Yara Australia Pty Ltd v Oswal

[2014] HCATrans 49

[2014] HCATrans 049

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth   No P45 of 2013

B e t w e e n -

YARA AUSTRALIA PTY LTD ACN 076 301 221

Applicant

and

RADHIKA OSWAL

First Respondent

PANKAJ OSWAL

Second Respondent

YARA PILBARA HILDINGS PTY LTD ACN 097 138 353 (FORMERLY BURRUP HOLDINGS LIMITED ACN 097 138 353)

Third Respondent

TOR HOLBA AND VINOJIT AMBALAVANER

Fourth Respondents

YARA PILBARA FERTILISERS PTY LTD ACN 095 441 151 (FORMERLY BURRUP FERTILISERS PTY LTD ACN 095 441 151 (RECEIVERS AND MANAGERS APPOINTED))

Fifth Respondent

RAMESH SODUM

Sixth Respondent

IAN CARSON AND DAVID McEVOY AND SIMON THEOBALD

Seventh Respondents

Application for special leave to appeal

HAYNE J
BELL J
GAGELER J

TRANSCRIPT OF PROCEEDINGS

FROM CANBERRA BY VIDEO LINK TO PERTH

ON FRIDAY, 14 MARCH 2014, AT 12.09 PM

Copyright in the High Court of Australia

____________________

MR J.C. SHEAHAN, QC:   May it please the Court, I appear with my learned friend, MR R.W. DOUGLAS, for the applicant (instructed by Clayton Utz Lawyers)

MR P. DURACK, SC:   May it please the Court, I appear with MR A. SHEARER, for the first respondent (instructed by Norton Rose Fulbright Australia)

MR J.H. KARKAR, Q.C:   May it please the Court, I appear with MR K.J.M. DE KERLOY, for the seventh respondents (instructed by Herbert Smith Freehills)

HAYNE J:   There is submitting appearance by the second to fifth and there is no appearance by the sixth.  I understand, Mr Sheahan, that from page 350 of the application book that there have been attempts at service.

MR SHEAHAN:   Yes, your Honour.

HAYNE J:   Is that right?  Yes.

MR SHEAHAN:   Your Honours, ad hoc implication involves the Court adding to a contract a term that the parties have not expressed.  The Court does that – not by reference to their actual intention but by reference to their presumed intention.  As a consequence, a discipline is necessary, especially where a commercial contract has been reduced wholly to writing.  In Australian law this discipline is imposed, in particular, by two anchors.  One anchor is that the implication must be harmonious with the terms that have been agreed by the parties.  There is an overriding requirement of fidelity to the parties’ expression of their agreement.

A second is that the implication can be justified only if it necessary to give the contract business efficacy.  Reasonableness is not enough.  Together, those two anchors serve the goals of certainty and predictability and give proper deference to party autonomy, to the role of the parties as those most likely to be the best judges of their interests.

The decision of the majority of the Court of Appeal in this matter drags on both those anchors, in our respectful submission.  It drags on the second – the test of necessity – because there was another mechanism readily available to the parties to overcome the difficulty for which the implied term was seen as a solution.  It drags on the first anchor – fidelity to the contract – in three ways.  First, it effectively rendered an expressed term otiose.  Second, it conflicted, really, with the text and structure of an expressed term.  Thirdly, it cut across the evident intent of the parties to conform their arrangements to a pre‑existing contract.

Before explaining why, in our submission, those things are so, may we address immediately what is perhaps the most weighty argument against a grant of special leave in this case?  That submission is that if we be right, the decision below represents nothing more than a flawed application in particular circumstances of well‑established rules – rules, indeed, which the court purported to apply.  This we can say about that submission.  The relevant rules are expressed in terms of standards – business efficacy, in particular, but necessity and consistency are all the language of standards.

Where rules are expressed in terms of standards, then it is the application in particular cases that gives the standards their content and, in particular, the application by intermediate appellate courts.  Now, the process of erosion of rules of this kind can be subtle, but it can be very real.  In your Honour Justice Gageler’s essay with Sir Anthony Mason on the contract, and Justice Finn’s essays on equity you refer to, but Professor Atiyah’s assessment in the early 1980s that in England the judges were paying lip service to the business efficacy rule, and at that time, implying terms on the basis that they were reasonable or reasonably necessary rather than by reference to the orthodox principles.

Now, obviously this Court does not intervene in a matter simply because there has been discerned some movement down what might be thought to be a slippery slope, but when there is a decision as unorthodox as in our submission this one is, by an intermediate appellate court of high standing on an important contract, we are perhaps a fair way down the slope.  Your Honours, if I can turn to the issues.  The facts were not contentious, the company, its subsidiary and all its shareholders were parties to a shareholders deed.  The deed provided for internal governance arrangements that were different from those in the company’s constitution, in particular voting power at board level depended upon levels of shareholding in the company.

