Elvin Pty Ltd v Knell [2003] ACTSC 36 (16 May 2003)

Last Updated: 20 May 2003

TOM ELVIN PTY LTD v SIDNEY CHARLES KNELL, ALISON KNELL [2003] ACTSC 36 (16 May 2003)

DEED - construction - perceived lack of clarity in operative provisions - effect of recitals - relevance of antecedent transaction - presumed intention of parties - whether clause providing for option clear and unambiguous.

Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112

O'Loughlin & Ors v Mount & Mount (unreported) [1998] SASC 6672 (8 May 1998)

Bacon, Maxims of the Law, Regula III

No SC 751 of 2002

Judge: Crispin J

Supreme Court of the ACT

Date: 16 May 2003

IN THE SUPREME COURT OF THE )

) No. SC 751 of 2002

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: TOM ELVIN PTY LTD

Plaintiff

AND: SIDNEY CHARLES KNELL

First defendant

ALISON KNELL

Second defendant

ORDER

Judge: Crispin J

Date: 16 May 2003

Place: Canberra

THE COURT ORDERS THAT:

1. It be declared that the plaintiff, Tom Elvin Pty Ltd, has validly exercised an option to purchase 84 shares in Dickson Hotel Pty Ltd from the second defendant, Mrs Alison Knell, provided by clause 3 of a deed executed by those parties and by Reswick Pty Ltd on 21 June 2002, and that the agreement thereby concluded is of such a character as to warrant an order for specific performance should the grounds for such an equitable remedy otherwise be established.1. The proceedings in this case and in matter number SC 775 of 2002 both concern a number of disputes that have arisen in relation to the control of Dickson Hotel Pty Ltd ("Dickson"). The matter first came before me on a motion for interlocutory relief relating to issues concerning the validity of registration of a transfer of 4,916 shares in Dickson from Reswick Pty Ltd ("Reswick") to Nationwide Development Corporation Pty Ltd ("Nationwide") and the validity of Mr Knell's appointment as a director of Dickson. However, it quickly became apparent that there was an urgent need to resolve other issues relating to the control and management of Dickson. Accordingly, it was agreed that the hearing of the motion should be treated as a final hearing in respect of those certain specific issues, and I granted leave for the action to proceed without pleadings.

2. The most pressing issue appeared to be whether Tom Elvin Pty Ltd ("Elvin") had acquired a legally enforceable right to purchase 84 shares in Dickson from Mrs Knell, by exercising an option said to have been granted to it by a deed dated 21 June 2002 ("the Deed"). It was not disputed that Elvin had purported to exercise such an option and the real issue was whether it had been open to it to do so. Dr O'Hair, who appeared for Mr and Mrs Knell, and Mr Walker, who appeared for Elvin, agreed that I should approach this issue as if on a construction summons, and determine whether there was a binding agreement for the sale of the shares amenable to specific performance at the suit of Elvin. Whilst it is normally inappropriate to determine particular issues prior to the hearing of the action, I was informed that this issue needed to be resolved urgently because it might well determine who would have effective control of Dickson and there was a need to make a potentially crucial decision about future leasing which the evidence suggested could have a very substantial effect on the value of the company. It was agreed that any judgment I might give on this issue should not be taken to prejudice any of the parties' rights in relation to any of the other issues to which I have referred save, of course, to the extent to which findings might directly impinge upon such issues. A subsidiary issue was raised as to the potential hardship that might be caused to Mrs Knell by the making of such an order, and it was agreed that this issue should be left in abeyance until I had determined whether grounds for such an order had otherwise been established.

3. The re-formulation of the proceedings in this manner made it necessary for Reswick to be informed of the developments, and be given a reasonable opportunity both to take legal advice about the extent to which findings in relation to the relevant issues might prejudice its position, and to revisit its decision to file a consenting appearance in the light of that advice. In view of the urgency of the matter Council for the plaintiff and the other defendant were reluctant to lose any time. For this reason it was agreed that I would hear their submissions concerning the effect of the option agreement, but make no findings until a transcript of their submissions had been served upon Reswick's solicitors and there had been a reasonable opportunity for that party to be heard. However, on the following day, Mr Colquhoun, who appeared on its behalf, informed me that his client did not wish to be heard on the issue.

4. Both Counsel were critical of the manner in which the Deed had been drafted and, whilst it is easy to be critical with the wisdom of hindsight, it does seem unlikely that the document will be cited by future text writers as an outstanding example of clarity in legal drafting.

