Skywest Holdings Pty Ltd v Howick Investments Pty Ltd (Formerly Known As East-West Developments Pty Limited) [1990] ACTSC 54 (21 December 1990)

SUPREME COURT OF THE ACT

SKYWEST HOLDINGS PTY. LTD. v. HOWICK INVESTMENTS PTY. LTD. (formerly known as
East-West Developments Pty. Limited)
S.C. No. 1297 of 1986
Contract - Evidence

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Miles C.J.(1)

CATCHWORDS

Contract - construction - implied terms - agreement for sale of shares - purchase price secured by mortgage over shares sold - presence of implied term that mortgagor not do anything to destroy or relevantly diminish effect of security.

Evidence - parole evidence rule - admissibility of negotiations - relevance to proof of implied terms in contract - negotiations admissible to show common understanding or assumption of parties but not to show actual intent of parties.

Codelfa Construction Proprietary Limited v. State Rail Authority of New South Wales [1982] HCA 24; (1981-1982) 149 CLR 337 at 347

Castlemaine Tooheys Ltd and Another v. Carlton and United Breweries Ltd. and Another (1987) 10 NSWLR 468

BP Refinery (Westernport) Pty. Ltd. v. President, Councillors and Ratepayers of the Shire of Hastings (1978) 52 ALJR 20

Secured Income Real Estate (Australia) Limited v. St. Martins Investments Proprietary Limited [1979] HCA 51; (1979) 144 CLR 596

Reid v. Moreland Timber Company Proprietary Limited and Others [1946] HCA 48; (1946) 73 CLR 1 at p 11

Ansett Transport Industries (Operations) Pty. Limited v. The Commonwealth of Australia and Others [1977] HCA 71; (1977) 139 CLR 54

Butt v. McDonald (1896) 7 QLJ 68 at 70-1

Cheshire and Fifoot's Law of Contract 5th Australian edition (1988) at para 425

Meehan v. Jones and Others [1982] HCA 52; (1982) 149 CLR 571

HEARING

CANBERRA
21:12:1990

Counsel for the plaintiff: Mr P. Heyden, QC with Mr Robb

Solicitors for the plaintiff: Blake Dawson Waldron

Counsel for the defendant: Mr Finklestein and Mr Nettle

Solicitors for the defendant: Mallesons Stephen Jaques

ORDER

The notice served on the plaintiff by the defendant on 14 July 1986 purporting to be notice pursuant to Clause 6(1) of a deed executed by the plaintiff and the defendant on 30 December 1983 is of no effect.

The defendant, its servants and agents be restrained from acting pursuant to the said notice served on 14 July 1986.

The defendant's counterclaim be dismissed.

The defendant pay the plaintiff's costs of the claim and counterclaim.

DECISION

This case commenced on 30 July 1986 by the plaintiff mortgagor (Skywest Holdings) issuing a writ which bore an endorsement seeking declarations to the effect that the defendant mortgagee was not entitled to enforce a mortgage over shares in a company called East-West Airlines Limited (East-West Airlines). The defendant at the beginning of the events in question was known as East-West Developments Pty. Limited and it is convenient to refer to it as East-West Developments.

2. East-West Developments opposed the making of the declarations and sought by counterclaim to recover the balance of the sum which it claimed had become immediately due under the terms of the mortgage, together with interest.

3. On matters of fact there is very little in dispute.

4. On 16 December 1983 East-West Airlines was a company incorporated in New South Wales with an authorised share capital of $5 million divided into 4,800,000 ordinary shares of $1 each, of which 2,575,026 were issued and fully paid, and 200,000 unissued cumulative preference shares of $1 each. East-West Developments was the registered holder and beneficial owner of all shares issued.

5. By agreement in writing dated 16 December 1983 (the sale agreement) East-West Developments agreed to sell to Skywest Holdings 2,475,026 of its shares in East-West Airlines for a total purchase price of $34,900,000. The purchase price was payable by an initial $250,000 on completion and the balance by certain annual instalments of $1,862,500 over a period of eight years. Payment of the purchase price was secured by deed of mortgage over the shares sold, executed on 30 December 1983 (the share mortgage), a guarantee executed by Robert Frederick Stowe and the giving of promissory notes for each of the instalments. (In these reasons I use the term "the agreement" to include the sale agreement and the share mortgage.)