The deed also restricted the transfer of shares and it required that any new members of the company execute a deed poll, called a deed of assumption, and the effect of the execution of such a deed was to make the new shareholder a member, a party to, the shareholders deed for all purposes.  It effected a novation, as Justice Murphy in the majority in the Court of Appeal rightly found.  Now, despite the terms of the shareholders agreement, there was a change in the shareholding that was not brought to the knowledge of my client, one of the shareholders, and which did not involve the new members executing a deed of assumption.

That was disclosed to my client on the eve of the execution of a share sale agreement by which my client was acquiring for $141 million an additional 5 per cent interest in the company.  A clause was added to the share sale agreement to cater for this, it is clause 5 and it is the express clause that is in question.  One sees at 272 in the appeal book where it is set out in the reasons of Justice Murphy.  As the trial judge dealt with in, in particular at pages 96 to 97 of the appeal book, the text in the structure of clause 5 disclosed provision for a two stage process.

If one looks at clause 5 on page 272 one can see how this arises, 5(b) in particular, it has two sentences.  The first stage in point of time is defined by the second sentence in clause 5(b).  It provided for an interim arrangement, it commences with the word “until”, in which the Oswals, the new members of the company, were committed to comply with the shareholders deed, but by its terms it gave them no rights – the second sentence.

Justice Murphy, President McLure and the trial judge were all agreed about that.  Justice Pullin alone disagreed.  He held that the phrase, the Oswals “agreed to comply”, meant that Yara became subject to obligations to them.  That view, as I say, was not shared by any of the other members of the court who have considered this.  Now, the second stage of the process created by clause 5 is in the first sentence of 5(b).  It is the execution of documents of joinder and as Justice Martin said at first instance at page 309 of the application book:

the obvious and most viable method for achieving joinder and overcoming privity issues 

his words –

was for [Mr and Mrs Oswal] to individually execute and deliver Assumption Deeds –

as provided for by the shareholders deed itself.  Now, there was an unchallenged finding by the trial judge that that could be done, that is, Mr and Mrs Oswal could execute deeds of assumption immediately with no difficulty and it required the participation of no one else.  Now, President McLure went a little further than the trial judge and held that the execution of the deed of assumption was unequivocally what was called for by clause 5 of the share sale agreement; that is at application book 220, paragraph 178.

Justice Murphy disagreed with that, in particular because as he noted clause 5 does not actually refer to a deed of assumption which you might have expected if it was unequivocally what was intended.  But he could not and did not deny that an available means for Mr and Mrs Oswal to bind themselves in privity in the shareholders deed was to execute the deed of assumption.

BELL J:   Mr Sheahan, just while we are dealing with the differences in reasons, can I take up with you your special leave questions turn on the circumstances in which a term may be implied in an agreement?

MR SHEAHAN:   Yes.

BELL J:   You say at paragraph 11, page 310 of the application book that:

the dispositive reasoning was that of Murphy JA (with whom Pullin JA relevantly agreed . . . ).  Murphy JA found that the SSA contained an implied term –

But, of course, the critical reasoning in Justice Pullin was, as you identified a few moments ago, the construction of the clause in terms of the significance of the word “comply”.

MR SHEAHAN:   Yes.  That is so.

BELL J:   It was, as it were, as a side wind that his Honour said, well, in the event I am wrong about that, I would imply the term.  That rather undercuts the submission that this is a suitable vehicle in which to consider the standard that intermediate courts apply when implying a term, is it not?

MR SHEAHAN:   It is against us, we accept, but, in our respectful submission, the Court will not be detained long by Justice Pullin’s reasoning for this for two reasons in particular.  One is the apparent tension between what he concluded about construction and the text of clause 5.  On his approach, the first sentence of clause 5(b) has no function and he struggled in his reasons even to suggest how as a matter of abundance of caution, it could be conceived to operate.  The second is that the way he described ‑ ‑ ‑

HAYNE J:   Well, is that right?  Why is it not just a further assurances provision?

MR SHEAHAN:   Because it assures on analysis, we think, your Honour, nothing.  In terms it imposes an obligation on the Oswals to execute documents.

HAYNE J:   All documents necessary.

MR SHEAHAN:   Necessary, yes.

HAYNE J:   The hypothesis then must be that a document is necessary.

MR SHEAHAN:   Yes.

HAYNE J:   On Justice Pullin’s construction, would that lead to the conclusion that the execution of a document was not necessary to achieve the particular result in issue?

MR SHEAHAN:   Yes.