5. The deed began by reciting the fact that Reswick and Elvin each held 4,916 shares in Dickson and that Mrs Knell, described in the deed as "Region", had acquired 168 shares from the organisation, Parents Without Partners. It then contained the following recitals:

(C) Nationwide Developments Corporation Pty Limited (ACN 100 695 663) ("Nationwide") proposes to purchase from Reswick and/or Elvin their respective shareholding in Dickson pursuant to a respective agreement ("the Share Sale Agreement").

(D) Region has agreed to grant to Reswick and to Elvin or their nominees each an option to acquire their respective shares should the Share Sale Agreement not proceed, in accordance with this Deed.

6. Nationwide was referred to in argument as "Mr Knell's company" and, whilst there was no real evidence as to whether he held all or a majority of shares, he clearly entered into negotiations on its behalf, and for present purposes I am prepared to assume that he had a substantial interest in the company.

7. The option which the plaintiff claims to have exercised is said to have been granted by clause 3 of the Agreement which is in the following terms:

3. Grant of Option

Subject to Clause 3(7)

(1) Region grants to Elvin (or its nominee) an option to purchase one half of the Shares for one half of the Purchase Price and otherwise on the terms and conditions contained in this Deed.

(2) The Option granted in the preceeding sub clause (1) above may be exercised at any time after 90 days and before the First Expiry Time by service on Region, on a Business Day, of an Exercise Notice substantially in the form of Appendix B.

(3) Region grants to Reswick (or its nominee) an option to purchase one half of the Shares for one half of the Purchase Price and otherwise on the terms and conditions contained in this Deed.

(4) The Option granted in the preceeding sub clause (3) above may be exercised at any time after 90 days and before the First Expiry Time by service on Region, on a Business Day, of an Exercise Notice substantially in the form of Appendix B.

(5) Where Elvin does not exercise its option pursuant to sub clause (2) above by the First Expiry Time, or fails to complete in accordance with Clause 5, Region will notify Reswick in writing of Elvin's failure to exercise or to complete, and within seven days of the First Expiry Time and Reswick has an option to purchase that one half of the Shares which may be exercised at any time after the First Expiry Time and before the Final Expiry Time, by service on Region on a business day an exercise notice in the form of Appendix B. Where Region fails to give a notice as required pursuant to this clause, the Final Expiry Time will be extended for 30 days from the date Reswick becomes aware that Elvin has not exercised its option.

(6) Where Reswick does not exercise its option pursuant to sub clause (4) above by the First Expiry Time or fails to complete in accordance with Clause 5, Region will notify Reswick in writing of Elvin's failure to exercise or to complete, and within seven days of the First Expiry Time and Elvin has an option to purchase that one half of the Shares which maybe exercised at any time after the first expiry time and before the Final Expiry Time, by service on Region on a business day an exercise notice in the form of Appendix B. Where Region fails to give a notice as required pursuant to this clause, the Final Expiry Time will be extended for 30 days from the date Reswick becomes aware that Elvin has not exercised its option.

(7) The Parties agree that an option in this Clause 3 may not be exercised by a party where that party has transferred all its shares in Dickson.

(8) Subject to clause 3(10), Reswick and Elvin each grant to Region an option to sell the Shares to them in the proportions that Reswick and Elvin hold shares in Dickson at the time the option is exercised in clause 3(10) ("the Proportion") for the corresponding Proportion of the Purchase Price.

(9) The option in clause 3(8) constitutes an irrevocable offer by each of Reswick and Elvin to enter into a binding agreement to purchase the Shares. The option and offer automatically lapse in respect of Reswick or Elvin if they are no longer a shareholder in Dickson.

(10) The put option in 3(9) may be exercised after the Final Expiry Time and before 5.00 p.m. on the Put Option Expiry Time by delivering to Reswick's and/or Elvin's solicitors (as applicable) a duly executed notice of exercise of put option in the form of Annexure "A".

(11) The put option in clause 3(8) lapses in respect of Reswick or Elvin where that party transfers its shares in Dickson to Nationwide pursuant to the Share Sale Agreement.

(12) To secure its obligation to Region under clause 3(8), Elvin charges all its right title and interest in Dickson in favour of Region.

(13) To secure its obligation to Region under clause 3(8), Reswick charges all its right title and interest in Dickson in favour of Region.

