Triseal Pty Ltd v Triseal Holdings Pty Ltd - [2019] WASC 349

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   TRISEAL PTY LTD -v- TRISEAL HOLDINGS PTY LTD [2019] WASC 349
CORAM:   MASTER SANDERSON
HEARD:   6 AUGUST 2019
DELIVERED          :   26 SEPTEMBER 2019
FILE NO/S:   CIV 1268 of 2019
BETWEEN:   TRISEAL PTY LTD
Plaintiff
AND
TRISEAL HOLDINGS PTY LTD
Defendant

Catchwords:

Contract - Proper interpretation of provisions of contract - Turns on own facts

Legislation:

Nil

Result:

Contract interpreted

Category: B

Representation:

Counsel:

Plaintiff	:	Mr A P Hershowitz
Defendant	:	Mr R J Squires & Ms K Parker

Solicitors:

Plaintiff	:	Paiker And Overmeire
Defendant	:	Greenstone Legal

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

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337

MASTER SANDERSON:

By originating summons the plaintiff sought the following orders:
1. A declaration that the condition in clause 5.2 of an Agreement for Sale of Business between the plaintiff and the defendant dated 3 May 2017 ('Agreement') has been fulfilled.
2.A declaration that the Business sold pursuant to the terms of the Agreement achieved a total annual revenue of $2,000,000 (net of GST) by the end of the 2019 financial year.
3.Orders that the defendant is to pay to the plaintiff the sum of $150,000.
4.An order that the defendant pay interest on the sum of $150,000 at the legal prescribed rate of interest.
5.An order that the defendant pay the costs of this application.
At the hearing of the application, what the parties sought was a declaration as to the proper meaning of a particular clause in the agreement. This question was not directly raised in the originating summons. Both parties were content I should deal with the issue. I will have more to say about this process below. First, the relevant facts should be outlined.
By written agreement for sale of business (Agreement) dated 3 May 2017 the defendant purchased from the plaintiff the business known as Triseal Pty Ltd for a purchase consideration of $1.6 million. Triseal carries on the business of supply and manufacture of mechanical seals and rotating equipment. Settlement of the Agreement took place on 31 May 2017.
A copy of the Agreement appears as attachment PR‑3 to the affidavit of Paul Julian Rolls Reilly sworn 12 February 2019. Annexure A to the Agreement contains 'Special Conditions'. Relevantly, special condition 5 reads as follows:
This Agreement is subject to and conditional upon the purchase price to be apportioned as follows:
5.1First payment of $1,450,000 plus stock at value to be paid in full on the Settlement date
5.2A deferred payment of $150,000 to be paid at 30^th June 2019 subject to:
5.2.1The Seller completing his obligations under clause 4 of the special conditions; AND
5.2.2The business achieving total annual Revenue of $2,000,000 (net of GST) by the end of the 2019 Financial Year.
5.3Where the total annual revenue is equal to or greater than $1,880,000 (net of GST) but less than $2,000,000 (net of GST) by the end of the 2019 financial year then the Seller shall be entitled to 50% of this deferred payment ($75,000).
5.4David Frederic Lauga and Marie‑Francoise Lauga (the Buyer's Guarantors) hereby guarantees to the Seller the responsibilities of the Buyer pursuant to clauses 5.2 and 5.3 in this Annexure A.
Both parties agree cl 5.2.2 is ambiguous. The plaintiff, in its written submissions (par 17) says that on a fair reading of cl 5.2.2 the deferred payment might be paid if the business achieves an total annual revenue of $2 million either:
(a)at any time from the date of settlement prior to the end of the 2019 financial year including if it is earned during the 2018 financial year; or
(b)only if the total annual revenue is achieved in the 2019 financial year.
The plaintiff contends for the first of those constructions. The defendants contends for the latter.
Both parties accepted that, consistent with the High Court decision in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, evidence of surrounding circumstances known to both parties when the contract was made is admissible to assist in the interpretation of the contract because the language is ambiguous and susceptible to more than one meaning.
In circumstances such as this, the use of an originating summons to initiate proceedings is not appropriate. The originating summons procedure is for use in those cases where there is no dispute of fact. In this case it is apparent evidence as to the circumstances surrounding the entry into the contract would be required. Moreover, both parties accepted the proper procedure would have been for a writ to be issued in the District Court – on any view, the amount of the claim was no more than $200,000. It is doubtful whether summary judgment would have been available even assuming both parties issued an application for summary judgment. The position of both the plaintiff and the defendant is arguable. The only course was to have a trial where each party led oral evidence as to the circumstances surrounding the creation of the contract. On that basis a determination of the proper meaning of the contract could have been obtained.
During the course of the hearing I put to both counsel that was the proper course and that the approach adopted was inappropriate. The matter was adjourned while both counsel took instructions. When the court reconvened both counsel indicated their clients wished to have the matter determined on the documents which had been filed. Cost was clearly a big factor in that decision. Not without some hesitation I agreed to deal with the matter on that basis.
There was no disagreement between the parties as to the principles of law involved. They can be summarised by saying that the construction of a written agreement involves ascertaining what a reasonable person would have understood the parties to the Agreement to mean. The rights and liabilities of the parties are determined objectively. Consideration should be given not only to the language of the Agreement but also the apparent purpose and object of any transaction created by or evidenced in the Agreement.
Both parties were agreed that the inclusion of the word 'annual' meant 'covering the period of a year'. The plaintiff says the reference to achieving the prescribed revenue covering the period of a year 'by' no later than the end of the 2019 financial year means on a fair reading the revenue could be achieved in a period of a year up to any time before the end of the 2019 financial year. This approach can be illustrated in this way.
