Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 199 (15 July 2009)

Last Updated: 16 July 2009

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 199


FILE NUMBER(S):
40221/08

HEARING DATE(S):
20 May 2009

JUDGMENT DATE:
15 July 2009

PARTIES:
Regency Media Pty Ltd (Appellant)
AAV Australia Pty Ltd (Respondent)

JUDGMENT OF:
Spigelman CJ Beazley JA McColl JA

LOWER COURT JURISDICTION:
District Court

LOWER COURT FILE NUMBER(S):
DC 2577/07

LOWER COURT JUDICIAL OFFICER:
Rolfe DCJ

LOWER COURT DATE OF DECISION:
19 June 2008

LOWER COURT MEDIUM NEUTRAL CITATION:
AAV Australia Pty Limited v Regency Media Pty Limited [2008] NSWDC 106

COUNSEL:
C R C Newlinds SC; P Silver (Appellant)
A G Bell SC; C Bova (Respondent)

SOLICITORS:
Holman Webb Partners (agents for Norton Gledhill (Victoria)) (Appellant)
Clayton Utz (Respondent)

CATCHWORDS:
CONTRACTS – general contractual principles – construction and interpretation of contracts – construction of the phrases “close of business” and “bank statements” – ascertaining the intention of the parties

LEGISLATION CITED:
Suitors’ Fund Act 1951

CATEGORY:
Principal judgment

CASES CITED:
Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; (1973) 129 CLR 99
Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337
Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420
Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235
Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Julan Pool Supplies Pty Ltd v Onga Pty Ltd [1999] SASC 20
Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5
Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181
McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165
Trnka v The Commonwealth (1986) 44 SASR 572
Upper Hunter District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429
Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15

TEXTS CITED:


DECISION:
(1) Appeal allowed;
(2) Set aside the orders made by Rolfe DCJ on 26 June 2008;
(3) The respondent’s claim is dismissed with costs;
(4) Order that the respondent pay the appellant’s costs at first instance and of the appeal. The respondent is to have a certificate under the Suitors’ Fund Act 1951 if otherwise qualified.



JUDGMENT:

- 43 -

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40221/08

SPIGELMAN CJ

BEAZLEY JA

McCOLL JA

15 July 2009

Regency Media Pty Ltd v AAV Australia Pty Ltd

Headnote

The appellant and the respondent were parties to a Joint Venture that operated through two enterprises, AAV Regency Management Pty Limited (the Manager) and AAV Regency Pty Limited (the Sales Agent). The appellant was a party as to 49 per cent of the Joint Venture and the respondent was a party as to the remaining 51 per cent. On 27 February 2006, the parties entered a Share Sale Deed terminating the Joint Venture. Pursuant to the Share Sale Deed, the purchase price and certain other payments were either to be made on and/or calculated as at the close of business on the day of Completion.

Completion occurred on 30 June 2006. On that day, Sony Pictures Home Entertainment Pty Ltd (Sony) made a payment in respect of its outstanding account. The payment was not included in the amount the appellant paid the respondent pursuant to its obligations under the Share Sale Deed and the Letter Agreement. The respondent brought proceedings claiming it was entitled to 51 per cent of the Sony Payment. Pursuant to cl 3.3(b) of the Share Sale Deed, which provided that the appellant was to distribute “51% of all [monies] held in a financial institution to [the respondent] ... on or before Completion” and which was amended on 30 June 2006 by an agreement the parties had entered into (“the Letter Agreement”).

Rolfe DCJ ordered judgment in favour of the respondent. The appellant appealed against his Honour’s orders. At the heart of the dispute between the parties was the meaning of the terms “close of business on the day of completion” and “Bank Statements” in the Letter Agreement and the characterisation of the Sony payment.

Held, allowing the appeal
Per Beazley JA (Spigelman CJ agreeing):

1. The terms of an agreement are construed by reference to the language by which the parties have expressed their agreement, as construed by the meaning that reasonable persons would give those terms. It is the objective intention of the parties that is relevant not the individual subjective intentions of the parties. Primacy is given to the actual terms used, but the surrounding circumstances and the purpose and object of the agreement are relevant: [47]-[48].

Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 (referred to)

McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579 (referred to)

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 (referred to)

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 (referred to)

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 (referred to)

Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 (referred to)

2. The objective intention of the parties is ascertained from the contract as a whole: [47]-[48].

Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 (referred to)

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 (referred to)

Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 (referred to)

Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 (referred to)

3. In determining the objective intention of the parties the court is entitled to know the commercial purpose of the contract. That involves an understanding of the genesis of the transaction, the background to and context in which the agreement was made and, if relevant, the market in which the parties to the agreement operate: [44]-[59].

Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 (referred to)

4. In this case, the objective intention of the parties was to provide for certainty in ascertaining when the amount of the Distribution was to be determined: [57].

5. Upon its proper construction “close of business” meant 5 pm: [60]-[78] and the transaction listings printed out just after 5 pm on 30 June were “Bank Statements” within the meaning of the agreement: [79]-[92].

Per McColl JA:

6. Commercial contracts should be construed so as to be given a sensible commercial operation: (at [105]).

Upper Hunter District Council v Australian Chilling and Freezing Co Ltd [ 1968] HCA 8; (1968) 118 CLR 429; Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; (1973) 129 CLR 99; Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA applied

7. If words used in a written contract are unambiguous, the Court must give effect to them notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different: (at [106]).

Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; (1973) 129 CLR 99 applied.

8. Ascertaining the meaning of a written agreement includes taking into account what it would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: (at [107]).

Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 applied.

9. The Letter Agreement achieved that certainty for both parties, making it plain that “5pm on the day of Completion” was the critical time when the line was to be drawn: when the Distribution was to be calculated and paid to the respondent. After that time the appellant would be at liberty to reduce the balance in the NAB account, including by making the Distribution payment: (at [109]).

10. The Letter Agreement would have conveyed to a reasonable person with the parties’ background knowledge that 5pm on the day of Completion had been deliberately chosen as the time for calculation of the Distribution payment: (at [110]).

11. The respondent’s contention would require the Court to re-write the Letter Agreement, an exercise the principles of construction do not permit it to undertake: (at [110]).

Australian Broadcasting Commission v Australasian Performing Right Association Ltd [1973] HCA 36; (1973) 129 CLR 99; Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 applied

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40221/08

SPIGELMAN CJ

BEAZLEY JA

McCOLL JA

15 July 2009

Regency Media Pty Ltd v AAV Australia Pty Ltd

Judgment

1 SPIGELMAN CJ: I agree with Beazley JA.

2 BEAZLEY JA: This is an appeal from a decision of his Honour Rolfe DCJ, in which his Honour ordered judgment in favour of the respondent in the sum of $677,328.97 (comprising $567,744.40 in damages and $109,584.57 in interest). The respondent claimed it was entitled to payment of that sum pursuant to the terms of a Share Sale Deed that terminated a Joint Venture to which the parties had hitherto been parties, as that Deed was affected by the terms of an agreement entered into between the appellant and the respondent on 30 June 2006 (the Letter Agreement). The appeal raises the proper construction of the meaning of two terms used in the Letter Agreement. The terms in question are “close of business on the day of completion” and “Bank Statements”.

3 The parties to the Joint Venture were AAV Duplication Services Pty Limited (AAVD) as to 51 per cent and Regency Recordings Pty Limited as to 49 per cent. Regency Recordings Pty Limited subsequently changed its name to Regency Media Pty Limited, which is the named appellant in the proceedings. Until the sale of its shares pursuant to the Share Sale Deed, the respondent, AAV Australia Pty Limited, was the owner of the entire share capital of AAVD.

4 The business of the Joint Venture concerned the duplication and manufacture of audio and audiovisual home entertainment products. The Joint Venture was operated through two enterprises, AAV Regency Management Pty Limited (the Manager) and AAV Regency Pty Limited (the Sales Agent). The shareholding in each of these companies was owned in the same respective shares as the Joint Venture itself, namely, AAVD owned 51 per cent and the appellant owned 49 per cent of the share capital in each of these companies.