8. Mr Walker submitted that by sub cl (1) Mrs Knell had clearly granted Elvin an option to purchase one half of the shares in question. It had exercised the option in an appropriate manner and within the period stipulated in the agreement. Hence, it had acquired a contractual right to purchase the shares and, since they were shares in a private company the ownership of which might have a significant impact upon its control, it was entitled to an order for specific performance of the agreement so formed.

9. Dr O'Hair conceded that, considered in isolation, cl 3 of the Deed could be readily construed as granting both Reswick Pty Ltd and Tom Elvin Pty Ltd substantially unqualified options to purchase half of the shares. However, he argued that the provisions of clause 3 should be construed by reference to the intention of the parties, which was evident both from the nature of the transaction and the recitals.

10. He pointed out that at the time the Deed had been executed there had been 10,000 shares in Dickson, with Elvin and Reswick each holding 4,916 and Mrs Knell holding the remaining 168. Hence, whilst her shares represented only 1.68% of the total shareholding, they provided a potential basis upon which she, or any subsequent purchaser of the shares, might hold the balance of power in the event of any deadlock between Elvin or Reswick. This was obviously a matter of some significance to Mrs Knell because, as recital (C) indicated, her husband's company, Nationwide, proposed to purchase the shareholding of Reswick and/or Elvin. In the event that it was able to secure the purchase of only one of those company's shares, the 4,916 shares so acquired together with the 168 shares held by Mrs Knell might effectively permit Mr and Mrs Knell to control Dickson. Furthermore, Mrs Knell had paid the sum of $180,000 for her 168 shares which represented more than $1,000 per share. In contrast, Nationwide had subsequently been able to purchase 4,916 shares from Reswick for the sum of $350,000 which represented less than $100 per share. The comparatively high price that had been paid for Mrs Knell's shares obviously reflected a premium paid to obtain the balance of power in the company.

11. Dr O'Hair argued that Mrs Knell could not have intended to grant unqualified options to both Reswick and Elvin to each purchase half of her shares as that would have involved abandoning the opportunities for her and her husband to secure effective control of the company and defeated the very purpose for which she had obviously acquired them.

12. He further submitted that the true nature of the options provided by cl 3 had to be understood by reference to the intention of the parties as expressed in recitals (C) and (D). It was clear from recital (D) that the options granted to Reswick and Elvin to purchase shares from Mrs Knell were to operate only "should the Share Sale Agreement not proceed". It was equally clear from recital (C) that the term, "the Share Sale Agreement", referred to a proposed agreement for Nationwide to purchase the shareholding of "Reswick and/or Elvin". Hence, the parties had plainly intended that neither Reswick nor Elvin would have an option to purchase half of Mrs Knell's shares if an agreement for Nationwide to purchase the shareholding of the other were to proceed. It was common ground that an agreement for Nationwide to purchase the shares of Reswick had proceeded, though there was a dispute as to whether the transfer of those shares had been validly registered, and, in these circumstances, the parties had clearly intended that Elvin would not have any entitlement to exercise an option to purchase any of Mrs Knell's shares.

13. Whilst acknowledging that the operative clauses of the Deed should not normally be read down by reference to the recitals, Dr O'Hair submitted that this was not an inflexible rule. He pointed out that in Grant v John Grant & Sons Pty Ltd [1954] HCA 23; (1954) 91 CLR 112 eminent counsel, N. H. Bowen QC and M. M. Helsham, had conceded, at 116, that recitals might in some circumstances control the operation of a deed of release. In that case, Dixon CJ, Fullagar, Kitto and Taylor JJ had said, at 124, that the principles governing the construction of releases "seem really to be no more than special application of the general principle expressed by Bacon: `It is rule, that general words shall never be stretched too far in intendment, which the civilians utter thus: Verba generalia restringuntur ad habilitatem personae, vel ad aptitudinem rei.' (Bacon, Maxims of the Law, Regula III). `All words, whether they be in deeds or statutes or otherwise, if they be general and not express and precise, shall be restrained unto the fitness of the matter or person.' (Ibid. Regula X)."

14. Dr O'Hair argued that in the present case recitals (C) and (D) provided an essential key to understanding the nature of the transaction undertaken by the operative part of the Deed. He also argued that, whilst expressed as recitals, these paragraphs themselves were clearly intended to have at least some operative effect because cl 2 provided that words and phrases defined in the recitals should have the meaning there defined and recital (C) contained the only definition of "the Share Sale Agreement".

