
The second replacement prospectus included a 'right to withdraw' by which:
(a)applicants prior to 1 December 2017 could withdraw their applications at any time up to 1 January 2018; and
(b)the offer under the second replacement prospectus was required to be kept open until 1 January 2018.
The defendant learned of the right to withdraw on or about 15 December 2017. On 27 December 2017 (the first business day after the End Date 22 December 2017) the defendant served a termination notice on the plaintiff.
It is only necessary to refer in detail to certain provisions of the SPA. The relevant clauses are as follows.
Clause 2.1(e) of the SPA provides that:
Completion of the sale and purchase of the Shares under this Agreement is conditional upon and will not occur until each of the following Conditions are satisfied … on or before the End Date [22 December 2017] …:
(e)the Purchaser raising the Minimum Subscription under the Offer;
Clause 1.1 of the SPA provides, albeit in a different order, that:
Minimum Subscription means the minimum subscription of the Offer, being $4,500,000.
Offer means the Purchaser's IPO via the Prospectus of 22,500,000 fully paid ordinary shares at an issue price of $0.20 each to raise $4,500,000.
IPO means the proposed initial public offering of the Purchaser to effect the Purchaser's board's intention to seek official quotation of the Company on the ASX.
Prospectus means the Purchaser's disclosure document for the Offer, to be lodged with ASIC and ASX, to give effect to the Offer and the Purchaser's intention to seek official quotation of the Purchaser's Shares on the ASX.
Clause 2.2(c) of the SPA provides, in part, that:
The Conditions described in … Clauses … 2.1(e) … are for the benefit of all Parties.
Clauses 2.3(a) and 2.3(c) of the SPA provides that:
2.3Reasonable Endeavours
(a)Each Party must use all reasonable endeavours, and must cooperate with each other, to ensure the prompt satisfaction of the Conditions after the date of this Agreement but in any event not later than the End Date.
…
(c)Each Party must keep the other Party informed of any fact, matter or circumstance of which it becomes aware that may result in a Condition not being satisfied in accordance with its terms.
Clause 2.5 of the SPA provides that:
2.5Conditions Not Met
If a party has complied with its obligations under Clause 2.3, it may terminate this Agreement by giving notice in writing to the other Party if:
(a)a Condition for which that Party is entitled to the benefit of is or becomes incapable of being satisfied;
(b)a Condition is not satisfied, or waived by the Party entitled to the benefit of that Condition, before 5.00pm on the End Date; or
(c)a Condition for which that Party is entitled to the benefit of, having been satisfied, does not remain satisfied in all respects at all times before Completion.
Essentially there was no difference between the parties as to the relevant legal principles. Taken from their respective submissions the position can be summarised as follows.
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. It requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding of the genesis of the transaction, the background, the context and the market in which the parties are operating. Unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption that the parties intended to produce a commercial result. A commercial contract is to be construed so as to avoid it making commercial nonsense or working commercial inconvenience.
That background knowledge may include matters of law. The object or purpose of a written contract may be discerned from, amongst other things, the legal context in which the contract is entered into and in which its terms are expected to be applied.
The whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable inconvenient or unjust, even though the construction adopted is not the most obvious, or the most grammatically accurate. It will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument. The court should construe commercial contracts fairly and broadly, without being too astute or subtle in finding defects. That proposition is not limited to documents drawn by businessmen for themselves and without legal assistance.
With respect to the language of the contract, the relevant principles are sufficiently stated in Seddon NC, Bigwood R & Ellinghaus MP, Cheshire & Fifoot: Law of Contract (10th ed, 2012):
The cases are replete with admonitions against technical or artificial interpretation, in particular of commercial contracts: 'expressions in a mercantile contract are to be read in no narrow spirit of construction'. 'It is inimical to the effective administration of justice in commercial disputes that a court should use a finely tuned linguistic fork'. Questions of meaning are 'to be answered in a practical and realistic way, not in a way which adopts an overly fine or theoretical approach that is alien to commercial agreements'. ...
Taking account of context also requires that particular terms be considered in the light of the whole text of the contract, and particular phrases in the light of their setting. Cross-references to related terms will be made. Related contracts will also be taken into account. In formal contracts, recitals and headings will be given due weight. Of course, close textual analysis, including resort to dictionaries, will not be eschewed, but the court will not ignore the wood for the trees.
In Charter Reinsurance Co Ltd v Fagan [1997] AC 313, Lord Mustill observed that:
There comes a point at which the Court should remind itself that the task is to discover what the parties meant from what they have said and that to force upon the words a meaning which they cannot fairly bear is the substitute for the bargain actually made one which the Court believes could better have been made. This is an illegitimate role for a Court (388).
In Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 Samuels JA observed that:
[A] condition precedent is strictly construed. So where a provision lays down an act by one party as a condition precedent to the existence of an obligation on the part of the other party, the condition precedent will not be fulfilled until the former party does an act that strictly matches that described in the contract.
...
... it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed or it has not. If it has, performance enlivens the obligation to which the stipulation is a condition precedent. If it has not, the obligation does not arise.
... Where an act by one party as a condition precedent to the liability of the other, whether it has occurred or been fulfilled depends on if the act proffered matches the description of the condition precedent in the contract, and not the seriousness of the divergence with that description (704D ‑ 705D).
In construing a contract, the parties are presumed to have known the relevant law governing their contract and the transactions contemplated within. In Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2001) 210 CLR 181, Gleeson CJ, Gummow and Hayne JJ cited Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912, as follows:
Interpretation of a written contract involves, as Lord Hoffmann has put it:
'the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract'.
That knowledge may include matters of law, as in this case where the obtaining of intellectual property protection was of central importance to the commercial development of Mr Allen's ironing board [11].
In Amcor Ltd v Construction, Forestry, Mining and Energy Union [2005] HCA 10; (2005) 222 CLR 241, Kirby J stated:
The legislative background is therefore part of the common knowledge attributable to the parties to the Agreement. So far as it is relevant, it would ordinarily be assumed that, in agreeing as they did, the parties intended the Agreement to take its place within the industrial setting created by the Act [64].
In Westfield Management Ltd v AMP Capital Property Nominees Ltd [2012] HCA 54; (2012) 247 CLR 129, French CJ, Heydon, Crennan, Kiefel and Bell JJ stated (citing Amcor [41], [64]):
Interpretation of a written agreement may involve consideration of the background knowledge available to the parties at the time of the contract, which may include matters of law including relevant legislation. Here it may be taken that the Agreement was drafted with the knowledge that the scheme was governed by the provisions of Ch 5C. Its recitals acknowledge that it is a scheme for the purposes of the Corporations Law [36].
It is worth pausing at this point to note that this Initial Public Offering (IPO) is a common way of raising funds for mining exploration. Over the years there must have been thousands of so‑called 'small‑cap' companies which have progressed the same way. The approach is quite straightforward. Prospective mining property is identified and an agreement is entered into with the owner of that property to acquire the rights to the property when a new company is floated. The owner of the mining rights are generally compensated by way of a small payment of cash and a significant issue of shares. Those shares are held in escrow for a period of time with the effect they cannot be traded for that period - in this case two years - after the company joins the list. The funds raised are then used for exploration - to prove up the asset with a view to raising more funds and eventually actually mining the tenements.
In the prospectus the Chairman's letter summarises the position of the plaintiff in this case. Relevantly it reads:
As detailed in this Prospectus, subject to the terms and conditions of a share purchase agreement, the Company will acquire a package of a 100 Mining Rights over an 8.36km² area located approximately 6km west of the town of Milford in Beaver County, Utah, United States (Project).
The core strategy of the Company is to advance the Project and undertake further exploratory activities focusing on the Silver Bear and Captain Jack Prospects. Anomalous gold, zinc, silver and lead mineralisation occur at several prospect areas in siliceous and ferrugenous vein/alteration/replacement systems which are fault controlled and proximal with lithological contacts. Veins located at Captain Jack show vague epithermal textures over several hundred meters of strike. The Company's strategy will be to leverage the expertise of its management and Directors to monetise the Project through a thorough evaluation of each of the Mining Rights' mineral exploration potential and the potential development scenarios.
Running in parallel with the proposed evaluation and exploration of the Project the Company's ongoing strategy will also include the identification and acquisition of projects, across the commodity spectrum mentioned above, that the Board believes will provide fundamental value to Shareholders.
Of course the key to the whole venture is securing the mining tenements. In this case the plaintiff and the defendant came together with a view to vending the defendant's mining tenements into a company which would be listed. The whole aim and singular purpose of the venture was to have the plaintiff own the tenements to conduct further exploration and to have all parties benefit as a consequence of a rising share price as investors realised the value of the plaintiff's assets. It was to give effect to this enterprise that the SPA was entered into and it is clear the SPA is the linchpin of the whole undertaking.
The parties agree that there are four pleaded grounds of defence but, really, there are two issues. First, the defendant contends that as at the End Date cl 2.1(e) had not been satisfied because the subscriptions which the plaintiff had received did not satisfy the definition of 'Minimum Subscription' and/or did not constitute the raising of the 'Minimum Subscription under the Offer'.
Put another way the defendant says the Minimum Subscription was in fact the only amount which could be raised by the prospectus. Because the second replacement prospectus sought to raise more than $4,500,000 there was in fact no Offer - the definition of 'Offer' in the SPA was not satisfied. Because there was no Offer there was no prospectus because the prospectus could only relate to the Offer. Therefore the whole agreement failed.
