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Court of Appeal of New Zealand |
Last Updated: 31 January 2019
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BETWEEN |
THE MALTHOUSE LIMITED Appellant |
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AND |
RANGATIRA LIMITED Respondent |
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Hearing: |
8 November 2018 |
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Court: |
Miller, Lang and Moore JJ |
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Counsel: |
H N McIntosh for Appellant SCDA Gollin and J E Standage for Respondent |
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Judgment: |
20 December 2018 at 10.00 am |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Miller J)
[1] This case tests the limits of a court’s willingness to read words into a contract to make what the court thinks is commercial common sense of it.
The facts
[2] The appellant, The Malthouse Ltd (TML), represents the founding shareholders of Tuatara Brewing Company Ltd, a successful craft brewer. The respondent, Rangatira Ltd, is a private equity firm which the founding shareholders introduced in 2013 to provide management expertise and capital the business needed for expansion. They wanted to make the company an attractive purchase for a major brewer. The dispute concerns the price payable by Rangatira for the 35% shareholding it acquired under an investment agreement dated 30 June 2013.
[3] It is common ground that the parties could not agree price. The vendors believed the company was worth $12 million as at the date of the transaction and wanted Rangatira to pay $4.5 million for its stake. Rangatira asserted that the company was worth no more than $10 million and sought to pay $3.5 million for its stake. The parties avoided an impasse by settling on a contractual mechanism under which Rangatira would pay the lesser sum on settlement and pay the difference if the company proved to be worth $12 million. The additional payment would be required should either of two events happen.
[4] The first triggering event was Tuatara achieving before a sunset date, 30 December 2015, earnings that implicitly valued the company at $12 million. That target was earnings before interest, tax, depreciation and amortisation (EBITDA) of $2 million over any period of 12 consecutive months. It was an all or nothing obligation, meaning that the payment would not be scaled if the company fell short of the target. Through a change of accounting policy, which the founding shareholders resent but do not challenge, this target was not met before the sunset date.
[5] The second triggering event, which is in dispute, was the sale of Tuatara for a price exceeding $12 million. The question is whether Rangatira’s obligation to pay the balance arose only if that event happened before the sunset date. No words to that effect appear in the clause creating the obligation. Rangatira would have us read them in.
[6] On 31 January 2017, the parties sold Tuatara to Dominion Breweries for a price far in excess of $12 million.
[7] The parties agree that should the appeal be allowed the amount payable (after certain adjustments that do not concern us) is $920,282.86.
The contract
[8] The transaction involved the issue of new shares, for which Rangatira subscribed, and the sale of existing ones. Nothing turns on the fact that the transaction was structured in that way, except that Rangatira paid the company for the new shares and the founding shareholders for the existing ones.
[9] The agreement provided that consideration for the shares was the “total” purchase and subscription prices. That total was defined as the “initial” prices if the triggering events did not happen, and the sum of the initial and “contingent” prices if either of them did:
- (a) The initial purchase and subscription prices were $2,722,206.58 and $328,505.42 respectively. That is a total of $3,050,712. (We ignore GST throughout.) On payment of those sums the shares were subscribed and transferred.
- (b) The contingent purchase price and subscription prices were $777,788.18 and $222,230.94, a total of $1,000,019.12.
[10] The clauses dealing with the issue and purchase of shares provided that:
3.5 Contingent Subscript Price: The Purchaser shall pay to the Company the Contingent Subscription Price upon the EBITDA Hurdle being met as agreed or determined in accordance with clause 9 and within the timeframe specified in clause 9.1.
...
4.5 Contingent Purchase Price: The Purchaser shall will pay each Vendor its proportionate entitlement to the Contingent Purchase Price upon the EBITDA Hurdle being met as agreed or determined in accordance with clause 9 and the timeframe specified in clause 9.1.