6. Over objection evidence was given about the circumstances surrounding the preparation and signing and execution of the documentation referred to.

7. The evidence was admitted subject to the objection. I think that the evidence was admissible. The objection was based on the so called parole evidence rule which excludes extrinsic evidence, including statements of intention and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument: Codelfa Construction Proprietary Limited v. State Rail Authority of New South Wales [1982] HCA 24; (1981-1982) 149 CLR 337 at 347 per Mason J., as he then was. However, as His Honour observed at p 348, evidence restricted to the factual background known to the parties at or before the date of contract, including evidence of the "genesis" and "objectively" of the "aim" of the transaction, has come to be regarded as admissible. It is admissible to prove not the subjective intention of the parties but "the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting" (p 352). It is admisible to that end because the construction of contracts "centres upon the presumed, rather than the actual, intention of the parties" (p 353). In making an inquiry whether a term is to be implied the court is engaged in one "illustration of the process of construction", which differs from the orthodox ascertainment of the meaning of a contractual term, and which permits recourse to surrounding circumstances, including evidence of precontractual discussions which goes to prove that there was a common understanding on a relevant matter.

8. In Castlemaine Tooheys Ltd and Another v. Carlton and United Breweries Ltd. and Another (1987) 10 NSWLR 468, Hope J.A., with whom the other members of the NSW Court of Appeal agreed, referred to the judgment of Mason J. in Codelfa and went on to say at p 487:
"Terms implied by the business efficacy test are

terms unique to the particular contract under
consideration; they depend upon the express terms of
the contract and the relevant surrounding
circumstances." (my emphasis)

9. I take it then to be clear law that evidence of surrounding circumstances including pre-contractual negotiations is admissible to prove an implied term in a contract otherwise constituted by express terms so long as the evidence is not tendered to show the actual intention of the parties and that its acceptance is limited to the extent to which it sheds light on some relevant matter such as, in this case, an alleged common understanding or assumption on the part of each of the parties.

10. In the present case the evidence was of discussions between Mr Michael John Grey on behalf of East-West Developments and Mr Aleko Vrisakis on behalf of Skywest Holdings. It was tendered on behalf of Skywest Holdings in order to show that there was a factual background to the contract against which the parties were presumed to have a common understanding to the effect that the mortgage to be granted back to the seller by the buyer was to be over all of the shares in East-West Airlines and that the buyer-mortgagor would not do anything to bring about an increase in the share capital or to acquire shares that might be the subject of such an increase.

11. The evidence was given by Mr Michael John Grey and I accept it. He said that he was a director of East-West Developments in 1983. His father Mr Brian Grey was the chairman and controlled the company. He was sent by Mr Grey senior to negotiate the precise terms of an agreement to sell the company's holdings in East-West Airlines. He met Mr Vrisakis representing the purchaser in the office of Mr Stowe in Perth on about 20 November 1983. It appears that prior agreement had already been reached on the sale price of $35 million payable by a payment of $20 million forthwith and $15 million payable over eight years. The discussion centered around the security for payment of the instalments. Mr Vrisakis initially proposed a mortgage over the shares with some of the shares being released from the mortgage as payments of instalments were made. In the early part of the discussion Mr Grey insisted that "the mortgage should remain in place until the whole of the outstanding funds were repaid". Later during the course of the two or three days of negotiations Mr Vrisakis proposed in addition a personal guarantee from Mr Stowe. The proposal was acceptable to Mr Grey. Agreement was reached on the sale of all but 100,000 of the shares and that the mortgage over the shares sold be subject to the release of shares in proportion to the outstanding balance of the purchase price as instalments were paid, and agreement on that aspect became embodied in clause 3 of the share mortgage.

12. In pursuance of the sale agreement and the share mortgage, Skywest Holdings became the registered holder of 2,475,026 shares on the East-West Airlines share register. The scrip, so it appears, remained with East-West Developments except to the extent that as instalments were paid, a proportionate number of shares were released and transferred back to Skywest Holdings in accordance with clause 3 of the share mortgage.

13. In 1984 there was a series of extraneous events which was to have some bearing on the relationship between the parties. East-West Airlines purchased the share capital of a company called Skywest Airlines Pty. Limited from the vendor, Devereaux Holdings Pty. Limited (Devereaux) for $13,807,000. The purchase price, or most of it, remained outstanding and East-West Airlines remained indebted to Devereaux for the balance.