5 By the Share Sale Deed made on 27 February 2006, the appellant purchased the respondent’s shares in AAVD, so that the appellant was to have 100 per cent ownership of the business that had been conducted by the Joint Venture. The date of Completion, although not specified in the Share Sale Deed, was eventually agreed between the parties to be 30 June 2006. The purchase price and certain other payments were either to be made on and/or calculated as at the close of business on the day of Completion. The characterisation of a payment made by Sony Pictures Home Entertainment Pty Ltd (Sony) on 30 June is at the heart of the dispute between the parties.

The Share Sale Deed

6 Clause 1.1 of the Share Sale Deed was a definition provision in which, relevantly, the following terms were defined:

“ ‘Completion’ means completion of this Deed and the sale and purchase of Sale Shares in accordance with the terms of this Deed.

...

‘Completion Accounts’ means the balance sheets of AAVD as at the close of business on the Completion Date to be prepared and audited pursuant to clause 6, in accordance with the Completion Accounting Principles and containing information derived from the management accounts in relation to the AAV Regency Joint Venture.

‘Completion Date’ means the date on which Completion occurs.

‘Completion Payment’ means $22 Million.

‘Purchase Price’ means the aggregate amount of:

(a) the Completion Payment;

(b) the WC Adjustment Payment (if any); and

(c) the Final Adjustment Payment (if any).”

...

‘Sale Shares’ means all of the shares in the capital of AAVD, more particularly described in Schedule 1 including any Further Shares.

...

‘Settlement’ means completion of a Relevant Sale.

‘Settlement Date’ means the date and time a Settlement occurs.

...

‘WC Adjustment Payment’ means either:

(a) subject to (b), 51% of the amount (if any) by which the Working Capital Amount at Completion exceeds the WC Average Amount, confirmed or adjusted by the Auditors under clause 6.2 or as determined by the Independent Accountant under clause 6.4; or

(b) where clause 6.5 applies, the amount (if any) calculated in accordance with that clause.

‘WC Average Amount’ means the monthly average Working Capital Amount during the 12 month period immediately preceding the Completion Date, confirmed or adjusted by the Auditors under clause 6.2 or as determined by the Independent Accountant under clause 6.4.

‘WC Payment Date’ means either:

(a) subject to (b), the date which is 5 Business Days after the date upon which the Completion Accounts, Working Capital Amount at the Completion Date, the WC Average Amount and the WC Adjustment Payment become final and binding on the Vendor and the Purchaser under this Deed;

...

‘Working Capital Amount’ means:

(a) subject to (b), the positive sum (if any) of the following in respect of the AAV Regency joint venture:

(i) the aggregate of trade debtors, (net of doubtful debts) inventory, prepayments and non cash and non cash equivalent deposits; less

(ii) the aggregate of trade creditors, accruals, employee leave provisions, but excluding any liabilities (interest bearing or otherwise) relating to property, plant and equipment,

excluding any debts owing by the Manager or the Sales Agent to a Joint Venturer and excluding provisions for or accruals in respect of Royalties ...”

7 “Completion Accounts” were to be struck “as at close of business” on the Completion Date. “Close of business” was not defined. The Completion Date was internally defined by reference to the date upon which Completion occurred. The WC Adjustment Payment was calculated by determining the monthly average of the Working Capital Amount for the previous 12 month period and then assessing whether the Working Capital Amount at Completion exceeded the Working Capital Average Amount. The WC Adjustment Payment was 51 per cent of any such excess.

8 Clause 3 provided for the payment of the Purchase Price. Clause 3.1 provided that the consideration for the sale shares was the Purchase Price. The Completion Payment and the WC Adjustment Payment were to be made, respectively, on the Completion Date and the WC Payment Date: cl 3.2. The Completion Payment was defined to mean $22 M. As events turned out, there was no Final Adjustment Payment. The calculation of the WC Adjustment Payment required account to be taken, inter alia, of the amount owing by trade debtors as at Completion of the Share Sale Agreement. Pursuant to cl 3.3 there was a discrete obligation on the appellant to pay to the respondent to 51 per cent of cash, cash equivalent and monies in financial institutions. Such monies did not form part of the Purchase Price. Clause 3.3 provided, relevantly:

“3.3 Debt and cash on hand

...

(b) Each of the parties acknowledge and agree that, between the date of this Deed and Completion, the Manager and the Sales Agent will (and the Joint Venture Companies will cause the Manager and the Sales Agent to) distribute (in accordance with the Joint Venture Agreements and past practices) 51% of all cash or cash equivalent on hand or held in a financial institution to AAVD (and in any event prior to Completion distribute 51% of all cash or cash equivalent on hand or held in a financial institution to AAVD) and AAVD will distribute to the Vendor (whether by way of loan repayment or dividend) all cash or cash equivalent on hand or held in a financial institution on or before Completion.” (Emphasis added)

There was no evidence that any provision of the Joint Venture Agreement related to the distribution of such sums nor was there any evidence as to past practices.

9 Pursuant to cl 5.1, Completion was to take place on 30 June 2006 or any earlier Settlement Date. As events turned out, Completion took place on 30 June 2006. Clause 5.3(a)(i) provided that on Completion, the purchaser was to “pay the Completion Payment ... to the Vendor”.

10 Clause 6 related to Completion Accounts. Pursuant to cl 6.1 the appellant was to prepare accounts “as at the close of business on the Completion Date”. Those accounts were to be prepared as soon as practicable and in any event, no later than 25 business days after Completion. The accounts were to be provided to the respondent and to the auditors: cl 6.2. The auditors were to audit the Completion Accounts within a specified time and provide a written report to both parties.

11 Both parties had a right to have the audited Completion Accounts or any aspect of those accounts reviewed within 10 business days after the date on which each was given a copy of the written report of the audit: cl 6.3. Subject to there being no dispute, the audited accounts were to be taken to be the final Completion Accounts and the Working Capital Amount at the Completion Date. In this regard, the amount set out in the audited report was to be final and binding on the parties. Clause 6.4 was a dispute resolution provision, should there be a dispute as to the Completion Accounts or the Working Capital Amount at the Completion Date.

12 Clause 14.1 made provision for the service of notices under or in connection with the Share Sale Deed. Relevantly, it provided that if a communication was received after 5 pm, it was taken to be received at 9 am on the next working day: cl 14.1(e).

The Letter Agreement

13 On 30 June 2006, the appellant and the respondent entered into the Letter Agreement. The Letter Agreement provided, principally, for the time at which the amount of the payment required to be made under cl 3.3(b) was to be determined.

14 The Letter Agreement was in the following terms:

“We refer to clause 3.3(b) of the Share Sale Deed and the obligations of the Sales Agent, the Manager and the Joint Venture Companies (each as defined in the Share Sale Deed) to distribute to AAVD between the date of the Share Sale Deed and Completion (as defined in the Share Sale Deed) (in accordance with the Joint Venture Agreements (as defined in the Share Sale Deed) and past practices) and in any event prior to Completion fifty one per cent (51%) of all cash or cash equivalent on hand or held in a financial institution (the ‘Distribution’).

As the Completion Accounts (as defined in the Share Sale Deed) are to reflect the financial position as at close of business on the day of Completion, we have agreed that the amount of the Distribution will be calculated as being the aggregate amount of cash or cash equivalent held on hand by the Sales Agent or the Manager as at 5.00 pm on the day of Completion together with the aggregate credit balances (without offset or deduction against any accounts in debit) as stated in the bank statements of the Sales Agent’s and the Manager’s financial institutions as at 5.00 pm on the day of Completion (‘Bank Statements’), notwithstanding that Completion may have occurred earlier that day.

You undertake to us to procure that the Sales Agent and the Manager print the Bank Statements at 5.00 pm on the day of Completion (and provide copies of the same to us) and that they make payment of the Distribution (calculated in the manner set out above) to us directly in immediately available cleared funds within 2 Business Days (as defined in the Share Sale Deed) of the day of Completion in accordance with the payment directions issued to each of the Sales Agent and the Manager in our favour by AAVD and dated with today’s date.

