XCB Pty Ltd v Creative Brands Pty Ltd

IN THE SUPREME COURT OF VICTORIA	Not Restricted
AT MELBOURNE COMMERCIAL AND EQUITY DIVISION

No. 2047 of 2005

XCB PTY LTD & ANOTHER	Plaintiffs
v
CREATIVE BRANDS PTY LTD	Defendant

---

JUDGE:	WHELAN J
WHERE HELD:	Melbourne
DATE OF HEARING:	5, 6, 10, 11 and 12 October 2005
DATE OF JUDGMENT:	26 October 2005
CASE MAY BE CITED AS:	XCB Pty Ltd & Anor v Creative Brands Pty Ltd
MEDIUM NEUTRAL CITATION:	[2005] VSC 424

CONTRACT – business sale and purchase agreement – rectification – unilateral mistake – knowledge of party benefiting from mistake – whether mere knowledge of mistake and failure to correct is sufficient for rectification.

Leibler v Air New Zealand Ltd (No. 2) [1999] 1 VR 1, applied.

APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mr T.J. Walker	Phillips Fox
For the Defendant	Mr P. Solomon	Deacons Lawyers
HIS HONOUR:

Introduction

By a business sale and purchase agreement ("the Agreement") entered into on 25 November 2004, the first plaintiff, XCB Pty Ltd then named Creative Brands Pty Ltd, and the second plaintiff, sold a business to the defendant ("Creative Brands") then named Creative Brands (Australia) Pty Ltd. The business sold was a business of distributing, marketing and wholesaling cosmetics and other products including products marketed under the name Australis and under the name Le Tan.
The plaintiffs issued this proceeding claiming that certain sums were owed to it pursuant to the terms of the Agreement.
Creative Brands denies liability for the amounts claimed by the plaintiffs and counterclaims for amounts allegedly owed to it. It also alleges that it is entitled to have the Agreement rectified. On 2 September 2005 I ordered pursuant to Rule 47.04 that the Creative Brands’ claim for rectification be heard and determined separately from, and in advance of, the determination of all other issues between the parties. The trial of the rectification claim began on 5 October 2005. I reserved my decision on 12 October 2005.
The clause of the Agreement which Creative Brands seeks to have rectified is clause 16. Under that clause Creative Brands assumes liability for returns, discounts, credits, rebates and like concessions in relation to a variety of designated products. Creative Brands contends that the clause ought to have been limited to one particular type of product, being what it refers to as “promotional stock”. In its counterclaim as originally filed it sought rectification on the basis of a common mistake of fact or a unilateral mistake on its part of which the plaintiffs were aware. On the last day of the hearing Creative Brands amended its counterclaim so as to remove reliance upon common mistake. Its claim to rectification is accordingly limited to a claim based upon a mistake on its part which, it is alleged, the plaintiffs were aware of, and which entitles it, in the circumstances, to rectification.
Legal Principles
Counsel for both parties adopted, with one qualification or difference to which I will refer, the exposition of the principles applicable where rectification is sought on the basis of unilateral mistake set out in the judgment of Kenny JA in Leibler v Air New
Zealand Limited (No 2).[1]
[1] [1999] 1 VR 1. The other two Judges of the Court, Winneke P and Phillips JA, were in "substantial agreement" with Kenny JA: see [11].
The fundamental principles, as summarised by her Honour, are the following:[2]
[2] Ibid [36].

(1) Where a party mistakenly apprehends that an agreement contains a provision
that it does not contain; and
(2) the other party knows of the omission and that it is due to a mistake; and
(3) the party with knowledge of the mistake lets the mistaken party remain under the misapprehension and concludes the agreement in circumstances where equity would require the party aware of the mistake to take some step or steps, depending on the circumstances, to bring the mistake to the mistaken party's attention; then
(4) the party aware of the mistake will be precluded from relying on the mistaken
party's execution of the agreement to resist rectification.

Other relevant principles which emerge from Kenny JA's judgment are the following:

(1)

Where parties have engaged in protracted negotiations and have been assisted by solicitors, and have then executed a comprehensive, or apparently comprehensive, agreement, that agreement will be taken to represent their intentions unless the contrary is established by "convincing proof."[3]

(2)

A mistake which might entitle a party to rectification is a mistake which results in a document the contents of which do not conform to the intentions of the relevant party at the date of execution. Rectification will not be available where the mistake is as to the effect, or financial implications, of the terms rather than as to their content.[4]
(3) The relevant mistake is to be found in the "mind of the person entrusted with
making the … agreement".[5]
(4) It is not necessary that the exact form of words which embodies the "true"
intention be established.[6]
[3] Ibid [49], and see also [38] and [73].
[4] Ibid [70].
[5] Ibid [59].
[6] Ibid [73].