HAYNE J:   So, where is the tension?

MR SHEAHAN:   Well, the tension is that it makes – the first point is that it makes the first sentence otiose because it has no ‑ ‑ ‑

HAYNE J:   In this particular operation it may, but wholly otiose?  It is a rather larger and different proposition, I would have thought.

MR SHEAHAN:   Well, we think so, with respect, your Honour, because if the first sentence is designed to achieve an effective joinder with a reference to the possibility of further agreements – which does not need to be referred to, parties can agree with whatever they wish to about whatever they want to whenever they want to – it is operation is to require execution of documents to join.  On Justice Pullin’s construction, joinder was effected by the second sentence.

HAYNE J:   The second sentence is directed to a state of affairs existing until a document has been executed, is that right?

MR SHEAHAN:   Yes.

HAYNE J:   It seeks to equate the state of or the legal obligations of the parties until that event occurs with the state that will be reached when the document is executed?

MR SHEAHAN:   Well, the way his Honour put it ‑ ‑ ‑

HAYNE J:   Forget how his Honour put it, is that an available construction?

MR SHEAHAN:   The available construction, we think – I hope I am answering your Honour, I am not sure that I am ‑ ‑ ‑

HAYNE J:   I might mention it if you are not.

MR SHEAHAN:   I am sure you will.  The available construction on this approach is that by the execution of the share sale agreement itself, Mr and Mrs Oswal acquire all the rights that they would acquire if they executed, for example, a deed of assumption, and they acquire all the burdens that they would acquire if they executed a deed of assumption, by the execution of the share sale agreement itself, by virtue of the operation of the second sentence of clause 5(b).  Now, the first sentence of clause 5(b) then sits there and it says, you are obliged to execute documents, but the execution of the documents has no function.  If no documents are ever executed the “until” and “as if” in the second sentence operate.

HAYNE J:   Well, the proposition has no function is masking what may be an important distinction.  Has no function in altering obligations, or has no function in connection with the obviously commercial desire for parties of this kind and this size and a transaction of this kind to have it in writing.

MR SHEAHAN:   Your Honour, parties can reduce to writing what they want to when they wish to.  On his Honour’s analysis, the first sentence, put at its highest, is a flag.  We may after today get together and agree something more formal.  There is a second problem with it though.  On his approach – and this is the privity problem – the Oswals get all the rights and all the obligations under the shareholders deed.  That is reflected in the order that was made by the Court of Appeal at page 296 to 297.  The bottom of 296:

From the entry of the SSA, Pankaj and Radhika Oswal (Radhika) jointly replaced Pankaj alone as a ‘Shareholder’ –

next sentence:

They held a right to jointly appoint up to three Nominee Directors –

et cetera.  So the orders of the majority had the consequence that by virtue of an instrument executed simply by the shareholders, rights of corporate governance which would bind the companies were given to them.  Going back to where I began, the companies were parties to this agreement, the shareholders deed, and they were parties advisedly.  The shareholders agreement is extracted at some length by the trial judge in his reasons and there are express obligations on the companies in various provisions.  It is in the application book commencing at 132.  Obligations on the companies are expressed, for example, at page 137, clause (g), clause (h), the next page clause (i) and, importantly, at 154 clause 19.2:

Holdings and BFPL undertake to do such things as are necessary to give effect to the terms of this deed –

which would include the new constitutional arrangements concerning the voting power at board level.  Your Honours, the implication, if I can return to that, cuts across the express terms, for the reasons given by Justice President McLure.  It fills a gap that does not exist and it distorts the structure that the parties intended to invoke, as Justice Murphy made plain.  The parties were intending to fit their agreement into the framework of the shareholders deed. 

The framework of the shareholders deed is one in which the companies are parties, advisedly, along with the shareholders.  It becomes a constitutional document.  What they create – what Justice Pullin by his construction, Justice Murphy by his implication is something at odds with the structure, the framework created by the shareholders deed because it involves a side agreement between shareholders to which the companies are not parties, but which for reasons that are obscure their Honours seemed to think, judging by the orders, would affect the companies because of the ability of the shareholders immediately to exercise the powers of corporate governance that were conferred by the shareholders agreement.  Those are our submissions, your Honour.

HAYNE J:   We need not trouble counsel for the respondents.

Resolution of the issues between the parties depended upon the application of undisputed and established principles to the bespoke agreement they had made.  A grant of special leave would tender no question of general principle.  We are not persuaded that the applicant enjoys sufficient prospects of disturbing the actual orders made by the Court of Appeal to warrant a grant of special leave.  Special leave is refused.  With costs I think, Mr Sheahan?  With costs.

AT 12.30 PM THE MATTER WAS CONCLUDED