You further undertake that you will not (and will procure that the Sales Agent and the Manager do not) between the time at which Completion occurs and 5.00 pm on the day of Completion, reduce the amount of cash or cash equivalent on hand or held in a financial institution by or on behalf of either of the Sales Agent and the Manager.

Except as set out above, nothing in this letter in any way changes or amends the provisions of the Share Sale Deed. This letter is without prejudice to any rights or remedies that AAV Australia Pty Ltd (ACN ...) may have under the Share Sale Deed.

Please execute the attached copy of this letter as a deed and return to us to signify your acceptance of and agreement to the terms of this letter and that you undertake and confirm to us in the terms set out above.”

15 The Letter Agreement, as between the appellant and the respondent, affected the operation of cl 3.3(b) of the Share Sale Agreement. (As the Letter Agreement was only entered into by the appellant and the respondent it did not amend the Share Sale Deed to which there were further parties. Nothing relevant turns on this for the purposes of the appeal).

16 The issue between the parties, both at first instance and on the appeal, was whether, as at Completion, monies paid to the Joint Venture by Sony (the Sony payment) were part of the credit balance in a bank account so as to be treated under the terms of cl 3.3(b). The respondent claimed they formed part of the credit balance in the relevant bank account. The appellant denied that this was so. Although it was not relevant to its argument, the appellant submitted that the Sony payment was a trade debt to be taken into account in the calculation of the WC Adjustment Payment. The resolution of the dispute depends upon the construction to be given to the Letter Agreement.

Events leading to Completion on 30 June and other surrounding circumstances

17 As I have already indicated, the parties had agreed that Completion was to be on 30 June 2006. On 22 June 2006, the appellant’s solicitors emailed the respondent’s solicitors, raising a number of matters relating to Completion, including, relevantly, the following:

“Under clause 3.3(b) of the Share Sale Deed, [the Sales Agent] and [the Manager] must distribute to AAVD, and AAVD must then distribute to [the respondent], 51% of the cash or cash equivalent on hand or held in a financial institution on or before completion. At what point in time on 30 June 2006 is your client expecting our client to determine the amounts held in financial institutions? Obviously if this amount is to be paid at completion, the relevant time would need to be some time before completion.” (Emphasis added)

18 There were further communications between the solicitors for the parties on both 26 and 27 June, relating to how “cash” was to be dealt with. A file note by the appellant’s solicitors, dated 26 June, stated:

“Clients talking tomorrow. Couple of matters.

cash – completion as at COB on 30 June 06

sweep at bank at a time – say 12 noon

undertaking at settlement to extent any

cash in b/n 12 & COB – pay when pay

final adjustment.

They will draft undertaking and send.”

19 There is a file note by the respondent’s solicitors made at about the same time. It is not clear whether that is a mirror of the file note taken by the appellant’s solicitors. Nonetheless, it essentially records the same matters. On 27 July 2006, there was a further telephone conversation between the solicitors. The appellant’s solicitor’s file note of that conversation is as follows:

“[The respondent’s solicitor] wanted to clarify the payment of cash by [the Sales Agent] & [the Manager] to AAVD & then to [the respondent]. Bank Statements to be printed at specific time, say 12 noon and [the appellant] to give undertaking to pay cash held b/n 12 & COB on Friday. Share Sale Deed actually only provides for cash held on or before completion. Understand [the respondent] has agreed that 5 pm will be cut off. [The respondent’s solicitor] will confirm this. At any rate, completion accounts to be as at 5 pm on Friday.”

20 It appears that on 27 June 2006, the parties reached agreement, or expected to reach agreement, in terms of the Letter Agreement (which was not signed until 30 June), as the Sales Agent emailed the National Australia Bank as follows:

“As per our telephone conversation earlier this afternoon, we require bank

[sta]tements or document[s] for all 4 accounts clearly showing bank balances

[at] 5.00pm on the 30^th June, must be received by Tim Morrissey

email: tmorrissey@ ... or fax number 03 ... by 5.10pm

same day.

Please confirm that this request ha[s] been actioned.”

21 On 29 June, Todd Martin of the National Australia Bank confirmed by email to the Sales Agent that the bank would attend to the request. Mr Martin continued:

“I will attend to the requirement on Friday, however I should note that [we] will provide a transaction listing detailing what has passed through the account from when the last statement was issued, until the COB on Friday. Any transactions that are effectively in the system, like unpresented cheques or over the counter bank deposits, may not show up on our transaction listing. If there are none of these type transactions, all should be in order.”

22 The appellant did not advise the respondent of the information contained in this email. There was no obligation to do so and the respondent did not thereby allege it was misled. However, it is to be inferred that the respondent did not have a full understanding of banking practices as was reflected in this letter, or as was reflected in the evidence of Professor Clarke, an expert in banking practices, whose evidence is referred to below.

23 At 5.26 pm on 30 June 2006, by facsimile to the Sales Agent, Mr Martin sent the transaction listings for the four accounts that the Joint Venture held with the National Australia Bank. He also informed the Sales Agent that there had been no transactions on the US accounts up until 5 pm that day. The following notation appeared at the bottom of each page of the transaction listings:

“IMPORTANT:

This provisional list is NOT A STATEMENT of account.

It may include transactions which appear on previous statements.

It may NOT include all transactions processed since last statement was issued.

With the exception of cheque serial numbers, the details shown in the particulars column may be an abbreviation.

Inclusion of a debit does not always indicate payment by the Bank.”

The qualifications in this notation were to the same effect as those made by Mr Martin in his email of 29 June. They signified to the recipient of the document that there may be differences between the actual credit or debit status of the account and the information contained in the transaction listing.

24 Tim Morrissey of the appellant forwarded copies of the transaction listings to the respondent by facsimile. He noted that the facsimiles were not very clear and said that he was going to have the National Australia Bank confirm the balances by email. In the meantime, he set out the balances as he understood them to be and advised the respondent that 51 per cent of all credit balances would be transferred immediately.

25 The National Australia Bank, by an email sent at 5.41 pm, referred to its “earlier facsimile” and confirmed to the Sales Agent that “the balances were correct as at 5 pm”. The reference to the earlier facsimile appears to be a reference to the transaction listings of 30 June (above at [23]). The Sales Agent forwarded the email to the respondent.

26 The appellant paid to the respondent an amount representing 51 per cent of the credit balances confirmed as correct by the National Australia Bank in its email. The appellant’s payment to the respondent did not include 51 per cent of the Sony payment, which was not recorded on the transaction listings the National Australia Bank had forwarded to the appellant and, on the evidence to which I refer below, probably had not been deposited into the Sales Agent’s account by that time. Nor did it include 51 per cent of a number of other smaller deposits made into the bank accounts on 30 June. It was the appellant’s case that either the email from the National Australia Bank confirming the credit balances or the transaction listings, or both, were “Bank Statements” for the purposes of the Letter Agreement. I return to whether this was so below. It is first necessary to understand the background to the Sony payment.

27 In May 2006, the Sales Agent had issued 81 invoices to Sony, totalling $1,079,593.01. These invoices were due for payment on 30 June 2006. On 26 June, Sony forwarded its “Remittance Advice” to the Sales Agent by email. The Remittance Advice set out the 81 invoices, recorded the amount paid (in the sum just stated) and recorded that the “Effective Date” for payment was 30 June 2006. Pursuant to its internal accounting system, Sony had created a payment instruction for $1,079,593.01 to be paid from its Westpac account to the Sales Agent’s account with the National Australia Bank.

28 Westpac processed Sony’s instruction at 12.09 pm on 30 June 2006. It informed the National Australia Bank of the details of the transaction at 1.13 pm. However, the Sony payment did not appear on the transaction listings forwarded by the National Australia Bank to the appellant. The reason this is so relates to the manner in which inter-bank transactions are conducted. Evidence of this was given by Professor Clarke, who had accepted expertise in accounting and information systems.

29 The trial judge recounted Professor Clarke’s evidence in terms that were not disputed. Accordingly, it is convenient to set out those paragraphs of his Honour’s judgment in full:

“[44] Professor Clarke said it was not meaningful to infer a specific time at which the credit of $1,079,593.01 reached the Sales Agent’s account at the NAB. This was because of the way inter-bank transactions are conducted in Australia. Professor Clarke’s evidence about this was as follows.