Kenny JA's judgment also discusses the possibility of a difference between the United Kingdom and Australia on the issue of whether actual knowledge of the mistake is required or whether something less may suffice. In Taylor v Johnson[7] the majority of the High Court suggested that an awareness that circumstances exist which indicate a party is entering into a contract under a serious mistake or misapprehension is sufficient. Kenny JA did not find it necessary to resolve this suggested possible difference, and, for reasons which will become clear, it is also unnecessary for me to seek to resolve this issue.
[7] (1983) 151 CLR 422, 432 (Mason ACJ, Murphy and Deane JJ).
Counsel for the parties before me did differ in their submissions in relation to one aspect of the principles set out by Kenny JA. Counsel for Creative Brands submitted that Kenny JA's judgment meant that a non-mistaken party's knowledge of the existence of the mistake and a failure to correct it were, without more, sufficient to entitle a mistaken party to rectification. Counsel for the plaintiffs submitted that this was not correct and that something more than knowledge of the mistake and a failure to correct was required.
It seems to me that something more than mere knowledge of the mistake and a failure to correct is required. In Leibler itself the case put against the appellants was that they had "deliberately refrained" from drawing the mistake to the mistaken party's attention.[8] Kenny JA referred to the circumstances of the Leibler case as being "unusual" and "special".[9] Amongst the circumstances which existed in Leibler, and which Kenny JA referred to in this context, were the fact that the executed agreement was "completely at variance" with the prior discussions, the considerable complexity of the drafting problems in the context of which the mistake occurred, the "well known" fundamental importance of the deleted provision in that case to the mistaken party, and the closeness of the relationship which the agreement in question there sought to bring about. I do not consider that Kenny JA's judgment can be interpreted, as counsel for Creative Brands submitted, as suggesting that mere knowledge of the mistake and a failure to correct are in themselves sufficient. It seems to me that Kenny JA set out the applicable principle in the following passage:
"In some circumstances, as in the special circumstances of this case, it may be enough that the non-mistaken party chooses to leave the mistaken party under the misapprehension in executing the agreement."[10] [emphasis added]
Mere knowledge of a mistake and a failure to correct will be sufficient only "in some circumstances", and those circumstances will be "special." The circumstances must be such as to render it unconscionable for the non-mistaken party to rely on the terms entered into by the mistaken party.
[8] [1999] 1 VR 1, [65].
[9] Ibid [67] and [68].
[10] Ibid [68].
Sequence of Events
Creative Brands' acquisition of the business was, in part, a management buy-out. The persons associated with the buyer, Creative Brands, who were involved in the matters which are the subject of this rectification claim are Mr Bruce Wilson, who was chief executive officer of XCB Pty Ltd and is now managing director of Creative Brands, and Mr Stephen Mason, a person introduced to the business by Mr Wilson. The sellers were represented in the negotiations by Mr Graham Smorgon, a director of each of the plaintiffs, and by Mr Ian Kiers who was employed by a related company of the plaintiffs.
The commercial negotiations prior to 25 November 2005 were substantially conducted between Mr Mason on the one hand and Mr Smorgon and Mr Kiers on the other. Each side had lawyers involved. Deacons acted on behalf of Creative Brands. The solicitor there with responsibility for the matter was Mr Robert Sultan. Phillips Fox acted on behalf of the plaintiffs. The solicitors responsible for the matter there were Mr Richard Moshinsky and Ms Cynthia Sica.
All of the participants to whom I have referred gave evidence before me. Creative Brands also called evidence from Mr Maurice Grasso who was chief financial officer of XCB and is now an accountant employed by Creative Brands.
The two plaintiffs were treated as being indistinguishable in the evidence before me. They were usually referred to together as "XCB" and I will hereafter simply refer to XCB as incorporating both of them.
The negotiations for the acquisition of the business extended over many weeks. A draft agreement was drawn up progressively by the solicitors and was in substantially final form by 24 November 2004. The parties met at the offices of Phillips Fox, the solicitors for XCB, on 25 November 2004. On that day the eventual terms of the now contentious clause 16 were negotiated. The events of that day are the critical events in relation to Creative Brands' claim to rectification, but in order to understand what occurred on that day it is necessary to briefly describe what had gone before.
Negotiations prior to 25 November 2004
