Ipex Software Services Pty Ltd & Ors v Hosking M6/2001 [2001] HCATrans 351 (10 August 2001)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M6 of 2001

B e t w e e n -

IPEX SOFTWARE SERVICES PTY LTD and TAKAPANA INVESTMENTS PTY LTD and IPEX RESEARCH AND DEVELOPMENT PTY LTD and TOREN PTY LTD and MELTON GULLY PTY LTD and IPEX ITG PTY LTD

Applicants

and

MARK HOSKING

Respondent

Application for special leave to appeal

GAUDRON J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 10 AUGUST 2001, AT 12.21 PM

Copyright in the High Court of Australia

MR S.P. WHELAN, QC: Your Honours, I appear with MS J. DODDS-STREETON, for the applicant. (instructed by Arnold Bloch A. Leibler)

MR J.A. MYERS, QC: May it please the Court, I appear with MR A.J. RIORDAN and MR P.H. SOLOMON, for the respondent. (instructed by Vadarlis & Associates)

GAUDRON J: Yes, Mr Whelan.

MR WHELAN: Your Honours, this is a fairly simple point. The issue is can parties make an enforceable contract entitling - - -

GAUDRON J: What do you mean enforceable?

MR WHELAN: I am sorry, your Honour.

GAUDRON J: Let us start with more precise language, shall we.

MR WHELAN: Can parties make a contract entitling the promisee to a share holding in circumstances where the rights and obligations that would constitute the share holding are not agreed and are not otherwise ascertainable and, in essence, we say, your Honours - - -

GAUDRON J: It does not say that their value cannot be ascertained.

MR WHELAN: No, but that issue does not arise in this case.

GAUDRON J: Well, the question of value per se does not arise, but if the value of the contractual right for which the parties have bargained can be ascertained, does that not bear on the question?

MR WHELAN: Well, no, your Honour, because the point of the inquiry is to ascertain the liability before one imposes it, if I can borrow an expression from Justice Dixon in York.

GAUDRON J: Yes, but this is a commercial contract.

MR WHELAN: Yes.

GAUDRON J: We know what they bargained for. They bargained for 5 per cent equity in a group of companies.

MR WHELAN: Well, the problem is, your Honour, as Justice Callaway said, we do not know what the quid pro quo was for the plaintiff's promise, because saying 5 per cent equity - and, in this case, it was envisaged to be a share holding - does not say anything other than that the promisee will be entitled to a bundle of rights and obligations, which we call a share. But what a share is has no existence independently of what rights and obligations are agreed to constitute it. If one has not addressed the question of what are the rights and obligations that constitute the share, all one has done is to make a contract to enter into a contract, and that is exactly what has happened here. The protagonists on the defendant's side of Mr Hosking made a contract to enter into a contract and nothing at all was agreed about what the terms of that latter contract would be.

When your Honour says it was 5 per cent equity of a group, your Honour, that oversimplifies the position because the group, so called, was constituted by discretionary trusts, unit trusts and companies, and when that expression was used, when the parties were making their agreement, it specifically envisaged the possibility of future entities and envisaged the possibility, if not the likelihood, that the entire arrangement would be reconstituted into some new entity and that the equity, whatever form it took, would then be held in the new entity.

So that, the error of the majority in the Court of Appeal arises, we say, in two ways. Firstly, they do not appreciate, as Justice Kirby, when President of the Court of Appeal in New South Wales, did in Biotech, that underlying this problem is the issue of making a contract to enter a contract. They do not appreciate what is the true nature of a share.

GAUDRON J: Let us assume that it is a contract to make a contract, you still have a contract.

MR WHELAN: Yes.

GAUDRON J: The question is, in the circumstances of this case, what are the damages for breach, because you did not make a contract.

MR WHELAN: Well, your Honour, if I might say so, with respect, that is one of the other errors made by the Court of Appeal. It cannot bear upon the question: has a binding contract been made, has a contract of sufficient certainty been made, to address the issue of what relief is sought? Your Honour has no doubt read Justice Eames majority judgment and he falls, most grievously, we would submit, into that error. How can it alter the question whether the contract is sufficiently certain or whether the promise is illusory to discuss the issue of damage or specific performance? It is very clearly wrong, your Honour, and - - -

GAUDRON J: Well, for my part, that is not a proposition that instantly appeals to me.

MR WHELAN: No.

GAUDRON J: I mean, I would have thought that certainty and the availability of remedy were necessarily involved - necessarily bound up one with the other.

MR WHELAN: Perhaps in the broad your Honour is correct in terms of analysing what one is attempting to do, but in a particular case one cannot do what Justice Eames did here, to say, well, there are gaps - I think he used the expression "gaps" - but they are not of great moment because all that is sought is damages and they have not sought specific performance. Your Honour, that has nothing to do with what his Honour ought to have been considering. His Honour ought to have been considering the question: have these parties agreed on sufficient matters to produce an enforceable contract?