14. On 28 June 1985 a meeting of the directors of East-West Airlines was held in Sydney. The meeting resolved to convene a number of meetings the following day, the first to commence at 10 a.m., to give effect to a proposal to discharge the debt owing to Devereaux. The resolution noted that the purpose of the proposal was to "restructure the existing debt of $13,750,000 owing by the company so as to create a class of redeemable preference shareholders and to remove that company as a creditor".

15. Meetings on 29 June 1985 took place. A resolution was put and carried to the effect that the articles of association of East-West Airlines be altered to provide that the share capital be increased to $100,000,000, divided into 8,900,000 ordinary shares, 100,000 convertible preference shares, and 15,000,000 cumulative redeemable preference shares, all of $1 each. It was further resolved that the 15,000,000 cumulative redeemable preference shares should confer on the holders certain rights to receive notices of and attend shareholders' meetings and also certain limited rights to vote at such meetings. Those rights included the right to vote on a resolution to "sanction the sale of the company's main undertaking", the right to vote on a resolution for the winding up of the company and the right to vote on a resolution to reduce the capital of the company.

16. Later the same day the East-West Airlines directors were authorised to issue and allot to Skywest Holdings 13,750,000 cumulative redeemable preference shares. Those shares were then issued and allotted and Skywest Holdings paid to East-West Airlines the sum of $13,750,000 in full satisfaction of the allotment price.

17. Minutes of the meeting held at 10 a.m. record that the Chairman, Mr D.G. Howe, informed the meeting that "the purpose behind the issue of redeemable preference shares was to provide the company with sufficient funds to repay the outstanding debt of $13,750,000 owing to Devereaux Pty. Limited". At the final meeting for the day held at 11 a.m. (after receipt of the allotment price) it was resolved "to pay $13,750,000 of the debt owing to Devereaux Pty. Limited". The Secretary of East-West Airlines was instructed to arrange payment immediately.

18. More than a year later, on 14 July 1986, and after the payment of the instalment of $1,862,500 on 15 December 1985, East-West Developments, by this time known as Howick Investments Pty. Limited, served on Skywest Holdings a written notice reciting that East-West Developments as the holder of the shares in East-West Airlines had caused East-West Airlines at the meetings on 29 June 1985 to pass the resolutions increasing the share capital and authorising the allotment, and further had caused East-West Airlines to allot the 13,750,000 cumulative redeemable preference shares to Skywest Holdings. The notice alleged that the conduct of East-West Developments in that regard constituted a breach of the share agreement and the share mortgage. Accordingly, the notice gave fourteen days notice of demand pursuant to clause 6(1) of the share mortgage for the payment of the whole of the balance of the money secured by the share mortgage.

19. On 31 July 1986 an interim injunction was granted by this Court by consent restraining East-West Developments from proceeding any further to enforce the share mortgage. The instalments due on the share mortgage have continued to be repaid by Skywest Holdings and at the time of hearing two only remained to be paid, one on 15 December 1990 and the last on 15 December 1991.

20. East West Developments claimed in its counter-claim that it was entitled to immediate payment of the whole of the sum secured immediately at the expiration of fourteen days after the notice of 14 July 1986, that such payment not having been made at that time, it became entitled to the interest foregone on that sum in the meantime. Further, it was submitted on behalf of East West Developments that it was entitled then to the payment of the outstanding balance of the two instalments. The claim is based on a term alleged to be implied in the share agreement and the share mortgage. Paragraphs 10 and 11 of the amended defence and counterclaim of 8 December 1989 are as follows:
"10 Further to paragraph 9 hereof, at all relevant