There were a number of drafts of the proposed agreement circulated amongst the solicitors and the relevant officers of the parties prior to 24 November 2004. These drafts contained a specific provision, initially clause 15 and then clause 16, which regulated liability for returns, discounts and markdowns of promotional stock. Promotional stock was stock that was not part of the business' basic product lines; an example given was Christmas gift packs. It was anticipated that retailers would seek discounts or markdowns in relation to this promotional stock and that there would be a significant rate of returns. Broadly, prior to 24 November 2004 the proposed draft agreements dealt with the issue by requiring Creative Brands as buyer to obtain XCB’s approval prior to agreeing to any discount or markdown and that XCB would be liable for costs associated with such approved discounts or markdowns. In relation to returns the provision broadly required Creative Brands to purchase undamaged returned promotional stock at cost and required XCB to cancel the invoice to the customer in relation to that stock. These provisions reflected the fact that the manner in which these issues were dealt with was important not only to the parties’ dealings with each other, but also to Creative Brands' ongoing relationship with the customers.
By 24 November 2004 the parties and their solicitors were addressing what was described as "Draft 4.0" of the proposed agreement. A draft of the agreement produced early in the morning of 24 November 2004 contained two important new qualifications affecting clause 16. The first was that the entire clause was marked for further consideration by the inclusion of the following notation:
"This clause 16 is subject to change once all outstanding issues are
resolved by the parties."
The second was that a new provision, clause 17.6, was introduced to specifically regulate the position in relation to rebates concerning three customers, Priceline, Price Attack and Target. This provision was not limited to promotional stock, but governed all stock.
During the course of 24 November 2004 a further alteration to clause 16 was proposed by Mr Sultan, the solicitor for Creative Brands. Up until that time clause 16 had dealt exclusively with promotional stock. At Mr Sultan’s suggestion a new sub-clause headed "Other Returns" was included. The sub-clause read as follows:
"16.8 For the avoidance of doubt, despite any other provision of this agreement, the Buyer is not obliged to take or otherwise accept returns of Products except as contemplated by this clause 16."
The introduction of proposed clause 16.8 expanded for the first time the ambit of clause 16 beyond promotional stock, although it did so merely for the "avoidance of doubt."
During the course of 24 November a further suggestion was made for an addition clause 16.8. This suggestion was embodied in the first draft of the proposed agreement which was circulated on 25 November 2004, and which I quote below.
At 6.00 pm on 24 November 2004 a meeting was held at Phillips Fox attended by Mr Ian Kiers, Mr Graham Smorgon, and Mr Richard Moshinsky on behalf of XCB, and by Mr Stephen Mason, Mr Bruce Wilson, and Mr Robert Sultan on behalf of Creative Brands. By the end of that meeting the parties believed that they had substantially resolved all outstanding issues. Mr Wilson and Mr Kiers had met together separately in order to finalise a document which could be attached as a schedule to the agreement and which designated the stock which was to be treated as promotional stock.
Later that evening Mr Kiers, Mr Moshinsky and Mr Smorgon went to dinner with Mr Wilson. Mr Smorgon’s evidence was that at some stage that evening he said to Mr Wilson words to the effect that the buyer should take on the liability for credits relating to all stock because XCB would only give credits to customers who were legally entitled to claim the credits without regard to the ongoing relationship with the customers. Mr Moshinsky also gave evidence that he recalled this comment being made by Mr Smorgon, Mr Kiers, or both. Mr Wilson did not recall it, neither did Mr Kiers.
The evidence in the trial before me focused very substantially on the events of 25 November 2004. Because of the controversy surrounding those events I acceded to an application on behalf of Creative Brands that the witnesses give their evidence-in- chief orally.
The parties and their solicitors met that day between approximately 11.00 a.m. and approximately 3.00 p.m. The meetings concluded with the execution of the Agreement. There were exchanges between the solicitors, and some other relevant events, prior to the meeting commencing at approximately 11.00 am. There was an initial meeting with all the relevant participants (Smorgon, Kiers, Moshinsky and Sica for XCB, and Mason, Wilson and Sultan for Creative Brands) for some time. There was then a short meeting between Mr Smorgon and Mr Mason alone. There were then a series of further joint meetings which culminated in the execution of the Agreement.
25 November – Events Prior to the Meeting
Early on the morning of 25 November 2004 Mr Moshinsky amended the draft agreement as a consequence of the discussions on 24 November and circulated a draft described as "Draft 5.0". In this draft, clause 16 was divided into two parts. The first part dealt with promotional stock. The second part was headed "Other returns, discounts and markdowns", and read as follows:
"16.7 For the avoidance of doubt, despite any other provision of this agreement, the Buyer is not obliged to take or otherwise accept returns of Products except:
16.7.1 as contemplated by this clause 16; or
16.7.2 if accepted for return by the Buyer, in which case any liability, cost or expense associated with the return of such Products shall be as Assumed Liability under this agreement.