In my view there is no justification for reading the SPA in that way. An initial public offering is concerned with securing sufficient funds to allow a company to list on the ASX and to pursue its stated aims - in this case further exploration of the tenements. The ASX is concerned to ensure that companies which list are not from the outset constrained by a lack of funds. So all parties - the company itself, the promoters of the listing, a party vending property into the listed entity and the shareholders - are concerned to ensure there is a minimum subscription. But that minimum subscription is not a hard and fast amount from which no variation is possible. No listing will be possible if the minimum subscription is not achieved; but it may be in everyone's interest to accept oversubscription.
It is true that by accepting more than the Minimum Subscription the interest of the defendant was 'watered down' - that is to say his percentage shareholding in the plaintiff was less if shares were issued above the Minimum Subscription. But the effect on him was so marginal as to be insignificant. It certainly could not justify termination of the contract.
In my view, there is no warrant for reading the terms of the SPA in the highly restrictive way proposed by the defendant. It is artificial and in the context of this case makes no business sense. In my view, the defendant's arguments on this issue fail.
By his second ground the defendant contends that, as at the End Date, cl 2.1(e) had not been satisfied because the proper construction of the words 'the Minimum Subscription of the Offer' alternatively the proper construction of the words 'raising the Minimum Subscription of the Offer' required the plaintiff to have received subscriptions and payments totalling $4,500,000 by the End Date. As at the End Date it was open to any party who had subscribed for shares pursuant to the second replacement prospectus to withdraw their Offer. It could not be said the terms of the SPA had been satisfied by the End Date. Put another way, what is said is that the 'raising of the Minimum Subscription' did not occur until 1 January 2018 because until then under the terms of the offer subscriptions could be withdrawn.

This raises the question of what is meant by the word 'subscription'. This question is examined in some detail by Finkelstein J in Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025. The facts of the case are irrelevant to the issue presently under consideration. But his Honour did have a useful analysis of both the term 'subscription' and expression 'minimum subscription'. He said:
It is convenient first to consider the meaning of the word 'subscription' in the expression 'minimum subscription'. One possible meaning is the mere lodging of an application for an interest in the project. That meaning, however, can be dismissed out of hand. The Prospectus makes it clear that a person wishing to subscribe for an interest must, at the same time as he lodges his application form, also lodge a power of attorney form and deliver three cheques, one for the price of the shares, one for the management fee and one for the seed fee. There can be no valid application for an interest (and hence no subscription) in the absence of those cheques, or at least the delivery of one cheque for the total amount to be paid.
This immediately raises the question whether there can be a valid subscription for an interest on receipt of the application and power of attorney forms together with a cheque or cheques for the amounts to be paid, or whether it is also necessary for those cheques to have been presented and honoured. On one view, the meaning of the words 'subscribe' or 'subscription' involves the affixing of a written signature to a document which manifests an intention to give or pay some amount for a designated purpose, usually some purpose for the promotion of which numerous persons are pooling their means and efforts. I suppose that now, by common usage, a subscription need not be formal; nor must it be in writing. It may be oral and it may be implied from words or conduct.
There is, however, a contrary view. Historically, in deciding whether a minimum subscription had been subscribed for an allotment of shares, the price of the shares actually had to have been received. The making of a conditional payment by the delivery of a cheque would not suffice: Mears v Western Canada Pulp and Paper Co Ltd [1905] 2 Ch 353; Re National Motor Mail-Coach Co Ltd; Anstis' & McLean's Claims [1908] 2 Ch 228; Burton v Bevan [1908] 2 Ch 240. The reason for this was to ensure that there would be no bogus subscriptions. The intention of the company was to raise actual capital; not a bubble.
This meaning of 'subscription' in this context was altered in England by the Companies Act 1928 (UK) which amended s 85 of the Companies Act 1908 (UK). The new section, as it appeared in the consolidated Companies Act 1929 (UK), provided:
'39(1)No allotment shall be made of any share capital of a company offered to the public for subscription unless the amount stated in the prospectus as the minimum amount which, in the opinion of the directors, must be raised by the issue of share capital in order to provide for the matters specified in paragraph 5 in Part I. of the Fourth Schedule to this Act has been subscribed, and the sum payable on application for the amount so stated has been paid to and received by the company.
For the purposes of this subsection, a sum shall be deemed to have been paid to and received by the company if a cheque for that sum has been received in good faith by the company and the directors of the company have no reason for suspecting that the cheque will not be paid.'
In Victoria, the Companies Act 1938 (Vic) followed the orthodox approach. S 39(1) provided:
'(a)No allotment shall be made of any share capital of a company offered to the public for subscription unless -
(i)the amount stated in the prospectus as the minimum amount which, in the opinion of the directors, must be raised by the issue of share capital in order to provide for the matters specified in paragraph 5 of Part I. of the Fourth Schedule has been subscribed; and
(ii)the sum payable on application for the amount so stated has been paid to and received by the company.