[45] Professor Clarke’s evidence was that after receiving the payer’s payment instruction, the payer’s bank executes it. This involves transferring to the payee’s bank:

(a) funds equivalent to the amount in the payment instruction;

(b) details of the transaction, in particular, the payee’s payee account identifier.

[46] Generally inter-bank transactions are conducted by means of an intermediary banker with which both banks have an account. In Australia such inter-bank payments are made through entries against accounts each bank holds with the Reserve Bank of Australia (‘RBA’). These are called Exchange Settlement (‘ES’) accounts.

[47] For very large transactions it is normal to execute the instruction promptly and individually. In this context ‘very large’ means tens of millions of dollars rather than transactions of only up to seven figure sums.

[48] Because there is a large volume of payment transactions ranging from amounts of $50 to $5,000,000, it is more efficient for each bank to combine all of the instructions of this kind that they receive during a business day and issue a single instruction to the RBA to transfer a total amount from the paying bank to each of the receiving banks. This is referred to as ‘deferred net settlement’. It is ‘net’ in the sense of being a single bulk or summary transaction for each bank, rather than a large number of detailed transactions. It is ‘deferred’ in that it does not occur progressively during a business day, but just once at the end of each business day.

[49] This effects the transfer of the funds to the payee’s bank. In order for the funds to be credited to the payee’s account with that bank, the date in the payment instruction also has to be transferred to the payee’s bank. This is achieved by what is generically referred to as a clearing scheme.

[50] After the payee’s bank has received both:

(a) the funds (by means of net settlement through the ES account with the RBA) and

(b) the payment instruction (by means of the relevant APCA clearing system, in the case of direct entry transactions, BECS);

the payee’s bank effects the final instruction by crediting the ‘amount’ to the ‘payee-account identifier’.

[51] Banks generally effect the creditor payee accounts in one or more batches each ‘business day’, that is, each calendar day on which the bank is open for business. The batch processing may be undertaken both during the ‘working day’, that is, between 9am and 5pm weekdays (except public holidays) and overnight after the end of the working day during which the direct entry payment instructions were received.

[52] All banking works on ‘daily rests’. That is to say, banks do not regard funds as arriving in an account at a particular time within a business day, but only on a particular business day. Consistently with that approach, interest accrues per business day, not per hour.

[53] Accordingly, all processing is regarded as having occurred ‘as at close of business’ on a particular business day. It is not relevant whether the processing actually takes place during working hours, or at some time overnight (although it does need to have been completed prior to the beginning of the following working day).

[54] Professor Clarke further explained that a customer could not reliably know what transactions had been reflected in the processing for a particular business day until the commencement of the following working day. That was based on a long-standing practical arrangement which allows banks to have from approximately 8.30pm in the evening until 8.30am the following morning to complete the previous day’s processing.

[55] Professor Clarke also said that payees may have more timely access to information by means of online displays of data equivalent to a ‘bank statement’ and perhaps also to data relating to each transaction that is processed against their account. Generally, the transactions displayed are recorded up to the preceding business day.”

30 So far as the Sony payment was concerned, Professor Clarke was of the opinion that by 5 pm, Westpac had not made the deferred net settlement payment to the RBA and that the RBA had not credited the National Australia Bank with the Sony payment until some time after 5 pm. Professor Clarke was also of the opinion that the National Australia Bank had probably not allocated any amount to the Sales Agent’s account prior to 5 pm.

31 The first occasion that the Sony payment appeared on the Sales Agent’s account with the National Australia Bank was at 8.45 am on 3 July 2006, being the first business day after 30 June. The Sales Agent’s online statement reports generated at that time were in respect of transactions on 30 June 2006 and included the inter-bank credit reflecting the Sony payment. Professor Clarke accepted that it was a possibility that the Sales Agent’s account might have been credited with the Sony payment before 5 pm, but said that it was unlikely that any money had been deposited into the account before 5 pm.

32 Professor Clarke explained that banking works on “daily rests”, that is, banks do not regard funds as arriving in an account at a particular time within a business day. Rather, banks treat funds as arriving in an account on a particular business day. He stated that a corollary of that rule was that “all processing is regarded as having occurred ‘as at close of business’ on a particular business day”. It was not relevant to banking practice whether the processing actually occurred during working hours or at some time overnight. He observed that a customer cannot reliably know what transactions have been processed for a particular day until the commencement of the following working day. He said that was a long-standing practical arrangement, such that banks had from approximately 8.30 pm on a particular day until 8.30 am the following morning to complete the previous day’s processing.

33 Professor Clarke said that transactions were processed in date order and the balance of account at the end of a business day is made available to clients though a “bank statement”. He said that was a slow process because it involved printing and mailing out a hard copy. He observed that there was an online equivalent to a “bank statement”. He said that the online statements generally displayed transactions recorded up to the end of the preceding business day.

34 Professor Clarke explained that the National Australia Bank had “declared” to the Sales Agent as the account holder that the “[Sony] transaction was credited to the account on 30 June 2006”. He drew this inference from the online statement generated at 8.45 am on 3 July 2005, together with the hardcopy quarterly Bank Statements for the Sales Agent’s account for the period 5 May 2006 to 4 August 2006. The hardcopy bank statement recorded various transactions, including the Sony payment, that were included in the online statement of 3 July as being transactions carried out on 30 June 2006.

35 Professor Clarke stated the National Australia Bank’s declaration that the funds were credited on 30 June needed to be understood in the light of the processes he had earlier explained. In this regard, he said it was not meaningful to infer a particular time at which the credit reached the Sales Agent’s account. However, his opinion was that the evidence clearly showed that the Sony payment was treated by the National Australia Bank as being in the account as at close of business on 30 June 2006. The trial judge, at [56], accepted that this was what had occurred. It should be noted that Professor Clarke did not suggest that his use of the phrase “close of business” was meant to have any relationship with the terminology used in the Letter Agreement. Indeed, his reference could only have been to “close of business” in a banking sense. On Professor Clarke’s evidence, in an automated banking world, “close of business” was well after 5 pm on any given day.

36 It will be recalled that the appellant paid the respondent 51 per cent of the credit balances as they appeared in the transaction listings in the email from the National Australia Bank on 30 June. On 31 July 2006, the respondent’s solicitors wrote to the appellant’s solicitors in relation to what they claimed was a shortfall of $571,643.52, plus interest from 4 July 2006, owing to them. That amount, for the most part, was 51 per cent of the Sony payment. The appellant’s solicitors responded that the appellant had:

“... complied with the Sale Agreement when it paid your client its share of the cash and aggregate credit balances as stated in the relevant bank statements as at 5 pm on the day of Completion”.

37 Pursuant to preliminary discovery, the respondent subsequently obtained copies of the Sales Agent’s online statements generated at 8.45 am on 3 July and ascertained that the Sony payment had been deposited in the Sales Agent’s account on 30 June.

38 As I have previously stated, the appeal essentially involves the proper construction of two terms used in the Letter Agreement. Although there are some 21 grounds of appeal, all grounds relate to these two principal questions.

First Issue: proper construction of the phrase “at the close of business”

39 The trial judge accepted the respondent’s submission that the words in the Letter Agreement:

“... the aggregate credit balances ... as stated in the bank statements of the Sales Agent’s and the Manager’s financial institutions as at 5.00 pm on the day of Completion”

meant the sum of the credit balances stated in their bank accounts “as at the close of business on 30 June 2006” and that “close of business necessarily meant the time after which nothing further relevant would occur”. The trial judge said that this construction was consistent with the parties’ objective purpose of “filling the gap” between the actual time of Completion and close of business.

40 His Honour considered that his construction was supported by the introductory words to the second paragraph of the Letter Agreement which set out the rationale of the 5 pm cut off, namely, that the “Completion Accounts ... are to reflect the financial position at close of business on the day of Completion”. His Honour considered the parties had decided to achieve their commercial objective of there being no further credit balances after close of business on 30 June 2006 “through the bank statements printing mechanism” specified in the Letter Agreement.