16.8 Despite any other provision of this agreement, other than clause 16.3, the Buyer will not be liable for any discounts or mark downs agreed by the Sellers prior to Completion."

An "Assumed Liability" was a liability to be undertaken by Creative Brands. Thus, in relation to stock other than promotional stock, Creative Brands was liable if the stock was returned and accepted for return by Creative Brands.
Mr Sultan immediately commented upon Mr Moshinsky’s revised draft by e-mail. In relation to clause 16 his only comment was to point out the typographical error in clause 16.7.2 (cl.16.6.2 in the "clean" version without tracked changes) whereby "as" ought to have been "an".
Another event of significance occurred prior to the meeting commencing on 25 November 2004. Mr Grasso (then CFO of XCB) undertook a calculation of the extent of the potential liability represented by markdowns on promotional stock and forwarded that calculation by email to Mr Ian Kiers, Mr Stephen Mason, and Mr Bruce Wilson at 10.19 am that morning. Mr Kiers went to the offices of Phillips Fox just after 10.00 am that morning. His evidence was that he did not have the email, and had not seen it, prior to the meeting between the parties commencing at 11.00 am. I accept that. Mr Mason and Mr Wilson gave evidence that they did have the email when the meeting commenced at 11.00 am. I also accept that.
Mr Grasso's email set out a calculation which culminated in a "Nett Markdown Cost to CB" in relation to promotional stock of $173,000.
25 November 2004 – Initial Meeting between the Parties
Mr Smorgon, Mr Kiers, Mr Moshinsky and Ms Sica on behalf of XCB, and Mr Mason, Mr Wilson and Mr Sultan on behalf of Creative Brands met at approximately 11.00 a.m. on 25 November 2004. They all gave evidence of what was discussed at this initial meeting. None of them have notes which are of any relevant assistance.
Counsel for Creative Brands in his final submission submitted that the principal solicitor for XCB, Mr Moshinsky, was a witness whose recollection was "obviously truthful and precise". His evidence was that to the best of his recollection the issue of an alternative clause 16 was first raised by Mr Mason and his recollection was that it concerned all stock. Mr Mason and Mr Wilson said that the discussion concerned only promotional stock. Mr Smorgon and Mr Kiers said the discussion related to all stock. Mr Mason and Mr Wilson recalled specific reference being made to Mr Grasso's email. The witnesses called on behalf of XCB had no recollection of any such specific reference.
All of the witnesses recalled that Mr Mason proposed that XCB should make an allowance in favour of Creative Brands of $173,000 in consideration of Creative Brands undertaking the additional liability which was being discussed, whatever that was. Mr Smorgon rejected that proposal but requested that he and Mr Mason discuss it alone in private.
25 November 2004 – Separate Meeting between Mr Smorgon and Mr Mason
The respective groups briefly caucused amongst themselves prior to the separate meeting. Mr Kiers rang Mr Grasso and, according to Mr Kiers' evidence, simply asked him whether the $173,000 figure was one he had calculated. His evidence was that Mr Grasso confirmed that he had. He said that Mr Grasso told him of the email he had sent earlier that morning and that he (Mr Kiers) told him he had not seen it. Mr Kiers' evidence was that he did not see that email until later in the afternoon after the Agreement had been executed. Both Mr Smorgon and Mr Kiers maintained that prior to execution of the Agreement they did not know that the figure of $173,000 put to them by Mr Mason was a calculation which had been made by reference only to promotional stock.