times it was the intention of both the
Plaintiff and the Defendant, and the Plaintiff
and the Defendant entered into the Agreement
and the Mortgage on the footing that:
(a) the Mortgage should constitute a
security over all of the shares, and
over all dividends payable and to become
payable in respect thereof and over all
rights and benefits and advantages now
or hereafter attaching to the holding of
the shares, (except for 100,000 ordinary
shares), in the issued capital of
East-West Airlines Limited ("East-West")
and except for the shares released and
re-transferred from time to time in
accordance with clause 3 of the
Mortgage;
(b) so long as the Mortgage enured, the
Mortgage should continue to constitute a
security over all of the shares, and
over all dividends payable and to become
payable in respect thereof and
over all rights and benefits and
advantages now or hereafter attaching to
the holding of the shares, (except the
100,000 ordinary shares), in the issued
capital of East-West and except for the
shares released and re-transferred from
time to time in accordance with clause 3
of the Mortgage;
(ba) so long as the Mortgage enured the
Mortgagee would hold the Mortgage over
the shares in proportion to the amount
repaid pursuant to clause 3 of the
Mortgage, and not less.
(c) the Mortgage should provide the
Defendant with effective and adequate
security for the moneys thereby secured;
(d) so long as the Mortgage enured, the
Mortgage should continue to provide the
Defendant with effective and adequate
security for the moneys thereby secured.

11. Accordingly -

(a) by the Agreement and further or alternatively
by the Mortgage the Plaintiff
was under an obligation not to do
anything, by any act within its power or
control, to destroy or relevantly
diminish the effect of the Mortgage as a
security over all of the shares, and
over all dividends payable and to become
payable in respect thereof and over all
rights and benefits and advantages now
or hereafter attaching to the holding of
the shares, (except for 100,000 ordinary
shares), in the issued capital of
East-West or as an effective and
adequate security for the moneys thereby
secured;
(b) further or alternatively, it was an
implied term of the Agreement and
further or alternatively of the Mortgage
that the Plaintiff would maintain and
not destroy or relevantly alter the
effect of the Mortgage as a security
over all of the shares, and over all
dividends payable and to become payable
in respect thereof and over all rights
and benefits and
advantages now or hereafter attaching to
the holding of the shares, (except the
100,000 ordinary shares), in the issued
capital of East-West or as an effective
and adequate security for the moneys
thereby secured."

21. Although the claim in paragraph 11(a) appears to be made by reference to an obligation imposed independently of the terms of the agreement and the claim in paragraph 11(b) is made by reference to an implied term of the agreement, the argument on behalf of the defendant was confined to the question whether the defendant was entitled to relief because of the breach by the plaintiff of an implied term of the agreement. Subject to the discussion of the case law below, there is, in my view, nothing in the counterclaim as pleaded from which an obligation can be seen to arise apart from the obligation which arguably arose from the alleged implied term in the contract. It was not part of the case for Skywest Holdings that the relationship of the parties or any other aspect of the circumstances resulted in some sort of fiduciary duty on the part of Skywest Holdings not to cause the issue of further shares in East-West Airlines. I note also that there was no claim made on behalf of either party that the further shares that East-West Airlines allotted to Skywest Holdings were subject to the share mortgage.

22. The subject of implied terms in contracts is one which has received much attention in the case law and in academic writing. The difference between an express term and an implied term is upon examination not as clear as might be expected. There is also some disagreement on what are the various categories of implied terms. Those questions do not need to be considered in the present case. It is sufficient to proceed upon the premise that in law there are at least two types of implied terms in contracts, those implied by the law itself and those which are implied from the language of the particular contract between the parties and the surrounding circumstances. The former occur where the contract belongs to a particular class or category of contract recognized as such by the law, for instance a contract of employment or a tenancy agreement. The latter are peculiar to the particular contract between the parties: see Hope J.A. in Castlemaine Tooheys Ltd and Another v. Carlton and United Breweries Ltd. and Another, and the essential test (or one essential test) whether such a term is to be implied is whether or not it is "necessary to give business efficacy to the particular contract": Codelfa, p 346 per Mason J.

23. In this case we are concerned only with the latter type of implied term, which during the course of argument in the case was referred to as a "Codelfa" term. Such terms, however, were recognized well before the High Court's decision itself in that case. The judgment of Mason J. at p 347 and those of Stephen J. at p 344, Wilson J. at p 392 and Brennan J. at p 404 accept as authoritative the statement by Lord Simon, delivering the advice of the majority of the Privy Council, in BP Refinery (Westernport) Pty. Ltd. v. President, Councillors and Ratepayers of the Shire of Hastings (1978) 52 ALJR 20 at 26; [1977] HCA 40; (1977) 16 ALR 363 at 376. Although that case was not reported in the Commonwealth Law Reports, it has been expressly followed in later decisions which have been so reported, e.g. Secured Income Real Estate (Australia) Limited v. St. Martins Investments Proprietary Limited [1979] HCA 51; (1979) 144 CLR 596 at 605 and Codelfa itself.