(b)For the purposes of this subsection, if a cheque for a sum payable has been received by the company, the sum shall not be deemed to have been paid to and received by the company until the cheque is paid by the bank on which it is drawn.'
The intention behind the Victorian provision was set out in the Explanatory Paper which accompanied the Companies Bill 1938. There it was said: 'As the practice in regard to the receipt of application money differs in Victoria, [the English provision is altered to provide] that application money paid by cheque is not to be deemed to be received by the company until the cheque is paid by the bank on which it is drawn.' In due course the Victorian model was adopted throughout the Commonwealth (initially in the relevant State legislation and later in federal statutes). It was, however, repealed by the Corporate Law Economic Reform Program Act 1999 (Cth) seemingly for no good reason, other than to give offerors more 'flexibility' (R Baxt, et al, 'CLERP' Explained (2000), at [4‑720]). Now a condition requiring the receipt of a minimum number of applications for securities is satisfied by the receipt of applications for that number of securities together with promises to pay for them.
There is much to be said in favour of adopting the strict meaning of 'subscribe' when dealing with subscriptions for interests in a managed investment scheme. After all, the usual object of a minimum subscription clause is to ensure that the project has the required funds to undertake the venture in contemplation. It would be impossible to know if those funds are available if all that has been received are cheques or other negotiable instruments, the face value of which is equal to the amount to be raised. A number of cheques or instruments may be dishonoured and the payee or drawer (as the case may be) may not have the funds to make good the default. If the strict meaning is adopted the participants will know whether or not they have the capital needed for the project.
On the other hand both the Prospectus and the Constitution give the expression 'minimum subscription' a different meaning. According to those documents, an applicant subscribes for an interest by lodging with CIAFM a written application form, a signed power of attorney and the required 'Application Money' in the form of cheques for the amounts to be paid. If a sufficient number of applications are received (namely applications for 200 interests) then the minimum subscription will be reached. At that point CIAFM can accept an applicant as a participant in the project. I cannot find in the documents any requirement that an applicant's cheques must be presented and paid before CIAFM can accept the application. Of course, if CIAFM has any doubt about the credit-worthiness of an applicant it can defer accepting the application until the applicant's cheque has cleared. But it is not required to wait for that to occur before it accepts an application and 'issues' an interest.
According to this view, to determine whether minimum subscription had been reached by 30 June 1999, it is only necessary to decide whether applications for 200 interests together with the requisite cheques, namely cheques with a face value which total $1,514,000, had been received by CIAFM. (I put to one side whether it is also necessary to show that CIAFM had in fact accepted applications for at least 200 interests by 30 June 1999 because the case was not argued on that basis). It may be accepted that each applicant delivered one or more cheques which, when added to the money borrowed by that applicant from Bridging Credits, had a face value equal to the amount to be paid for the interest or interests applied for. It may also be accepted that the applicants' cheques were delivered to CIAFM on or before 30 June 1999. At any rate Mr Spangaro has not proved otherwise. The only issue which remains is whether the Bridging Credits cheque for $3,189,690 (which made up the balance of the subscription money) was also delivered on 30 June 1999 [21] ‑ [27].
In my view, the defendant's argument fails in light of the realities of any IPO. When a prospectus is issued the public are invited to subscript for shares in the entity it is proposed to list. As correctly pointed out by the plaintiff, on a contractual analysis the prospectus can be seen as an invitation to treat the application or shares as an offer. It simply cannot be the case the prospectus amounts to an offer. If that was so, when subscriptions were received there would be a binding contract between the company and the prospective shareholder. It may be that the requirement of a minimum subscription would be regarded as a condition precedent so that if the minimum subscription was not reached the contract would come to an end. But that ignores the possibility of over‑subscription - it is not clear how the company could, if the prospectus is regarded as an offer, decline to issue shares even if the offer was over‑subscribed by 100%. So once the application form is complete and the share purchase price is tendered the prospective shareholder has made an offer. By definition an offer can be withdrawn at any time before acceptance.
The Offer of a party subscribing for shares was said in the original prospectus and in the first replacement prospectus to be 'irrevocable'. It is difficult to see how that can be the case. Any Offer can be revoked before it is accepted and it would take a separate distinct contract between the offeror and the offeree to render the Offer irrevocable. So there is no difference between a party subscribing for shares under the original prospectus, the first replacement prospectus or the second replacement prospectus. The evidence clearly establishes the Minimum Subscription had been received by the company prior to the End Date. Even if there was a right to withdraw it had not been exercised and the defendant suffered no detriment. The minimum standard has been reached. There is no merit in this argument.
In my view the plaintiff is entitled for an order for specific performance of the SPA. I will make the appropriate orders.