Mr Smorgon and Mr Mason then met together alone. In evidence before me Mr Smorgon maintained that they discussed an "all in" resolution of the issue of returns, credits and the like in relation to all stock. Mr Mason maintained the discussion was expressly confined to promotional stock. They agreed on a figure of $160,000 for whatever liability it was they were discussing. Payment by XCB was to be deferred until 30 June 2005 when a deferred goodwill payment fell due from Creative Brands.
25 November 2004 – Joint Meeting Resumes
Mr Smorgon and Mr Mason returned to the joint meeting and one or other of them announced a resolution of the issue. Mr Moshinsky left shortly thereafter to begin drafting a replacement clause. Consistently with his evidence that he was of the belief that the arrangement involved all stock, the clause which Mr Moshinsky brought back to the meeting covered all categories of stock, not merely promotional stock.
Mr Mason gave evidence that upon his return from his separate meeting he made a note in pencil on a settlement document which he had with him. The note reads:
"NB: $160,000 allowance for promotional returns to be offset against
deferred goodwill of $250,000 due on 30 June 2005."
Creative Brands discovered this document for the first time in a second supplementary list of documents dated 16 September 2005. Mr Mason's evidence was that it was not discovered before then as he "must not have thought it was all that relevant."[11] Apparently no person other than Mr Mason had seen this document prior to 16 September 2005. As counsel for Creative Brands pointed out in his final submission, it was not put to Mr Mason that he had concocted this entry at some later time.
[11] Transcript 137.
Mr Moshinsky returned to the meeting with an entirely new draft of clause 16.[12] The redraft removed the separate treatment of promotional stock and other stock and had a single heading: "Product returns and credits". Its terms are clear and unambiguous on the key issue. It is not confined to promotional stock.
[12] P1, CB 3/1305.
The liability which this first re-draft provided that Creative Brands was to assume was drawn in very wide terms. Mr Moshinsky's evidence was that when the solicitor for Creative Brands, Mr Sultan, read this draft he expressed the view that it was "over the top". Even accepting in full the evidence given before me on behalf of XCB, this observation by Mr Sultan had substance.
Mr Mason's evidence was that he saw Mr Sultan reading the clause and that Mr Sultan became upset and said that it was not what had been agreed. Mr Mason then said in his evidence:
"there was some – a lot of debate about the breadth of the liabilities that
[13] Transcript 89.
we had assumed in the redrafted clause."[13]
Mr Wilson's evidence about his own consideration of the redrafted versions of clause 16 was difficult to follow. Eventually the position he adopted in cross- examination was that he did not see any of the redrafts of clause 16 on 25 November.[14]
[14] Transcript 175.
For present purposes it is sufficient to note that, if Mr Mason's evidence is accepted, there was "a lot of debate" about this first redraft of the clause. The terms of this draft are such that in my view it would have been impossible to debate it in any meaningful manner whilst remaining unaware that it covered stock beyond promotional stock.
One aspect of the first redraft of clause 16 which caused particular consternation was that the ambit of the assumed liability would have included product liability to end users.
Mr Moshinsky produced a second redraft of clause 16.[15] His evidence was that he handed out copies of this redraft to "all parties in the room". This redraft confined the ambit of the liability being assumed considerably when compared to the first redraft. Like the first redraft, even the most cursory reading of this redraft reveals that it covers stock beyond promotional stock. Clause 16.2 of this second redraft provides:
"In this clause 16, a reference to goods includes promotional products, basic stock, special stock, deleted stock, defective goods, retail stands, packaging, peripherals or any other type of goods sold or delivered by the Sellers to any Customer before Completion in the ordinary course of business."
[15] P1, CB 3/1300.
Mr Moshinsky's evidence was that Mr Sultan generally accepted this redraft. There were some alterations made to it.
One copy of this second redraft, which is in evidence, contains Mr Mason's own handwriting.[16] This draft clause had five sub-clauses. Next to four of them Mr Mason has placed a tick. Next to one of them he has made two handwritten notations. In cross-examination Mr Mason conceded that he ticked the sub-clauses so as to indicate his approval. One of the sub-clauses he ticked was clause 16.2, which I have quoted above. When asked about this he said in evidence that he had a lot of other matters on his mind, including finance, insurance, the need for a stocktake, and so on, and that his mind was "focusing on other things".
[16] P1, CB 1/45.
25 November 2004 – Final Changes and Execution
Mr Moshinsky again left the meeting and prepared execution copies of the agreement. The final version of four of the five sub-clauses of the redrafted clause 16 are the same as the sub-clauses which Mr Mason had ticked so as to indicate his approval. One sub-clause was altered, being sub-clause 16.4, and that sub-clause was altered in a manner consistent with the handwritten notations Mr Mason had made next to that sub-clause.