41 His Honour rejected the appellant’s contention that the parties countenanced within their agreement the possibility that invoices issued prior to Completion, but paid into the bank accounts between 5 pm and close of business on 30 June 2006, could “fall through the crack”. In dealing with this submission, his Honour clearly included the close of banking business in the sense that amounts might be credited into the relevant bank accounts at times after the physical closing hours of banks, or for that matter, the business of the Joint Venture. This is apparent from the finding that close of business meant “the time after which nothing further relevant would occur”.

42 The appellant contended that his Honour erred, firstly, in construing the phrase “as at close of business” as being “the time after which nothing further would relevantly occur”; and secondly, in finding that the objective purpose of the parties was to “fill the gap between the actual time of completion and the close of business”.

43 It is convenient to deal initially with the second of the errors alleged by the appellant namely, that his Honour erred in his finding as to the objective purpose of the parties, because it is apparent that his Honour was influenced in his construction of the phrase “at close of business” by his finding as to the objective purpose of the parties.

Intention of the parties

44 So far as the objective purpose of the parties was concerned, the appellant submitted that it was apparent from the email of 22 June, which it contended was the genesis of the Letter Agreement and the terms of Letter Agreement itself, that the objective commercial purpose of the parties was to achieve certainty as to when the amount of the Distribution payable to the respondent was to be determined.

45 The respondent submitted that the Share Sale Deed and the Letter Agreement had to be construed together. Under the Share Sale Deed, the parties, on Completion, were to share the financial result of their joint endeavours either by way of the WC Adjustment Payment or the payment of its proportion of cash, cash equivalent and the credit balances. The Letter Agreement did not change that. Indeed, the purpose of the Letter Agreement was to facilitate that intention.

46 It followed, on the respondent’s submission, that the time at which the Completion Accounts were struck had to be consistent with the time at which cash, cash equivalent and the credit balances were determined, so as to ensure the respondent received its full entitlement to monies earned during the course of the Joint Venture, either by way of the WC Adjustment Payment or payment under cl 3.3(b). This would only be the case if its construction, as accepted by the trial judge, was the proper construction of the Letter Agreement. The respondent submitted that what was not intended by the parties, in entering into the Letter Agreement, was that an invoice paid on the date of Completion would fall between the cracks.

47 The intention of the parties to a contract “is to be ascertained from the instrument as a whole”: see Fitzgerald v Masters [1956] HCA 53; (1956) 95 CLR 420 at 437 per McTiernan, Webb and Taylor JJ. Primacy is to be given to the language used by the parties: see McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579. However, in determining the objective intention of the parties, the court is entitled to know the commercial purpose of the contract. As Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ explained in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at [22]:

“In Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 350, Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-996:

‘In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’”

48 In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 the High Court noted, at [40], that it had recently reaffirmed in Pacific Carriers Ltd v BNP Paribas “the principle of objectivity by which the rights and liabilities of the parties to a contract are determined”. The Court continued:

“It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.” (Citation omitted)

See also Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 186 ALR 289 at [9]- [11] and Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 at [7]- [13] per Spigelman CJ.

49 In order to determine whether the objective purpose of the Letter Agreement is as contended by the appellant, it is first necessary to return to the Share Sale Deed. Under the terms of the Share Sale Deed, the amount of the WC Adjustment Payment would not be known as at Completion, for two reasons. First, there were likely to be trade debts outstanding and the WC Adjustment Payment involved a formula of which trade debts was but one integer and, secondly, cash, cash equivalent and credit balances in financial institutions, did not fall into the category of trade debts. The necessary calculations could not be done until the position of the accounts was known as at Completion.

50 In the accounting that was undertaken in accordance with cl 6 of the Share Sale Deed, the Sony payment was included by the accountants as “Cash at Bank”. In the result, no WC Adjustment Payment was payable. Had Sony been treated as a trade debtor there would have been a WC Adjustment payment to which the respondent was entitled. The respondent did not seek a review of the audited accounts in accordance with cl 6.3. The reasons for it not having done so are not relevant to the issues presently in dispute.

51 Clause 3.3(b) provided an obligation to pay to the respondent 51 per cent of cash or cash equivalent on hand or held in a financial institution. However, the terms of the Share Sale Deed governing the determination of when these amounts were to be ascertained were not clear, with references in cl 3.3(b) to distribution “on or before completion” and funds being on hand “on or before completion”. Thus, whilst the Share Sale Deed specified the funds payable to the respondent, it had not provided any clear statement as to, and there was no mechanism for determining, when those amounts were to be ‘closed off’ for the purposes of quantifying the amount so payable. The lack of clarity was likely to have practical implications, given that the business being conducted by the Joint Venture was still in operation and was in effect being ‘taken over’ by the appellant as a going concern.

52 The genesis of the Letter Agreement was the email of 22 June. It was apparent from the email that the appellant was concerned as to the lack of precision in the terms of cl 3.3(b), as it stated that the appellant wanted to know “at what point in time on 30 June 2006 [the respondent was] expecting [the appellant] to determine the amounts held in financial institutions” (at [17]). The email observed that if the amount was to be paid at Completion, the time would have to be determined at “some time before completion”. The only ‘response’ to the email, on the evidence, was the Letter Agreement itself.

53 It is apparent that the terms of the Letter Agreement responded directly to the issue raised in the email, (although the provision regarding not reducing the credit balances went further than the matters raised in the email).

54 By its terms, the Letter Agreement affected the manner in which cl 3.3(b) of the Share Sale Deed was to be implemented. The funds referred to in cl 3.3(b) and the proportion of those funds to be paid to the respondent, remained the same. However, importantly, the point of time on the day of Completion at which the credit balances in the accounts were to be determined was specified. The Letter Agreement further required that “Bank Statements” were to be printed at 5 pm and included a provision to ensure that the balances were not reduced between the time of Completion and 5 pm. It also specified that payment was to be made within two business days of Completion.

55 The parties were free to decide upon any time on the day of Completion (or a nominated day before or after Completion) at which the credit balances in the bank accounts were to be determined. The actual time or point in time was not of itself important. What was important was that there was a time or point in time specified so that the amount that the appellant was required to pay under cl 3.3(b) could be determined.

56 Having determined upon a time that was after the time when Completion was to take place, it is not surprising that the respondent would want to ensure that the credit balances were not diminished in the period between Completion and when the balances were to be determined. However, this was a consequence of the parties having agreed upon a time after Completion as the point in time at which the amount of cash and the credit balances were to be determined. It was not the purpose of the parties, objectively determined, in entering into the agreement. After all, if a trade debtor paid its account after the nominated time, the respondent did not ‘lose’ that amount. Rather, such monies would be taken into account in determining the WC Adjustment Payment and be dealt with as part of the Completion Accounts in accordance with cl 6.

57 In my opinion, therefore, the request in the email and the terms of the Letter Agreement demonstrate that the objective intention of the parties was to provide for certainty in ascertaining when the amount of the Distribution was to be determined. The purpose of the Letter Agreement was not, as his Honour found, the provision of a mechanism to achieve the objective purpose of the parties “filling in the gap between the actual time of completion and the close of business”. For the reasons explained, there was no gap to fill, but rather a question of how a particular sum of money, debt, or balance was to be treated. This depended upon the point in time chosen for ascertainment of the Distribution amount. The Letter Agreement added certainty to this process in the way discussed. The fact that the auditors did not audit the accounts on the basis of the agreement between the parties cannot affect the objective intention of the parties, nor the proper construction of their agreement.

58 Even if I am wrong in concluding that the objective intention of the parties was not as found by his Honour, it is apparent that the achievement of certainty was also part of the objective intention of the parties and his Honour erred in not so finding. I should add that the respondent does not dispute that the purpose of the parties entering into the Letter Agreement was because they perceived they had a “time of day problem” and they sought to resolve that in the Letter Agreement. Having accepted this was so, there would appear to be no dispute between the parties that an objective purpose of the parties was to make certain that which was uncertain.

59 When it is understood that certainty was the objective intention, or one of the objective intentions, of the parties in entering into the Letter Agreement, the expressions used therein are more readily understood.