15. Furthermore, when a deed clearly contained errors of drafting or was otherwise unclear, the intention of the parties might best be deduced by asking what construction would make the most commercial sense. In the present case, it was common ground that cl 3 contained at least one error in that the phrase in sub cl (6), "Reswick in writing of Elvin's failure", should read, "Elvin in writing of Reswick's failure", and the document was generally unclear. In considering what would make commercial sense of the transaction, it was appropriate to begin with the conclusion that, having paid a premium to acquire a small parcel of shares, apparently for the purpose of gaining the balance of power in Dickson and potentially enabling her and her husband to gain effective control of the company, Mrs Knell would obviously not have intended to grant options enabling whichever of Reswick or Elvin retained its shares to thwart those advantages upon Nationwide acquiring the shares of the other. However, Nationwide had not then acquired the shareholding of either Reswick or Elvin, and there was no certainty that it would do so. If the proposed acquisition had not proceeded, Mrs Knell might have been be left with only a small parcel of shares which were unlikely to produce any income commensurate with the apparently inflated price she had paid for them. She needed to ensure that she could recover her investment and it was obviously for that reason that she entered into a transaction giving her the benefit of put options.

16. It is less clear why Reswick and Elvin might have been willing to enter into the Deed. However, the transaction by which Mrs Knell had initially acquired her shares had involved Parents Without Partners agreeing to relinquish an entitlement to be allocated one of two units from Dickson and, as a consequence, Reswick and Elvin which together owned 98.32% of the shares in Dickson had already gained the benefit of a substantial increase in the net value of their investments. Furthermore, there had been a long standing dispute between Reswick and Elvin and each may have taken the view that, if they were not to have a new corporate partner in the management of Dickson, they should at least seek to ensure that there was not a minority shareholder capable of voting with and thereby effectively handing control of the company to the other. The latter inference gains some support from the provision in cl 8(3) of the Deed preventing Mrs Knell from participating in the management of Dickson or exercising any voting rights until any options had expired.

17. Hence, it made commercial sense for the Deed to be construed as providing for the call options to be exercisable only in the event that Nationwide did not proceed to enter into an agreement for the purchase of either Reswick or Elvin's shareholding. Recitals (C) and (D) confirm that that was the intention of the parties. The Deed should not be construed to frustrate that intention and create rights that were not in the parties' contemplation merely because it had been clumsily expressed and there was a general principle that operative portions of a deed should not normally be read down by reference to the recitals.

18. These propositions were most persuasively argued but, after carefully considering the provisions of the Deed, I have concluded that the operative clauses cannot be confined in the manner suggested.

19. The general principle is that if the terms of the operative portion of a deed are clear and unambiguous they cannot be read down by reference to any portion of the recitals: see, for example, O'Loughlin & Ors v Mount & Mount (unreported) [1998] SASC 6672 (8 May 1998). Despite the apparently unequivocal statements in some of the authorities cited that case I am not persuaded that operative parts of a deed, even if otherwise apparently clear and unambiguous, could never be read down by reference to the recitals. I am inclined to think that there may be cases in which the recitals may so clearly spell out the scope of the intended transaction that it would be an affront to common sense not to treat them as providing a context within which operative provisions in the deed should be construed. However, this is not such a case.

20. In the present case, the provisions of at least sub cl 3(1) of the Deed are clear and unambiguous.

21. Furthermore, the entitlement thereby provided has not been left unqualified save by any implication that might be thought to arise from the recitals. It is expressly limited by sub cl 3(7) which provides that an option under cl 3 may not be exercised by a party where "that party" has transferred its shares in Dickson. In the face of this specific provision dealing with the contingency that either Reswick or Elvin might sell its shareholding, it is difficult to accept any suggested inference that the parties had intended that the implications of this contingency should be governed by recitals (C) and (D), or that those recitals evinced an intention that, in the event of a sale by either Reswick or Elvin, the other of the company's would also be prevented from exercising an option under clause 3. Subclause 3(11), which provides for the put options, is similarly limited.

22. The latter subclause also seems somewhat incongruous with the contention that Mrs Knell had purchased the shares with a view to enabling her and her husband to gain effective control of Dickson. Had that been her motive, it is difficult to see why she would have wanted to be able to require Reswick or Elvin to purchase half of her shares when Nationwide had succeeded in purchasing the shareholding of the other and such a course would have prevented her and Nationwide from together holding a controlling interest.