Mr Moshinsky's evidence was that prior to the preparation of final execution copies he and Mr Sultan discussed consequential changes which would need to be made given the new clause 16. The final version of the Agreement which was executed contains the re-drafted clause 16 with one last handwritten amendment made at Mr Sultan’s request.
Other late changes were made to the Agreement, and submissions were made to me as to whether those changes were consistent or not consistent with an intention that clause 16 should govern all stock as opposed to simply promotional stock. Generally, as one would expect since Mr Moshinsky was the draftsperson, the changes reflect a move to a position where clause 16 covered all stock. The most obvious example of that is the removal of schedule 14, which was originally intended to comprise the agreed document designating what stock was promotional stock. Submissions were made concerning the significance of an alteration to clause 7.4.3 and concerning the removal of a proposed clause 29 which had been suggested earlier in the day. I do not consider that those matters are of significance.
At the conclusion of Mr Mason's cross-examination I asked him how it is that he read clause 16 in its final version and yet remained of the view that the relevant part of the Agreement Creative Brands was entering into concerned only promotional stock. He said:
"Well, when I read it, I realised that it had been greatly expanded and really I should have taken an issue with it, particularly when it's mentioning stands and other things because it was never intended to be that broad and it's clearly my mistake, but a thought that had gone through my mind at the time was that we didn't have a problem with basic stock …
…even though that wasn't the agreement, with basic stock there was no issue of returns and mark-downs. It didn't affect the integrity of the $160,000 …
I'm thinking, as a businessman, in dollars and cents, it wasn't going to have any impact whether the seller or buyer had to approve the terms of basic stock, the same guidelines would be applied because the same staff were, you know, exercising, you know, that function because all the employees transferred over. So to me it just wasn't a big issue and even though I thought, well, it's too broad, I just thought we want to get this deal done and that's not going to affect things monetarily."[17]
The following interchange between Mr Mason and I then occurred:
"Should I then understand that you saw that stock other than promotional stock was included but you thought it would have no financial effect, is that correct?---That is correct."[18]
A little later I asked whether the evidence he had given about basic stock applied to the deleted stock and the stands and so on and he indicated that those issues had "slipped through to the keeper".[19]
[17]             Transcript 140-141.
[18]             Transcript 141.
[19]             Transcript 150-151.
All of the relevant negotiations on 25 November 2004 occurred whilst Mr Mason and Mr Wilson had with them an experienced commercial solicitor, Mr Sultan. In relation to most issues of controversy Mr Sultan's evidence was that he could not recall. He said that his normal practice was to gain an understanding of what the clause ought to say and to then sit down with the client and go through it and see that it did say that. He agreed that if the agreement Mr Mason had reached with Mr Smorgon was one which was confined to promotional stock then he had made a serious error. He also said that it was possible that he had been instructed that clause 16 should apply to all stock and added:
"I mean, its pretty hard to argue against the clause's plain meaning or
plain words."[20]
[20] Transcript 219-220.
Events After 25 November 2004
Subsequently disputes arose between the parties as to the extent of the liability under clause 16. Mr Mason wrote a letter to Mr Kiers addressing this issue on 18 March 2005. Before he wrote the letter he had a conversation with Mr Sultan. In its relevant part the letter reads as follows:
"At the time the Sale Agreement was negotiated, it was clearly understood by all concerned that Creative Brands would only be responsible for discounts, credits, rebates or mark downs where goods particularly promotional stock had been returned on or after 1 December 2004. As you well know, our liability was not to extend to returns agreed to by XCB prior to 1 December, 2004 nor to credits, rebates, discounts or mark downs where the goods were not returned at all. All discussions and agreements were predicated on a physical return of goods."
This letter is not consistent with the express terms of clause 16 of the Agreement. It is also inconsistent with Mr Mason's evidence before me as to what was the agreement he reached with Mr Smorgon. The letter is inconsistent with the proposition that Mr Mason executed the Agreement in the belief clause 16 was confined to promotional stock. Mr Mason's explanation for this inconsistency was that at the time he wrote the letter he was under a lot of pressure and "so I decided to get off a quick note without properly thinking through the issues and it's just clearly a mistake." [21]
[21] Transcript 151-152.
Factual Conclusions as to Mistake
It is not necessary to decide what was said at the dinner on 24 November, what was said at the meeting between the parties prior to the private meeting between Mr Smorgon and Mr Mason on 25 November, or what was said between Mr Smorgon and Mr Mason in the private meeting. It is not necessary to decide these issues because I have reached these conclusions:

(1)

Mr Mason read each of the redrafts of clause 16 and the final version of clause 16. I cannot accept that having read those documents he remained of the belief or understanding that clause 16 was confined to promotional stock.

(2)

On the balance of probabilities, my conclusion is that Mr Sultan followed his normal practice and acted in accordance with his instructions. It seems to me that this is far more likely than the alternative proposition that he made an error of truly incredible proportions by negotiating a clause which any lay person reading it would immediately appreciate was not confined to promotional stock when his instructions were that it should be so confined.

(3)

Mr Mason made a mistake. His mistake was that he did not appreciate that broadening the clause would have financial implications. He made no mistake about what the clause provided for, his mistake was as to what the financial consequences of that provision were likely to be.

These conclusions are fatal to Creative Brands' claim for rectification because there was no relevant mistake at all. In recognition of the careful submissions of counsel for Creative Brands, I will briefly deal with the issues which would have arisen had I not reached this conclusion.
Other issues
Plaintiffs' Knowledge of any Mistake
Assuming, contrary to my finding, that Mr Mason had made a relevant mistake in that he had mistakenly believed that clause 16 was limited to promotional stock, Creative Brands submitted that I ought to conclude that the plaintiffs knew of this mistake when the Agreement was executed. The submission in this respect was principally directed at Mr Smorgon's knowledge, although reliance was also placed upon the knowledge and activities of Mr Kiers.
In relation to Mr Smorgon it was submitted that he must have known that the $173,000 could not possibly have been a genuine estimate of the proposed liability in relation to all stock. Two factors were relied upon. The first was what was submitted to be Mr Smorgon's knowledge of the accounts of the business which, it was submitted, would have inevitably led him to the conclusion that the $173,000 could not be an assessment of the liability in relation to all stock. The second was the calculation undertaken by Mr Grasso and circulated in his email in the morning of 25 November, and the evidence of Mr Mason and Mr Wilson that that calculation was expressly and specifically discussed between the parties at the initial meeting that morning.
In relation to Mr Kiers’ knowledge, and inferentially in relation to Mr Smorgon's knowledge as well, counsel for Creative Brands relied upon Mr Kiers’ concession that he knew there was information in the accounts which could have been used to calculate the potential liability, and upon a submission that Mr Kiers’ account of his conversation on the morning of 25 November with Mr Grasso in which he said he simply asked him whether he had calculated the $173,000 without further enquiry was simply not believable.
Creative Brands' submission was that on XCB's side, the relevant personnel fell into two categories. In the first category were Mr Smorgon, and possibly Mr Kiers as well, who knew that the proposed clause was not confined to promotional stock, and who also knew that Mr Mason was mistaken in relation to that matter. In the second category were Mr Moshinsky and Ms Sica, who knew that the clause was not confined to promotional stock but who did not know that Mr Mason was mistaken about that matter. It was put that they did not know it because they were not party to the private discussion between Mr Mason and Mr Smorgon, nor were they party to Mr Kiers’ phone conversation with Mr Grasso.
The submissions concerning XCB's knowledge of Mr Mason's alleged mistake face a number of difficulties.
First, the submission concerning the accounts, and Mr Smorgon's knowledge of them, was primarily founded upon a monthly management report of November 2004. There was no evidence that this report was available to the parties as at 25 November 2004 and there was no evidence that any of the relevant participants had read it. The date stamp on the copy of the report admitted into evidence suggests it was not available until January 2005.
In Mr Smorgon's cross-examination he was taken to the debtors' summary in the November monthly management report. This summary set out, amongst other things, a series of monthly provisions for rebates and returns. The provision for rebates for the month of November 2004 was $564,000. Mr Smorgon's evidence was that he did not recollect having previously seen the relevant page.