GAUDRON J: The first part is a question of fact.

MR WHELAN: Yes, although there is no issue about the facts here. There is no doubt here on the relevant matters that were agreed in the sense that the words that were used are not in any contention and it is not a situation of ambiguity. It is not an Upper Hunter type of case. It is not a question of construction. We all know that what was agreed was 5 per cent of the equity. The issue is: does that expression sufficiently delineate the quid pro quo, to use Justice Callaway's expression? One can test, if I might say, your Honour, the absurdity of the outcome which has now been produced, by this question, which Justice Callaway asked, shares, and units for that matter as well, are not simply collections of rights; they are collections of obligations and liabilities as well.

CALLINAN J: Yes, but did not the agreement use the word "equity" of the group?

MR WHELAN: Yes, equity, yes.

CALLINAN J: Well, that is a key word, is it not?

MR WHELAN: Yes, of course.

CALLINAN J: The same agreement used extremely emphatic language, by saying the fundamental basis is that the respondent should have that equity.

MR WHELAN: Yes.

CALLINAN J: Now, the use of the word "equity" takes into account the notion of liabilities and the allowance for them.

MR WHELAN: Your Honour, the case as put and as it has been decided was that equity meant shares or units in either a company or a unit trust. It has never been put, and it is not the case, that the plaintiff in a sense acquired 5 per cent of the assets and 5 per cent of the liabilities. It is not the basis of the majority judgment or the first instance judgment.

CALLINAN J: No, but that is not the way in which equity is used in that clause either.....it is.

MR WHELAN: No, it is not, exactly, your Honour, and if I might just go back to what I was about to say, that the real acid test of what is, we say, the absurdity of this outcome, is the question that Justice Callaway asked, which was: can it be seriously contended that the defendants could devise or tender to the plaintiff shares or units that involved significant liabilities and that the plaintiff would ipso facto be required to undertake those liabilities? In fact, it goes further - - -

CALLINAN J: The parties were bound to act in good faith.

MR WHELAN: Yes, but, your Honour, one does not act in bad faith because shares have liabilities. As Justice Callaway illustrated in this particular case - - -

CALLINAN J: Shares do not have liabilities unless they are partly paid.

MR WHELAN: No, that is not so, your Honour. The principle company in this case, Takapana Pty Limited, which is trustee of a discretionary trust, contains provision in its articles whereby members must indemnify the company for any taxation liability incurred as a result of the person's membership. Now, fringe benefits tax, for instance, is an obvious example, and Justice Callaway sets that article out in full by way of illustrating what might otherwise be overlooked, and we would submit has been overlooked by the majority, that shares are liabilities as well as rights and one cannot make an agreement to give someone shares without having agreed something about what the rights and liabilities are.

There is no doubt in this case that nothing at all has been agreed about that. Nothing has been agreed and it has never been put that anything was agreed as to what the rights and obligations which would constitute the shares in this case would be. The decision, your Honours, is informed by, in large measure, a perception that there is unfairness, because of the Ipex parties being seen to renege, I think was Justice Eames expression, and this is why one is so easily led into what we say is a clear error.

There are other remedies for that situation, and Justice Callaway refers to that as well, that if a person has made an arrangement which is insufficient and which is uncertain and which does not address matters that need to be addressed, but has acted to his detriment in reliance upon it, there are restitutionary remedies and the perception of unfairness ought to have been dealt with in that way. To now construct a binding contract out of a promise to give someone - - -

GAUDRON J: It is not a question whether one is constructing a binding contract. It is a question whether there was a binding contract.

MR WHELAN: I am sorry, your Honour, yes.

GAUDRON J: Certainly the essence of the contract was clear. What was not clear was the method of its performance.

MR WHELAN: Your Honour, that is not so. The end result of the promise is what is not clear. It is not the means of getting there. What is not clear is what Mr Hosking will have in the end. It is clear that he is supposed to have 5 per cent of something, but nothing is agreed about what the something is. It might be a unit trust where a trustee has very broad discretions. It might be a company. It might be limited. It might be unlimited. None of these - - -

GAUDRON J: Well, in the circumstances that have transpired, it is whatever is the group. One does not have to postulate what might hereafter by the case, does one?

MR WHELAN: No. Your Honour, the problem is - and again Justice Callaway points it out - 90 per cent of the assets in the group are in a discretionary trust. Now, how does one give 5 per cent of a discretionary trust? What rights and obligations are involved in that?

GAUDRON J: Well, again you are talking about method of performance, not the essence of the contract.

CALLINAN J: That is why the parties used the word "equity", surely.

MR WHELAN: The parties used the word "equity" because they had not agreed as to what would be Mr Hosking's interest.

GAUDRON J: Or what precise form his interest would take.

MR WHELAN: One can call it "precise form" if one wishes, your Honour.