Construction of “as at close of business on the day of Completion”

60 The provision of the Letter Agreement that calls for construction is the phrase “as at close of business on the day of Completion”. That phrase appears in the second paragraph of the Letter Agreement. However, the context in which the phrase appears needs to be understood as there are a number of different phrases used in the Letter Agreement which seemingly point to the same time but to which the parties give a different meaning.

61 In the first paragraph reference is made to cl 3.3(b) and the obligation under that clause to distribute 51 per cent of cash or cash equivalent on hand held in financial institutions (defined together as the Distribution). The Letter Agreement then continued as follows:

(1) The opening words of the second paragraph note that as the Completion Accounts were to reflect the financial position “as at close of business on the day of Completion”, the parties had agreed as to the calculation of the Distribution;

(2) The agreement was that the Distribution would be calculated as being the aggregate amount of cash or cash equivalent held on hand by the Sales Agent or the Manager “as at 5 pm on the day of Completion”; together with the aggregate credit balances as stated in the bank statements of the Sales Agent and the Manager “as at 5 pm on the day of Completion”, notwithstanding that Completion may have occurred earlier in the day;

(3) “Bank statements of the Sales Agent’s and the Manager’s accounts in financial institutions as at 5 pm on the day of Completion” were defined as “Bank Statements”. Thereafter the defined term “Bank Statements” is used in the agreement;

(4) Pursuant to the terms of the third paragraph, the appellant was required to procure the Sales Agent and the Manager to print the Bank Statements at 5 pm on the day of Completion”. Copies of the printed “Bank Statements” were to be provided to the respondent and the Distribution was to be paid within two business days of the day of Completion; and

(5) In accordance with the fourth paragraph, the appellant was not to reduce the cash or cash equivalent on hand or held in a financial institution, “between the time at which Completion occurs and 5 pm on the day of Completion”.

62 The appellant submitted that the parties intended that the expression “close of business” and “as at 5 pm” and “at 5 pm” to be synonymous. There was no direct dispute about this although it really only stated the problem and the parties differed as to the outcome. The appellant’s submission was that the Letter Agreement, in effect, defined “close of business” to mean “5 pm”. The respondent contended that “5 pm” was a reference to “close of business”. At different times in its submissions it put this interchangeably, namely, that “5 pm” meant “close of business”, or that “close of business” meant “5 pm”.

63 The appellant responded that this begged the question as to when “close of business” was. The respondent’s answer was that it meant the time at which no further business occurs on a particular day. It submitted that the parties understood that no further business would occur after 5 pm, which is why that time had been specified. Accordingly, whenever the term “5 pm” appeared in the Letter Agreement, it was be read as equally meaning “close of business”. In this regard, the respondent submitted that “close of business” meant “the close of all business”. As that was relevant to this case, it included the time at which banks attended to processing transactions that had occurred during the course of the day.

64 This construction was vital to the respondent’s case, because of the evidence of Professor Clarke as to banking practice. On the respondent’s argument, as the Sony payment (and the other small amounts) were paid on 30 June, it was entitled to 51 per cent thereof. It was irrelevant, on the respondent’s argument, that the processing of these payments by the National Australia Bank, including depositing the monies into the Sales Agent’s and Manager’s accounts, occurred after 5 pm. It was sufficient that, in accordance with banking practice, they were received on 30 June and subsequently recorded by the National Australia Bank as being received on 30 June, even if received after 5 pm and even if the record of the receipt of the funds into the accounts was created after that date.

65 Senior counsel for the respondent referred the Court to Julan Pool Supplies Pty Ltd v Onga Pty Ltd [1999] SASC 20 as to the meaning of “close of business”. In that case, the plaintiff was ordered to give further and better discovery “by close of business on 2 June 1998”. The plaintiff sent a supplementary list of documents to the defendant’s solicitors on 2 June 1998 by facsimile transmission. The transmission of documents commenced at 4.59 pm and took just over three minutes to complete. The defendant’s solicitors did not physically receive the document until 5.35 pm and successfully made an application to strike out the plaintiff’s action because of the delayed delivery.

66 On appeal, Debelle J remarked, at [13], that the expression “close of business” had “no commonly accepted or settled meaning”. His Honour commented that there was nothing that pointed clearly to whether “close of business” meant 5.00 pm, or the time at which the plaintiff’s or defendant’s solicitors closed their office, or the time at which most solicitors closed their offices. His Honour concluded, at [14]-[15], that the expression was “ambiguous” and that where there is ambiguity in a self-executing order with drastic consequences, such as striking out a claim, the ambiguity is generally resolved in favour of the party against whom the order has been made: see Trnka v The Commonwealth (1986) 44 SASR 572 at 575.

67 That case, however, is not of assistance, as the order that required discovery to be given “by close of business” did not specify what time that was. Here, the Letter Agreement specified a time, and the question of construction is how the phrase “close of business” is to be construed, having regard to the various phrases used in the Letter Agreement.

68 The appellant contended that its construction was the only objectively available construction of the Letter Agreement. In my view, that is correct. First, it was apparent from the appellant’s query in the email of 22 June, that when the question was raised as to “[the] point in time on 30 June 2006” that the respondent was expecting the appellant “to determine the amounts in financial institutions”, it wanted to know when it was to ascertain the credit balances so that it could determine what amount it was to pay by way of the Distribution.

69 In the Letter Agreement, the parties acknowledged the obligation in the Share Sale Deed that the Completion Accounts were to reflect the financial position “as at close of business”. The parties agreed that to fulfil that obligation, the respondent’s entitlement was in respect of cash, cash equivalent and credit balances as at a particular time. The time chosen was 5 pm. The phrase “as at 5 pm” is thereafter used in the balance of the Letter Agreement and the phrase “as at close of business” is not. The reason for this is obvious. There is no continuing function for the phrase “as at close of business”, as it that had been agreed as being “as at 5 pm”. In effect, “as at 5 pm” became the definition of “as at close of business”.

70 Having agreed to the time at which the Distribution amount was to be determined, the Letter Agreement provided the mechanism for the determination of the amount, (relevantly the amount of credit balances in financial institutions), being the amount stated in bank statements, not “as at close of business” on the day of Completion, but “as at 5pm on the day of Completion”. The words are clear. The respondent may have agreed to the specification of this time in ignorance of banking practice in respect of which Professor Clarke gave evidence. However, that is irrelevant to the proper construction of the Letter Agreement.

71 Should there have been any doubt as to what the parties meant, this is put to rest by the requirement that the “Bank Statements” be printed at the very point in time at which the balances were to be ascertained, that is, at 5 pm. The credit balances shown in the bank statements printed at that time were the amounts for the purposes of determining the Distribution to be paid to the respondent.

72 The respondent submitted that the obligation to print “Bank Statements” was an independent obligation unrelated to the ascertainment of the amount to be paid. In this regard, it submitted that the term “at 5 pm” in the third paragraph of the Letter Agreement had a different meaning to the phrase “as at 5 pm” in the second paragraph. It accepted that the term “at 5 pm” was to be construed literally and there was an obligation on the appellant to have “Bank Statements” printed at that time. However, “as at 5 pm” in the second paragraph meant at the close of business, that is, when all transactions had been recorded and processed.

73 In advancing this submission, senior counsel for the respondent acknowledged that the obligation to print “Bank Statements” at 5 pm, on the overall construction which it sought to give to the Letter Agreement, could not be subject of compliance because “Bank Statements”, as such, were not generated during the day, as Professor Clarke has explained. However, on the respondent’s submission, this simply forced one to look at the essential obligation of the appellant as specified in the second paragraph, namely, to pay the relevant percentage of credit balances in financial institutions “as at the close of business” on the day of Completion.

74 The obligation to print “Bank Statements” would have no purpose if the respondent’s submission was correct. The obligation to print the “Bank Statements” was an integral part of the agreement whereby the Distribution amount was to be determined as at 5 pm. This was apparent, first, from the fact that “Bank Statements” was a defined term, namely, the “bank statements of the Sales Agent’s or the Manager’s financial institutions as at 5 pm on the day of Completion” and secondly, the obligation was an obligation to print the “Bank Statements”. That is, the “Bank Statements” defined in the second paragraph were the same “Bank Statements” that had to be printed, as required in the third paragraph.