[11] It will be seen that these provisions refer to cl 9.1, which established how the EBITDA Hurdle would be calculated and also set the timeframe within which it must be met to trigger the contingent payment obligation. That provided:
9.1 EBITDA Hurdle: The:
9.1.1 Contingent Subscription Price shall be payable to the Company in immediately available funds; and
9.1.2 Contingent Purchase Price shall be payable to the Vendors in immediately available funds,
Within seven (7) days of the Company, the Purchaser and the Vendor Representatives agreeing, or it being determined pursuant to this clause 9, that the Company has met the EBITDA Hurdle, provided that the EBITDA Hurdle is met on or before the Contingent Sunset Date. For clarity, it is acknowledged that determination of whether the EBITDA Hurdle has been met need not necessarily occur prior to the Contingent Sunset Date.
The Contingent Sunset Date was 31 December 2015 or such other date as the parties might agree. No other date was ever agreed.
[12] The alternative triggering event, a sale of the business, is provided for in cl 9.8 (the intervening sub-clauses were machinery provisions dealing with the EBITDA calculation). Clause 9.8 provides:
9.8 Exit event: If any Exit event occurs which actually or by implication values the Business or the Company at greater than $12,000,000, then the Contingent Payments shall become immediately due and payable.
The sale to Dominion Breweries is an exit event as defined.
The judgments below
[13] This case first came before the High Court by way of a summary judgment application pursued by TML. Associate Judge Smith declined that application on 31 August 2017.[1] The Associate Judge reasoned that, if TML’s interpretation of the agreement was correct, several “odd” results seemed to arise, notably that Rangatira would be left with a contingent liability that might not crystallise for many years (a conclusion that lacked a plausible commercial rationale).[2] He concluded by saying that there was “a serious question as to whether experienced commercial parties such as these could have intended the result for which [TML] now contends”,[3] and that Rangatira’s meaning of cl 9.8 was reasonably arguable without considering external evidence beyond the agreement.[4]
[14] The case then proceeded to trial. In a judgment dated 27 April 2018, Churchman J dismissed TML’s claim.[5] We discuss his reasoning in more detail below, but for present purposes his key findings were that: cl 9.8 was intended by the parties to be subject to the sunset clause in cl 9.1, and cl 9.8 was only intended by the parties to operate if Tuatara was acquired before the EBITDA hurdle could be met;[6] that the most sensible commercial interpretation of the clauses was that they were intended to value Tuatara at the time of the contract, not some future date;[7] and that, if it were necessary, he would imply words into cl 9.8 to make it subject to the sunset clause.[8] He also made a factual finding that a conversation took place during the negotiations which evidenced an agreement that the parties intended cl 9.8 to be subject to the sunset clause, a finding which assumed some importance in argument and which we address at [26] below.[9]
The pleadings
[15] TML pleaded two causes of action: one in debt and one for breach of contract. Both turn on the correct interpretation of the agreement so we focus on the cause of action for breach of contract:
12. In breach of the Agreement, Rangatira has:
(a) erroneously claimed that clause 9.8
(i) is inoperative beyond 31 December 2015, described in the Agreement as the “Contingent Sunset Date”;
(ii) is subject to the Contingent Sunset Date; and/or
(iii) expired with the expiry of clause 9.1;
(b) failed to pay the Contingent Payments (as varied); and
(c) thus failed to pay:
(i) the Total Subscription Price (as varied); and
(ii) the Total Purchase Price.
Accordingly TML claims:
(a) Declarations:
(i) As to the correct interpretation of the Agreement as varied, namely that clause 9.8 is not subject to the Contingent Sunset Date, and/or remains operative after that date and/or the expiry of clause 9.1
(ii) That following the Sale:
(aa) the Total Subscription Price and the Total Purchase Price included the Contingent Payments (as varied); and
(bb) the Contingent Payments (as varied) therefore were and are payable.
That in consequence, pursuant to the Deed of Amendment and Partial Termination dated 21 January 2017, the Contingent Payments (as varied therein) are immediately payable in full by Rangatira to the Vendors.
...