23. I am conscious of Dr O'Hair's admonition that the poorer the quality of the drafting the less likely it will be that a court will be driven by purely semantic considerations in the construction of a deed. In the present case, however, neither sub cl 3(1) nor sub cl 3(7) are unclear or ambiguous. Furthermore, the argument appears to be a "two edged sword" because both recitals (C) and (D) are also poorly expressed. In the former, it is unclear what, if anything, is meant by the adjective "respective" and, construed literally, the latter would appear to mean that Mrs Knell had agreed to grant Reswick and Elvin contingent options to acquire their own shares. It is also unclear whether, in recital (D), it is the option, the subsequent acquisition of shares or the Share Sale Agreement that must be "in accordance with this Deed". In each case, one may be able to deduce the intended meaning but the evident clumsiness of expression makes it difficult to be confident that the recitals more accurately reflect the intentions of the parties than the operative portions of the Deed. Hence, I can find no basis upon which the general principle could be displaced.

24. I am also conscious of the force of Dr O'Hair's submission that, as matter of practical reality, it may be incumbent upon a party with an inherently improbable case to demonstrate that the deed upon which it relies has the claimed effect.

25. The argument based upon the potential significance of Mrs Knell's shares and the price she paid for them is a powerful one, at least in so far as it relates to her presumed intention. However, the evidence does not wholly exclude other possible reasons for the acquisition, such as the need to ensure that the interests of Dickson should not be imperilled by claims by Parents Without partners whilst her husband's company was seeking to acquire at least a half interest in it.

26. The argument has somewhat less weight when one turns to consider the likely intentions of Reswick and Elvin. By the time they entered into the Deed, Mrs Knell had already acquired the shares formerly owned by Parents Without Partners and any immediate threat to Dickson's interests had presumably been averted. Each had a substantial shareholding in Dickson and presumably had at least a general impression as to the value of its shares. If they were to have been denied the opportunity to regain a full 50% shareholding unless Nationwide failed to acquire the shares of either, then there would have been little reason for either to agree to put options committing them to purchase Mrs Knell's shares at such an apparently inflated price, other than concern that the other should not have an opportunity to buy all of the shares and thereby acquire a majority interest. That threat could have been averted by other means such as a simple agreement between them.

27. The weight of any inference that might have been drawn from these considerations is also diminished by the fact that the evidence concerning the course of prior negotiations and earlier drafts of the Deed reveal no hint of any common intention to limit the limit options in the manner suggested.

28. In all of the circumstances, I am unable to be satisfied that adequate grounds have been established for departing from the general principle that apparently clear and unambiguous provisions in the operative portion of a deed should not be read down by reference to the recitals. I accept that Mrs Knell may have entered into the Deed on the understanding that the options should be limited in the manner suggested and may be understandably disappointed by this conclusion, but I am required to construe the Deed according to its provisions and not by reference to the understanding of a particular party.

29. Dr O'Hair also submitted that the Deed was void for uncertainty because cl 7 provided that, upon the exercise of an option, Mrs Knell and the purchaser, would become bound under a contract for the sale of the shares "in accordance with the usual terms contained in such contract" and, it was contended, there are no "usual terms" for contracts of that nature. However, I accept Mr Walker's submission that, even if this provision were capable of introducing uncertainty into the contract, it is severable.

30. Since the issue of hardship remains unresolved, I am unable to make any order for specific performance at this stage. However, it is appropriate to make a declaration that the agreement concluded by the acceptance of the option is of such a character as to warrant an order for specific performance should the grounds for such an equitable remedy otherwise be established.

31. In view of the need for urgency I have not paused to refer to the evidence in detail and am conscious of the fact that I have not done justice to the extensive submissions made by both counsel. However, I have taken into account everything so ably argued on both sides and trust that this brief statement will be sufficient to explain the reasons for my decision.

I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Crispin.

Associate:

Date: 16 May 2003

Counsel for the plaintiff: Mr P Walker

Solicitor for the plaintiff: Meyer Clapham

Counsel for the defendant: Dr O'Hair

Solicitor for the defendant: Gates Lawyers

Date of hearing: 18-21 March, 8, 9 April 2003

Date of judgment: 16 May 2003