24. In the BP Refinery case Lord Simon said that for a term to be implied it must comply with the following conditions (which may overlap):

"(1) It must be reasonable and equitable;
(2) It must be necessary to give business efficacy
to the contract so that no term will be
implied if the contract is effective without
it;
(3) It must be so obvious that "it goes without
saying";
(4) It must be capable of clear expression;
(5) It must not contradict any express term of the
contract."

25. Counsel for the defendant, however, as I understand it, submits that there are other principles of law to be found in the cases which should be applied in addition to or instead of the BP Refinery tests. They are said to relate to or to stem from an old principle that "a man cannot derogate from his grant" a principle that was referred to by Dixon J., as he then was, in Reid v. Moreland Timber Company Proprietary Limited and Others [1946] HCA 48; (1946) 73 CLR 1 at p 11 in the following passage:

"A vendor of any form of property incurs an implied
obligation not to destroy, defeat or impede the
enjoyment by the purchaser of the subject of the
sale. He may not derogate from that which he has
disposed of. No doubt it is necessary that it
should affirmatively appear that the intention was
to give the sole right. But the intention to do so
may be collected from the nature of the agreement,
its business purpose, the subject with which it
deals and the circumstances surrounding its making."

26. It is important to recognize, in my view, that that was a case about an implied term to the effect that the right of the purchaser to cut timber on the land purchased was a right exclusive to the purchaser. The absence or presence of an implied term to that precise effect was, according to Dixon J., to be ascertained from the nature, business purpose and subject matter of the contract together with the surrounding circumstances. However, as the passage quoted indicates, that implied term was to be distinguished from the implied obligation not to derogate from that which was disposed of, an obligation which arose not from the peculiar circumstances of the relationship between the parties in the case, but because the contract belonged to a certain category or class of contract, namely a contract of sale of property, into which such an obligation would be imported unless the parties were shown to have excluded it. Hence, whilst it cannot be doubted that there is a principle that a vendor of property, including a seller of shares, is under an obligation not to "derogate from that which he has disposed of", the question still remains whether that principle required the implication of the terms which East-West Developments contends for. That question requires consideration of the surrounding circumstances.

27. The defendant also relied on the judgment of Barwick C.J. in Ansett Transport Industries (Operations) Pty. Limited v. The Commonwealth of Australia and Others [1977] HCA 71; (1977) 139 CLR 54, in which the then Chief Justice referred to both a general rule in contract as well as to a term which his Honour considered ought to be implied in the "two airline policy" agreement between the Commonwealth and Ansett. On p 61 Barwick C.J. said as follows:

"I agree with the reasons advanced by my brother
Aickin for concluding that it would be a breach of
the agreement between the plaintiff and the
Commonwealth for the Commonwealth by any means
within its lawful power to enable a third airline
operator to carry for reward on a trunk route. I
would prefer, I think, to put the obligation not to
do so upon the general rule that a party to a
contract made on the footing of the continuance of a
state of things may not by any act within its power
or control do anything to destroy or relevantly to
diminish that situation. But I would accept that
the same result may be reached by the implication of
a term with both positive and negative obligations
to maintain and not to destroy or relevantly alter
the basis on which the parties have contracted."

28. I interpolate that this passage appears to be the source of the claim pleaded in paragraph 9 of the counterclaim that Skywest Holdings was in breach of a duty cast on it other than by the terms of the contract itself. Insofar as that claim was but faintly argued and does not appear to be supported by other authority (except those relating to terms implied by law in recognized classes or categories of contract), I do not find it persuasive for the purposes of the present case.

29. The reasons advanced in the Ansett case by Aickin J., with which Barwick C.J. agreed, included the view expressed at p 102 that the question of whether or not the relevant term was to be implied was settled by a finding that there was "the common understanding the position then prevailing would continue during the term of the Agreements and that the common objectives of the parties would continue to be as stated". His Honour acknowledged further at p 103 that the numerous and well known tests of whether or not a term or covenant should be applied are difficult to apply in any individual case and that little assistance is to be derived from terms implied in one contract in determining whether terms are to be implied in another, particularly where the contract under consideration is "sui generis".