Implicit in Mr Smorgon's cross-examination, and explicit in the final submissions, was the suggestion that Mr Smorgon would have known that the liability under clause 16 as drafted could not possibly have been anything like $173,000, but the factual basis for this submission was not established by the evidence. There was no evidence that the particular document relied upon was available at the time, and it seems to me to be likely that it was not. Further, there are unresolved problems in drawing any meaningful conclusion from the provisions in the monthly management report. First, the provisions diverge significantly over the months from June 2004 to November 2004, falling to as low as $93,000 in July, and do not bear any apparent direct relationship to the level of gross debtors. Second, as Mr Smorgon pointed out, the particular entries are provisions. Clause 16 deals with legal obligations. The concepts are not identical. Finally, in order to reach a conclusion of the kind suggested by counsel for Creative Brands, it would have been necessary to deduct from the provisions the rebates separately dealt with in clause 17.6. There was no evidence as to what that deduction would be.
In relation to the Grasso email and the discussion between Mr Kiers and Mr Grasso, again the evidentiary basis for the conclusion contended for by counsel for Creative Brands was not established. Mr Grasso himself had no recollection of any discussion with Mr Kiers in the morning of 25 November 2004. He did give evidence of discussions in the evening of 24 November 2004 but his recollection of those discussions was imprecise. Neither Mr Moshinsky nor Ms Sica had any recollection of the Grasso email being discussed in the initial meeting. In all the circumstances, I cannot conclude that Mr Kiers, and through him Mr Smorgon, had knowledge of the Grasso email, and of the calculation which it annexed, when the discussions concerning clause 16 were undertaken.
Finally, counsel for Creative Brands was driven to submit that whilst Mr Smorgon, and perhaps Mr Kiers, had knowledge of Mr Mason's mistake, Mr Moshinky and Ms Sica did not. He was driven to this position because he did not submit that Mr Moshinsky and Ms Sica’s evidence should be rejected. I cannot accept this differentiation.
Creative Brands' case as to XCB's knowledge of the alleged mistake suffered from the fact that the mistake alleged, in the light of the express terms of both of the redrafted versions of clause 16 and of the final executed version, in the context of the discussion that occurred in relation to those drafts, and in the context of Mr Sultan's involvement as solicitor for Creative Brands, is extraordinary. It is difficult to prove knowledge of such an extraordinary mistake.
If I had found that Mr Mason had made the mistake that he believed clause 16 was limited to promotional stock, I would not have found that any of the representatives of XCB had knowledge of that mistake at the time the Agreement was executed. If less than actual knowledge is sufficient, I would not have found that they were aware of circumstances indicating a mistake had been made.
Liability for Returns and the Rectification Sought
As I have indicated, by early on the morning of 25 November 2004 clause 16 was in two parts, one part dealing with promotional stock, and the other part dealing with other returns, discounts and markdowns. The second part (clauses 16.7 and 16.8 in the first draft circulated that morning – 16.6 and 16.7 in the draft without tracked changes) provided that Creative Brands was liable for returns in relation to all types of stock if Creative Brands accepted that stock for return.
In the course of the proceeding it became apparent that if the rectification sought in the counter-claim was granted so that clause 16 was confined to promotional stock, the absence of the provision concerning return of other stock, which had existed in the draft circulated first thing that morning, would mean the rectified agreement would not reflect Creative Brands’ version of all aspects of the alleged consensus. During final submissions, counsel for Creative Brands sought and obtained leave to amend so as to vary the rectification sought in such a way that clause 16 would be confined to promotional stock and, in addition, the provisions about other returns, which were in the draft circulated early in the morning of 25 November 2004, would be reintroduced.

Counsel for Creative Brands submitted that if I were minded to find in favour of Creative Brands I should not refuse relief because of difficulty in formulating exactly how the provision should be rectified. I accept that submission, but the problem here is more fundamental. The difficulty Creative Brands' counsel confronted in relation to this issue arose because clause 16, previously separately dealing with credits on promotional stock and with returns of all stock, as a result of the negotiations on 25 November, dealt with credits and returns on all stock in one set of provisions. The disappearance of the provisions which had existed dealing with other returns was, like the disappearance of schedule 14, a consequence of the decision to deal with all stock in the one set of provisions. The problem addressed by the amended relief in the counter-claim was not so much a problem as to the exact formulation of the relief sought, as it was yet another indication of the fundamental deficiencies in the claim itself.
Conclusion
Accordingly, my conclusion is that Creative Brands' claim to rectification must fail. I will hear the parties on the orders necessary to give effect to these reasons, on issues of costs, and on further directions to deal with the other issues in the proceeding.

[2005] VSC 424

26 October 2005