75 Support for the appellant’s construction that “close of business” meant 5 pm is also to be found in the fourth paragraph of the Letter Agreement, in which the parties undertook not to reduce cash or cash equivalent held in financial institutions between the time at which Completion occurred and 5 pm on that day. Relevantly, the Letter Agreement did not specify the period between “Completion” and “close of business”.

76 There is another factor that supports this construction. The online statements generated on 3 July not only included the Sony payment, but also the payment made by the appellant to the respondent in the sum of $707,022.77, which the appellant contended satisfied its obligation in respect of the Distribution. The respondent does not concede any liability to offset that payment against the credit balance that was otherwise in the account, nor does the appellant contend that its payment should be offset. However, the appellant relied on the fact these monies appeared in the online statement generated on 3 July as supporting its argument that the relevant “Bank Statements” were the documents generated on 30 June. If the Distribution amount caught credit balances as at 30 June, rather than “as at 5 pm” on 30 June, the credit balances would have been reduced by the amount of that payment.

77 Reference should also be made to cl 14.1(e) of the Share Sale Deed. To the extent that it might be relevant, the provision in this clause, that communications received after 5 pm were to be taken to have been received at 9 am on the next working day, supports the appellant’s construction of the Letter Agreement, that “as at 5 pm” was to be the relevant time at which to determine “as at the close of business”. The respondent, in support of its argument that the parties throughout their dealings had treated 5 pm and close of business interchangeably, also referred to the terms of cl 20.5(b) of the Joint Venture Operating Deed, which set up the Joint Venture. Clause 20.5(b) provided:

“If any act or thing required to be done is done after 5 pm on the specified day, it is taken to have been done on the following Business Day”.

For the same reason, I am of the opinion that this supports the appellant’s case, rather than the respondent’s argument.

78 The respondent’s submissions as to why “5 pm” and “close of business” were to be read interchangeably really reflected its misunderstanding of banking practices. There was no claim that the Letter Agreement should be rectified because its terms did not reflect the true agreement of the parties. Accordingly, for the reasons I have given, I am of the opinion that the credit balances were to be determined “as at 5 pm” on the day of Completion.

The Bank Statements

79 This construction of the Letter Agreement is sufficient to dispose of the appeal. However, as there were a number of grounds of appeal and significant emphasis in the argument as to what constituted the “Bank Statements”, it is appropriate to deal separately with the arguments relating to that issue, although in many respects it has been determined by what I have already said.

80 As I have already explained, “Bank Statements” was a defined term in the Letter Agreement. Fifty one percent of the credit balances therein (together with cash and cash equivalent) comprised the Distribution.

81 Three possibilities as to what were “Bank Statements” within the meaning of the Letter Agreement emerged in the arguments of the parties. First, the transaction listings printed out just after 5 pm on 30 June and forwarded to the respondent. Second, the email from the National Australia Bank confirming the credit balances. Third, the online statements for 30 June generated at 8.45 am on 3 July.

82 The trial judge found, at [68], that the online statements were “Bank Statement as at 5 pm on the day of Completion” within the meaning of the Letter Agreement. In reaching that conclusion, his Honour noted that the online statements commenced and ended with transactions on 30 June 2006. His Honour concluded that as the Sony payment appeared in one of the online statements, it followed that “Sony was no longer a debtor of the Sales Agent as at close of business on 30 June 2006”. The Sony payment, therefore, fell within the Distribution amount.

83 It also appears to have been relevant to his Honour’s reasoning that the Letter Agreement did not require the appellant to make a payment on the day of Completion. Rather, the obligation to pay the Distribution amount was within two business days of the date of Completion. It followed, on his Honour’s reasoning, at [69], that “any interim payment” as made by the appellant on 30 June “cannot be taken to have qualified its obligation to pay 51 % of the credit balance in the account prior to such payment”. The reference to “any interim payment” was a reference to the payment of $707,027 (and two other small payments) that the appellant made on 30 June and which it contended was in full satisfaction of its obligation under cl 3.3(b) and the Letter Agreement.

84 This reasoning was consistent with his Honour’s construction of the phrase “close of business” as being the end of the period in which all transactions for 30 June had been accounted for, regardless of when monies were received or recorded. It is also consistent with his finding as to the objective intention of the parties. However, for the reasons already given, I consider that his Honour erred in both respects. In particular, his Honour’s findings failed to take account of the definition of “Bank Statements” and the obligation to print “Bank Statements” at 5 pm. The online statement generated on 3 July could not have been printed at 5 pm on 30 June. Online statements printed at 5 pm on 30 June may have answered that description, but no such documents were printed.

85 The appellant further contended that his Honour misunderstood the import of the email from the National Australia Bank forwarded to the appellant on 30 June. This email set out the balances in the account. His Honour set these out at [29]. However, the email also stated that the balances in the transaction listings were correct as at 5 pm. His Honour did not refer to that part of the email in his judgment. The appellant submitted that this email was itself a “Bank Statement” for the purposes of the Letter Agreement, as it was a statement from the National Australia Bank as to the credit balances in the accounts as at 5.00 pm on the day of Completion. The appellant pointed out that, as was apparent from Professor Clarke’s evidence, banks do not produce bank statements for part of a day. It followed, on the appellant’s argument, that any statement by an authorised officer of a bank containing the information required by the Letter Agreement was, therefore, a “Bank Statement” as defined. The appellant submitted that by failing to note the confirmation that the balances in the transaction listings were correct, his Honour may have overlooked the significance of the contractual obligation to print the “Bank Statements”, that is, to print the “Bank Statements” at 5 pm on the day of Completion.

86 The respondent contended that neither the transaction listings nor the email was a “Bank Statement” within the meaning of the Letter Agreement. First, it pointed out that the transaction listings were forwarded in response to the appellant’s email of 27 June that it required “bank statements” or “documents” clearly showing bank balances “at 5 pm”, whereas the obligation to pay was based upon credit balances ”as at 5 pm”. It followed, on this argument, that the transaction listings were not bank statements showing credit balances “as at 5 pm”. The respondent submitted that its position on this was reinforced by an examination of the transaction listing documents which revealed that the last transaction recorded therein was on 29 June. The respondent reminded the Court that the obligation under cl 3.3(b) and the Letter Agreement was to pay a proportion of credit balances as at 5 pm on 30 June, not 29 June.

87 The respondent also submitted that the qualifications in the National Australia Bank’s email of 29 June (set out at [21]) confirmed it was possible that the documents it proposed to forward would not specify the balances “as at 5 pm”. It was also apparent from the transaction listings themselves that they may not specify the balances “as at 5 pm”, given the qualifying notes on those documents. Accordingly, the transaction listings were not “Bank Statements” within the meaning of the Letter Agreement.

88 Next, it was submitted that the National Australia Bank’s email on 30 June at 5.41 pm had to be read in the context of the earlier communications between the bank and the appellant and in particular the email of 29 June. In short, it was submitted that the email of 30 June could only confirm as correct that which was contained in the transaction listings with their inherent inability to state the credit balances as at 5 pm on 30 June. In any event, on the respondent’s submission, the email of 30 June was no more than a representation by a bank officer. It was not a “Bank Statement” of any sort.

89 The respondent also submitted that the email was inaccurate, as it contained a mistake as to the balance in one of the US accounts. The error was small, but it indicated the unlikelihood that the email was a “Bank Statement” and reinforced that the email was only a representation of someone’s interpretation of some banking documents.

90 There would be considerable force in these submissions, were it not for the fact that the term “Bank Statements” was a defined term in the Letter Agreement. What the parties required was a mechanism to enable them to determine the amount of a particular balance at a particular point in time. Their agreement did not reflect banking practice, but this is not to the point. It is known from the evidence as to banking practices that there was no document that could have been generated relating to the Sales Manager’s account “as at 5 pm”, printed out at that time or shortly thereafter, that would have shown all transactions processed by the bank during the course of a given day. The fact that the party’s agreement did not countenance this does not mean that their agreement falls to be construed by later known facts. The position may have been different if the parties knew of these matters prior to entering into the agreement and/or knowingly conducted their affairs in accordance with such arrangements: see Codelfa.