30. Next, counsel for the defendant placed reliance on what was submitted to be a general rule that each party to a contract is under an implied duty "to co-operate in the doing of acts which are necessary to the performance by the parties or any one of them of fundamental obligations" to use the words of Mason J. in the Secured Income case at p 607. But as Mason J. went on to say immediately after, when the acts in question, although necessary to entitle the other party to a benefit under the contract, are not essential to the performance of his obligations and are not fundamental to the contract, the correct interpretation of the contract depends not so much on the general rule of construction but the presumed intention of the parties manifested by the contract itself. In my view, that is the situation in the present case, especially when it is borne in mind that the present case is not concerned so much with the construction of the contract in the usual sense but whether, in view of the contract itself taken together with the surrounding circumstances, the term suggested should be implied.

31. Indeed, there is considerable doubt whether the words of Mason J. apply at all in the circumstances of the present case where the co-operative conduct in question is the refraining on the part of Skywest Holdings from doing anything to cause the issue of further shares in East-West Airlines or to cause the allotment to it of those shares. I am unable to see how that conduct was essential to the performance of the obligations of Skywest Holdings under the contract or that it was fundamental to that contract.

32. Although Mason J. in Secured Income at p 607 referred with approval to a statement by Griffith C.J. in Butt v. McDonald (1896) 7 QLJ 68 at 70-1 that "it is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract", that principle may not be applied until there is a determination of what it was that the parties intended to be the benefit of the contract. It is usually in the nature of a contract that what is beneficial will differ according to the perspective of a particular party.

33. Lastly, I deal with what the learned authors of the 5th Australian edition of Cheshire and Fifoot's Law of Contract (1988) at para. 425 consider is the generally implied duty to act in aid of performance of the contract which lies behind another general principle of interpretation "that Courts should be astute to adopt a construction which will preserve the validity of the contract": Meehan v. Jones and Others [1982] HCA 52; (1982) 149 CLR 571 at p 589 per Mason J. In the present case the validity of the contract is not challenged, and the question is not simply one of construction.

34. Ultimately then I think that it has not been shown that there is any more appropriate way of approaching the case than to consider whether the terms contended for may be implied into the contract by the application of the several tests in the BP Refinery case.

35. I proceed to apply the criteria established by the Privy Council in the BP Refinery case, bearing in mind, as Lord Simon said (p 26), that the criteria may overlap and hence, as I see it, that they are not mutually exclusive and that one may, in the circumstances, be more important than another.