GAUDRON J: Or what form his interest would - - -

MR WHELAN: Yes, exactly, your Honour. They had not agreed - - -

GAUDRON J: But they had agreed on the nature of the interest - - -

MR WHELAN: No, they had agreed on nothing - - -

GAUDRON J: - - - in the sense that it was an equity and it was 5 per cent.

MR WHELAN: That is right. So your Honour is exactly correct. They have agreed that it is equity, it is shares or units, and it is 5 per cent, and nothing more.

CALLINAN J: Calculated when the structures were created by the parties acting in good faith.

MR WHELAN: Yes, your Honour, and the range of outcomes constituting 5 per cent equity, in those circumstances, is so diverse as to be an illusory promise, in exactly the same way as it was in - - -

GAUDRON J: Well, I wonder if that is so once you add the good faith obligation to it. I mean, certainly they are so divers. I mean the degree of diversity will vary depending whether the parties are proceeding in good faith or not.

MR WHELAN: Well, even if they are proceeding in good faith, your Honour, and assuming that they would, the range of potential outcomes are - well they range very, very widely, and the value of what is given ranges extremely widely as well. One does not need to scour the contract books to see that articles can provide for an enormous variety of circumstances, which have a very significant effect on the value of the shares.

CALLINAN J: But, Mr Whelan, when you referred to liabilities attaching to the shares, were you referring to the contingent liabilities to which Justice Callaway has regarded, 66 and 67?

MR WHELAN: I am sorry, what page was that again, your Honour?

CALLINAN J: Pages 66 and 67.

MR WHELAN: Is that of the application book, your Honour?

CALLINAN J: Yes.

MR WHELAN: Yes, your Honour.

CALLINAN J: So they are contingent liabilities? Was there any evidence of any actual, as opposed to contingent liability?

MR WHELAN: Yes, the issue upon which the parties fell out, the evidence was, was the fear of liability of fringe benefits tax, and the demand on the Ipex side that Mr Hosking should lodge money with the internal accountant against that possibility. There were other things as well, but that was one of the things. So that, as Justice Callaway appreciated, the possibility of liability is not hypothetical but, in any event, even if it were hypothetical, the problem here is that just as in Biotech v Pace - - -

CALLINAN J: But why is that not the bargain? I mean, if, in fact, as a result of good faith actions by the parties, like the St Martin's Investment Trust, requiring parties to act to do their utmost to bring the agreement into operation, if, in fact, acting that way there were liabilities, then why should not those liabilities be accepted as part of the consequences of the implementation of the agreement?

MR WHELAN: Well, yes, your Honour, and if the majority analysis is correct, they have already been accepted, notwithstanding that they have not yet been devised, because this judgment is, not that Mr Hosking is entitled to be offered shares or units, as in Biotech, but that he has them from 1 July and - - -

CALLINAN J: In the calculation of the damages regard is had - or the ascertainment of what the 5 per cent would be worth; is that right?

MR WHELAN: Yes.

CALLINAN J: That exercise would be an ordinary valuation exercise that would take into account the likelihood and extent of any liabilities; is that not right? It is the sort of exercise that courts do all the time.

MR WHELAN: Well, they do it all the time, your Honour, when they know what the shares are, when they know what the rights and obligations are.

CALLINAN J: Well, they know what the shares would be and the rights and obligations would be, because they will be what would be the result of good faith actions by the parties.

MR WHELAN: But, your Honour, that is a very undifferentiated range of possibilities and that is exactly what the problem was in Biotech if I might - - -

CALLINAN J: Let me add this, good faith activities in a commercial context by the parties acting commercially, and that is the sort of commercial exercise that commercial courts undertake.

MR WHELAN: Yes. Has your Honour had an opportunity to see what Justice McHugh said about how damages would have to be assessed had they found the contract binding in Biotech?

CALLINAN J: Yes.

MR WHELAN: He said that there are an enormous range of possibilities and damages will have to be assessed by reference to what is the most advantageous for the defendants. This case is worse because here Mr Hosking is not seeking to enforce a contract under which he is to be offered equity. His case is that the equity, in a sense, vested in him there and then, and it is a necessary corollary of this decision that the liabilities, as yet undevised even now, were accepted by him there and then and, your Honour, that just cannot be right. It just cannot be right. The problem is, your Honour, that the court has approached this issue, looking at equity as if it were a tangible thing, as if it were a car or a block of land, and the court has overlooked and has not addressed, other than Justice Callaway, the fact that equity is not a car or a block of land, it is a collection of rights and obligations, and if you have not determined what those are, you have not agreed to anything. If your Honours please.

GAUDRON J: Thank you. Yes, we need not trouble you, Mr Myers.

The present case turns very much on its own facts and raises only a question as to the application of settled principle to those facts. The case is thus not a suitable vehicle for the elaboration of any point of general principle which might attract the grant of special leave. Special leave is refused with costs.

MR WHELAN: May it please the Court.

AT 12.43 PM THE MATTER WAS CONCLUDED