91 What calls for determination is whether there were documents in existence that satisfied the contractual term. In my opinion, the email of 30 June does satisfy the definition of “Bank Statements” in the Letter Agreement. It stated that the “balances were correct as at 5 pm on 30 June” and sets out those balances.

92 It may not matter whether this is correct, as I consider the transaction listings were “Bank Statements” within the meaning of the Letter Agreement. The online statements generated on 3 July did not fit the definition, notwithstanding that they record the credit balances as at 30 June 2006. However, that was not what the Letter Agreement contemplated.

The notice of contention

93 The respondent filed a notice of contention (subsequently amended), in which it sought to have the decision of the trial judge confirmed on different bases than those relied upon by his Honour. The contentions raised by the respondent advanced the same matters as have been considered above, namely, that on a proper construction of the Share Sale Deed and the Letter Agreement, cash, cash equivalent and credit balances in financial institutions could only be and were to be ascertained as at a date and not at a particular moment on a date. Accordingly, the credit balances on 30 June (as recorded in the 3 July online statement) were the amounts that were to be the subject of the Distribution. For the reasons already given, the grounds raised in the notice of contention cannot succeed.

94 It follows that the appeal should be allowed. I propose the following orders:

(1) Appeal allowed;

(2) Set aside the orders made by Rolfe DCJ on 26 June 2008;

(3) The respondent’s claim is dismissed with costs;

(4) Order that the respondent pay the appellant’s costs at first instance and of the appeal. The respondent is to have a certificate under the Suitors’ Fund Act 1951 if otherwise qualified.

95 McCOLL JA: I have had the benefit of reading Beazley JA’s judgment in this matter in draft. I agree with the orders her Honour proposes. Her Honour’s account of the facts enables me to state my reasons without extensive factual elaboration.

96 Clause 3.3(b) of the Share Sale Deed required the appellant to distribute “between the date of this Deed and Completion ... and ... prior to Completion ... 51% of all cash or cash equivalent on hand or held in a financial institution” to the respondent.

97 Prior to Completion, which was nominated to occur on 30 June 2006, (cl 5.1) communications passed between the appellant’s and the respondent’s solicitors concerning when, on the day of Completion, the appellant should determine the amount held in financial institutions for the purposes of the cl 3.3(b) Distribution. That exchange of emails was the genesis of the Letter Agreement dated 30 June 2006 and executed as a Deed. That Agreement defined the time on the Completion Date when the “cash or cash equivalent on hand or held in a financial institution” was to be calculated for the purposes of the cl 3.3(b) Distribution.

98 The first paragraph of the Letter Agreement repeated the substance of cl 3.3(b).

99 The second of the un-numbered paragraphs of the Letter Agreement explained that “as the Completion Accounts ... are to reflect the financial position as at the close of business on the day of Completion”, the parties had agreed on how the Distribution was to be calculated. The paragraph then specified the critical components of the Distribution calculation. The first was “the aggregate amount of cash or cash equivalent held on hand by the Sales Agent or the Manager”. The second was the “aggregate credit balances (without offset or deduction against any accounts in debit) as stated in the Bank Statements ... as at 5pm on the day of Completion”. Thus the parties selected “5pm on the day of Completion” for the Distribution calculation, “notwithstanding that Completion may have occurred earlier that day”.

100 The third paragraph of the Letter Agreement set out the appellant’s undertaking to procure that “at 5pm on the day of Completion”, its agents should print copies of the Bank Statements, provide them to the respondent and “make payment of the Distribution (calculated in the manner set out above) to us directly ... within 2 Business Days ... of the day of Completion.”

101 Pursuant to the fourth paragraph of the Letter Agreement, the appellant undertook by itself, and its agents, not to reduce “the amount of cash or cash equivalent on hand or held in a financial institution” “between the time of which Completion occurs and 5pm on the day of Completion”.

102 The critical issue of construction of the Letter Agreement is whether the Distribution was to be calculated by reference to the credit balances in the National Australia Bank (“NAB”) Bank Statements printed as at 5pm on 30 June 2006, or as revealed in the bank statement printed at 8.45am on 3 July 2006. According to the 3 July 2006 statement the Sony Payment was credited to the NAB account on 30 June 2006, whereas that credit did not appear in the Bank Statements printed at 5pm on 30 June 2006. Professor Clarke gave evidence that the Sony Payment was allocated to the bank account some time between the evening of 30 June 2006 and 8.45am on 3 July 2006. He could not say it had been credited to that account prior to 5pm on 20 June.

103 The appellant’s case is simple. It argues that 5pm on the day of Completion meant precisely that, and that 5pm on that day was also the time the parties identified as the “close of business” for the purpose of the Distribution. The respondent, however, argues that “5pm on the day of Completion” meant the time in relation to any business after which no further business occurred, meaning, by reference to Professor Clarke’s evidence, the time when the Sony Payment was treated by the NAB as being in the relevant bank account. In other words, the respondent’s primary submission was that as the Sony Payment was a credit balance “as at the close of business” on 30 June 2006 (a conclusion whose factual foundation was the bank statement printed out at 8.45am on 3 July 2006), it was to be included in the Distribution.

104 In my view the respondent’s submission must be rejected. It is inconsistent with the clear language of the Letter Agreement.

105 Commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter District Council v Australian Chilling and Freezing Co Ltd [1968] HCA 8; (1968) 118 CLR 429 (at 437) per Barwick CJ; Australian Broadcasting Commission v Australasian Performing Right Association [1973] HCA 36; (1973) 129 CLR 99 (at 109) per Gibbs J (as he then was); Hide & Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 (at 313-4) per Kirby P; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA (at [64]).

106 If words used in a written contract are unambiguous, the Court must give effect to them notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The Court has no power to remake or amend a contract for the purpose of avoiding a result considered to be inconvenient or unjust. However, if the language of a contract is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (at 109) per Gibbs J.

107 Ascertaining the meaning of a written agreement includes taking into account what it would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract (Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70; (2001) 210 CLR 181 (at [11]) per Gleeson CJ, Gummow, and Hayne JJ), an exercise which requires objective determination: see Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 (at [22]) per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ and subsequent High Court authority to like effect.

108 It is apparent when regard is had to the terms of the Letter Agreement and its genesis, that it was intended to fix a time for the calculation of the Distribution, which could be after the time on the Completion Date when Completion took place. In other words it changed the requirement to make the Distribution “prior to Completion” (cl 3.3(b)) to a time subsequent to Completion. On Completion the respondent’s 51% interest in the Joint Venture agreement passed to the appellant which would thereafter conduct the business previously undertaken by the Joint Venture. It might be inferred the parties would be acutely conscious that any claim the respondent might have on the business’s assets post-completion should be identified with precision. This would ensure certainty for the appellant as to when it was free to operate on the NAB accounts For the respondent’s part, selection of a precise time at which the Distribution calculation was to be made, and before which the appellant could not reduce the monies held in the NAB account, gave it a degree of control over those funds notwithstanding Completion.

109 The Letter Agreement achieved that certainty for both parties, making it plain that “5pm on the day of Completion” was the critical time when the line was to be drawn: when the Distribution was to be calculated and paid to the respondent. After that time the appellant would be at liberty to reduce the balance in the NAB account, including by making the Distribution payment.

110 In my view, the clear words of the Letter Agreement would have conveyed to a reasonable person with the parties’ background knowledge that 5pm on the day of Completion had been deliberately chosen as the time for calculation of the Distribution payment. This may not be the result it may be inferred the respondent, in particular, intended, but, in my view the language in the Letter Agreement is intractable. The respondent’s contention would require the Court to re-write the Letter Agreement, an exercise the principles of construction do not permit it to undertake: Australian Broadcasting Commission v Australasian Performing Right Association Ltd; see also Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 (at [27], [38]) per Basten JA, Giles and Tobias JJA agreeing.

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LAST UPDATED:
15 July 2009