1. The term must be reasonable and equitable
I take this to mean that the term must be reasonable and
equitable as between the contracting parties.
Reasonableness and fairness in relation to other persons
would appear to be of little if any relevance. Whether
it would have been fair to East-West Airlines for the
controlling shareholder to lock itself into an agreement
which effectively prevented the company increasing its
capital or issuing unissued authorised capital for a
period of eight years, is not of direct concern. On the
other hand, the interest of a controlling shareholder
does not necessarily conflict with that of the company
controlled unless there is some particular factor which
can be shown to have that result. None has been shown
in the present case. The defendant seeks by the
implication of the term to secure its control of
East-West Airlines but does not indicate how that is in
the interests of East-West Airlines itself or in the
interests of the other shareholders. Reasonableness and
equity in the present case as far as both parties are
concerned, appears to lie in allowing East-West Airlines
to conduct its activities for the maximum benefit of all
shareholders. Insofar as the onus of proof lies on the
party asserting the implication of the term, I am not
convinced that the term sought to be applied is
reasonable and equitable between the parties.
2. The term must be necessary to give business efficacy to
the contract
If the contract is effective in a business sense as it
stands, no further term will be implied. However, the
agreement in the present case, in its express terms, in
my view, is effective in a business sense. It provides
for security for the payment of the purchase price over a
period of time. The fact that the number of shares
subject to the mortgage is reduced in proportion to the
periodic repayments of instalments of the purchase price
reinforces rather than weakens its commercial efficacy.
Control of the company by the mortgagee is not necessary,
or more accurately, potential control (since the
mortgagee is not entitled directly to enforce the rights
of a shareholder), is not necessary to secure
repayment of the debt to the mortgagee. The defendant's
contention that the commercial value of the shares
subject to the mortgage has been "destroyed or relevantly
altered" by the increase in authorised capital or the
allotment of the cumulative redeemable preference shares
to Skywest Holdings has to be tested against the
hypothesis of what alternative courses were available in
the circumstances. The debt owed by East-West Airlines
to Devereaux was incurred as a result of the purchase of
the assets of Skywest Airways which, in the absence of
evidence to the contrary, must be taken to have been in
the interests of East-West Airlines, or at the least done
and taken in good faith. The debt owed by East-West
Airlines to Devereaux was a fact and the controlling
shareholder, Skywest Holdings, was entitled, if not
bound, to authorise whatever steps were available to
discharge the debt to Devereaux. There is no evidence
that the issue of the cumulative redeemable preference
shares to Skywest Holdings was other than a bona fide and
effective method of discharging the debt of East-West
Airlines to Devereaux and there is no evidence that any
other method was reasonably available.
Furthermore, there was a complex arrangement to secure
the payment of the purchase price of the shares, of which
the mortgage was only one component. In addition to the
mortgage there was the personal guarantee by
Mr Stowe. Mr Gray said in evidence that he did not
originally seek a guarantee but when it was offered
during the course of negotiations, he was "happy to get
one". Another component in the overall arrangements was
the retention by the defendant of 100,000 ordinary shares
which were then converted into preference shares.
Payment of the instalments was further secured by the
handing over of promissory notes. The provisions of the
share agreement and the share mortgage were themselves
complex, and although the negotiations took place over a
relatively short period of time, the sophisticated nature
of the transaction as a whole, entered into after
negotiations between solicitors, with detailed
contractual documentation, points to the likelihood that
the parties intended that the words expressed in the
documents were to govern their relationship, without the
implication of further terms.
3. Is the implied term so obvious that it "goes without
saying?"
The test is not concerned with what the parties mutually
expected or intended, which might be relevant in a claim
for rectification of contract, or with what they mutually
or individually but wrongly assumed, which might afford a
ground for the Court releasing them from their
obligations on the ground of mistake. It is concerned
with whether the parties, had they turned their minds to
the implied term at the time of
agreement, would have acknowledged it unhesitatingly as
part of the agreement.
In my view, Mr Gray might have done so, but even he
might have hesitated. If the question had been preceded
by a reference to the future operational requirements of
East-West Airlines, he might have hesitated for some
time. In any event, Mr Vrisakis was unlikely to have
readily acknowledged the implied term as part and parcel
of the contract, as he was likely to be conscious of the
need to retain capacity to raise finance to acquire the
assets needed to carry on the business properly. In
addition the evidence leads to the conclusion that
Mr Vrisakis considered that the obtaining of the
personal guarantee of Mr Stowe, a man of means, was an
accomplishment and conferred a substantial benefit upon
the mortgagee. Such expression of opinion, of course,
may have been less than genuine and intended only to
comfort the party who had got the worse side of a bad
bargain. However, there has been no suggestion that
Mr Vrisakis was not genuine in his enthusiasm nor that
Mr Stowe was unable financially to withstand a claim on
the guarantee.
In my view, the term sought to be implied clearly fails
this test.
4. The term must be capable of clear expression
The term sought to be implied by the defendant is that
Skywest Holdings would "maintain and not destroy or
relevantly alter the effect of the Mortgage as a security
over all of the shares, and over all dividends payable
and to become payable in respect thereof and over all
rights and benefits and advantages now or hereafter
attaching to the holding of the shares (except the
100,000 ordinary shares), in the issued capital of
East-West or as an effective and adequate security for
the monies thereby secured."
That is a lengthy and complicated term. It is expressed
at a level of some abstraction. Length and complexity
are not necessarily inconsistent with clear expression.
Indeed they are often necessary for clear expression in
complex situations or where abstract matters are under
consideration. Yet a term of such complexity and
abstraction is to be contrasted with a term, say, that
Skywest would not procure an increase in the share
capital of East-West Airlines or the issue to itself of
more shares in East-West Airlines. The defendant has
avoided an allegation that the implied term was so sharp
and precise, no doubt for the good reason that it would
be the more difficult to prove. The generality of the
language of the alleged implied term obviously owes much
to the words of Barwick C.J. in the Ansett case.
With respect to the distinguished former Chief Justice,
these words are undoubtedly appropriate to the expression
of judicial opinion in which statements of legal
principle and structured legal reasoning are
applied to individual circumstances and lead ultimately
to a judgment in the particular case. But it is entirely
a different matter to seek to have those words inserted
by implication into a contract between two other parties
entered into in entirely different circumstances. When
that is sought to be done the meaning of the words and
the context of the judgment are liable to be obscured if
not lost altogether.
In the particulars to paragraph 11 of the amended defence
and counterclaim, the pleader states that the obligation
and the term are to be implied as a matter of law because
the plaintiff and the defendant entered into the
agreement and the mortgage on the footing alleged. The
words of the pleader, paraphrasing the words of Barwick
C.J. in the Ansett case, that the plaintiff "would
maintain and not destroy or relevantly alter the effect
of the Mortgage as a security" have a meaning, but it is
not immediately clear what that meaning is. The terms
seeking to define or describe the subject of the security
("all of the shares", "all dividends payable and to
become payable in respect thereof" and "all rights and
benefits and advantages now or hereafter attaching to the
holding of the shares") suffer also from what I consider
to be similar lack of clarity. Of course if those were
the words used by the parties, then lack of clarity would
be beside the point and a court would have to construe
them. The point is that by
definition the parties did not use those words at all:
they are said to be implied. I think that their relative
lack of clarity is further support for the contention
that they are not to be implied at all.
On this aspect it should be emphasised at this stage that
the defendant's case is that the terms are to be implied
by the express provisions of the contract and the
surrounding circumstances. However the particulars
furnished under paragraph 11 (alleging that the term is
to be implied as a matter of law) and the incorporation
of phrases from the judgment of Barwick C.J. in the
Ansett case strongly suggest that the plaintiff's case is
really that the term is to be implied simply because of
the relationship between the parties of mortgagor and
mortgagee and the subject matter of the transaction as a
mortgage of shares. Yet if the term is to be implied in
this share mortgage why should a similar term not be
implied in all share mortgages? What is so special about
the circumstances in the present case? The categories of
contractual relationship in which the law implies terms
and the content of the terms which the law implies are
themselves limited - for instance, the law implies terms
as to merchantability in agreements relating to the sale
of goods, or a term as to notice of termination in a
contract of employment. However, there are many terms in
those sorts of contracts which depend upon the individual
agreement between the parties, and
not on terms to be implied by law. It may be that in any
transaction which is properly characterised as a
mortgage, even a mortgage of shares, there are certain
terms which are so important and fundamental to a
mortgage transaction, that they will be implied by law
despite absence of express mention by the parties.
However, there is no authority for the proposition that a
mortgagor of shares undertakes obligations of the kind
contended for by the defendant in the present case. The
alleged implied term fails the fourth test.
5. The implied term must not contradict the express terms
The fifth test is that the implied term must not
contradict any express term. The term contended for in
the present case passes that test, but fails the four
other tests. Passing this fifth test is insufficient.