Settlement of the Agreement took place in May 2017. If between the beginning of September 2017 and the end of July 2018 a turnover of $2 million was achieved then the clause was engaged and the plaintiff was entitled to $150,000. It would not matter if in a 12 month period subsequent to the September/July period the $2 million turnover was never again achieved. What was required was a once off event.
The plaintiff says the relevant objective facts favouring that interpretation are as follows. First, the settlement of the Agreement took place on 31 May 2017 and there were to be two full years of trading prior to 30 June 2019. Second, Mr Reilly agreed to remain employed by the business for two years and commenced employment in the business on 1 June 2017. Third, Reece O'Sullivan, the business manager engaged by the plaintiff, addressed an email to Mr and Mrs Reilly dated 15 February 2017 setting out that the defendant had agreed to pay $1.6 million for the business with a payment of $1.5 million upfront and the balance over two years.[1] It was stated that the '25% growth over two years should be $2 million which is reflected in this calculation'. Fourth, the first draft of the expressions of interest by the defendant stated that the deferred consideration would be payable only after two years based on the business achieving a minimum revenue growth of 25% from a base of $1.6 million representing an additional $400,000 in revenue. Fifth, there was an email from David Lauga, the principal of the defendant, dated 15 February 2017 which attached a 'revised final offer' which provided in its terms:
Business growth top line by 25% in 24 months $1.6M to $2M - $400K over two years.[2]
[1] Attachment PR‑2 to the affidavit of Paul Julian Rolls Reilly sworn 12 February 2019.
[2] Attachment PR‑2 to the affidavit of Paul Julian Rolls Reilly sworn 5 June 2019.
The plaintiff says the clear purpose of the deferred purchase consideration payment was to encourage Mr Reilly and, thereby, the plaintiff to assist in increasing the revenue of the business by $400,000 from the position of $1.6 million revenue per annum. It is common ground between the parties the business turnover for the period 1 July 2017 to 30 June 2018 was more than $2 million.
Turning then to the submissions of the defendant, it is said the wording of cl 5.2.2 – and in particular the reference to 'by the end of 2019 financial year' – suggests the total annual revenue target must be met in the 2019 financial year to trigger the deferred payment.[3] With respect, I am not sure that follows. The wording of the clause anticipates payment on 30 June 2019. It is reasonable to suppose that if the 2018/19 financial year was the relevant period there would be some delay beyond 30 June 2019 to allow for payment. For instance, there might be funds earned in June 2019 which would not be paid until July or perhaps later. If the accounting was to be on an accrual rather than a cash basis there would still have to be a full reconciliation which might take some time. Further, it might take some time to actually arrange the funds to make any necessary payment. If it was the 2019 financial year which was the relevant year the defendant would almost certainly have been in default under the Agreement unless a payment was made in anticipation.
[3] Defendant's outline of written submissions filed 2 August 2019 at par 28.
Turning then to the relevant surrounding circumstances, the defendant makes three points. First, the plaintiff had operated the business for some years with an annual revenue averaging $1.6 million for the preceding four years. Second, the business had relied on Mr Reilly's individual expertise for many years and the defendant required Mr Reilly to agree to work full time as an employee of the business for a period of two years. Third, the defendant was unwilling to pay the purchase price asked by the plaintiff without some form of tangible assurance from the plaintiff that the market existed to enable the business to increase its annual revenue and sustain the revenue growth.[4]
[4] Defendant's outline of written submissions filed 2 August 2019 at par 35.
Putting these three factors together, the defendant says it is clear the Agreement anticipated growth of the business by 25% over a period of two years. That in turn leads to the conclusion it was the 2019 financial year which was important. It was the end point of the anticipated growth. In support of this proposition, counsel referred to the Expression of Interest dated 10 March 2017. It was submitted two paragraphs in particular were relevant:
H.Provisions
(iii)…
(f)A contingent deferred consideration of AU$150,000 will be only payable after a period of two (2) years based on the business achieving a minimum revenue total growth of 25% from an actual bae of AU$1.6 million. This represents an additional AU$400K in revenue in Year 2 …;
(g)The details in H(iii) will be detailed in the official offer and contract and agreed by both parties' (emphasis added).[5]
[5] Attachment DL-4 to the affidavit of David Frederic Lauga sworn 27 May 2019 at pages 51 – 55.
On balance, I am satisfied the interpretation of the contract contended for by the plaintiff should be accepted. What the contract seemed to anticipate was a growth in the turnover of the business. Both parties accept that proposition. The aim was to achieve the growth within a 12 month period. Both parties also accept that proposition. In my view, it flows logically that if over a 12 month period a turnover of more than $2 million was achieved, then the aim of the contract was satisfied and the deferred consideration became payable. In reaching that conclusion I have been guided by two considerations. First and foremost, the wording of the clause itself. It seems to me to anticipate the growth so that turnover was more than $2 million for a 12 month period and the cut‑off point of June 2019 was a temporal limitation rather than a temporal stipulation.
Looking at the surrounding circumstances, particularly the Expression of Interest, is of limited value. But insofar as it offers a guide, it seems to me consistent with the conclusion I have reached. That is the second consideration. What was important was the achieving of the $2 million turnover figure. That turnover had to be reached at some point – that point not necessarily being the end of the 2019 financial year. While the position contended for by the defendant has some force the surrounding circumstances suggest the interpretation proposed by the plaintiff.
Having reached that conclusion I will give the parties the opportunity to consider the form of the orders and what orders should be made with respect to costs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DG
Associate to Master Sanderson
26 SEPTEMBER 2019