36. It follows that the defendant has not proved the alleged implied term.

37. I would add for reasons to be briefly expressed that insofar as the implied term is alleged to involve a promise not to do anything to "destroy or relevantly alter the mortgage as an effective security", I do not find the breach of such promise to have been committed. I have already touched on the reasons for my opinion on this aspect and there is no need to repeat them except to say that it has not been shown that the mortgage ceased to be an effective security for the moneys secured. The plaintiff has continued to pay and the defendant to receive the instalments of the purchase price as those instalments fell due. If the defendant has lost anything it is no more than the right to seek from the Court, in the exercise of its discretion, interest under s.53A of the ACT Supreme Court Act 1933 in respect of the whole of the balance of the purchase price outstanding at 14 July 1986 when the defendant gave notice of demand, purporting to rely on the breach by Skywest Holdings of its obligation under the mortgage, and reducing progressively as instalments were paid. It is by no means assured that if the breach were proved and the notice of demand found to be valid, that interest would be awarded. The defendant has continued to receive the instalments on the purchase price for the shares which it sold to the plaintiff. Prima facie it has suffered a notional and not actual loss.

38. I make the following declarations and orders:

1. The notice served on the plaintiff by the defendant on 14
July 1986 purporting to be notice pursuant to Clause 6(1)
of a deed executed by the plaintiff and the defendant on
30 December 1983 is of no effect.
2. The defendant its servants and agents is restrained from
acting pursuant to the said notice served on 14 July
1986.
3. The defendant's counterclaim is dismissed.
4. The defendant is to pay the plaintiff's costs of the
claim and counterclaim.