[16] In its statement of defence, Rangatira responded as follows:
- It admits that the price paid for the Tuatara shares in the Sale was over $12 m and otherwise denies paragraph 8. It says further that:
(a) on a proper interpretation in light of the Investment Agreement as a whole, business common sense, and the context in which the Investment Agreement was entered into:
(i) clause 9.8 only applies if the Exit event occurred before 31 December 2015, the time frame set out in clause 9.1 (the Contingent Sunset Date); and
(ii) as the Sale occurred after 31 December 2015, clause 9.8 did not apply; and
(iii) the Contingent Payments did not become payable.
Particulars
(A) the Agreement was entered into in the context of:
(B) On 27 March 2013, a draft copy of the Agreement included a drafting note by the defendant’s solicitor to what became clause 9.8 stating in relating to the Exit event that it was “not anticipated but inserted for completeness.”
(b) In the alternative, that it was an implied term of the Agreement that:
(i) the mechanics of payment and the timeframe specified in clauses 3.5 and 4.5 (the Contingent Sunset Date) must apply to the Exit event in clause 9.8; and
(ii) this implied term is either necessary for business efficacy or is so obvious that it goes without saying because if there is no link between the Exit event in clause 9.8 and clauses 3.5 and 4.5, there is:
(aa) no payment mechanic for the Contingent Payments; and
(bb) no end date for the obligation to pay the Contingent Payments.
...
(Emphasis in original.)
[17] It will be seen that Rangatira’s pleading responded to TML’s arguments about the plain meaning of the agreement by referring to several pieces of evidence (which we discuss below), and by alternatively pleading an implied term argument. Rangatira did not plead rectification and conceded at the hearing that it was unavailable.
The law on contractual interpretation
[18] The correct approach to contractual interpretation has been authoritatively established for present purposes in two judgments of the Supreme Court: Vector Gas Ltd v Bay of Plenty Energy Ltd (Vector),[10] and Firm PI 1 Ltd v Zurich Australian Insurance Ltd (Firm PI).[11]
[19] Briefly, these authorities confirm that New Zealand courts take an objective approach to contractual interpretation which does not limit the background material available to interpret the contract. That material must however be reasonably relevant, and it must be objective; evidence of a party’s individual subjective intentions is inadmissible to interpret the contract.[12]
[20] Vector established that there need not be any ambiguity in the meaning of a contract before regard can be had to extrinsic evidence to shed light on its meaning. That conclusion put to bed the need for counsel to prove that contracts had such ambiguities, and instead emphasised the need for courts to take a contextual approach that inquired into the meaning of contracts against the background information known to the parties.[13]
[21] As the Supreme Court later clarified in Firm PI, the text of the contract remains “centrally important”.[14] The Court there noted that:
If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant.
(Footnote omitted.)
[22] The provisional meaning derived from the language of the contract is crosschecked against the contractual context.[15] As Tipping J explained in Vector:
[24] In some recent cases it has been suggested that contractual context should be referred to as a “cross-check”. In practical terms that is likely to be what happens in most cases. Anyone reading a contractual document will naturally form at least a provisional view of what is words mean, simply by reading them. That view is, in a sense, then checked against the contractual context. This description of the process is valid, provided the initial view is provisional only and the reader is prepared to accept that the provisional meaning may be altered once context has been brought to account. The concept of cross-check is helpful in affirming the point made earlier that a meaning which appears plain and unambiguous on its face is always susceptible to being altered by context, albeit that outcome will usually be difficult of achievement ...
(Footnote omitted.)
[23] It follows that, though there is in principle no limit to the amount of “red ink” a court can use in interpreting a contract (as Lord Hoffmann famously said in Chartbrook Ltd v Persimmon Homes Ltd),[16] there is a practical need for the party seeking to rely on the red pen to point to clear evidence justifying its use.[17] As Tipping J explained in Vector, the exercise “is and remains one of interpretation”.[18] There are limits to what the courts can do under the guise of interpretation, and words can only be construed with meanings that they can reasonably bear (subject, as Tipping J recognised, to considerations of rectification, private dictionary use by the parties, and similar).[19]
[24] Finally, the authorities also establish that, where there is a natural and ordinary meaning to the term in issue, departing from it for reasons of commercial common sense should only occur “in the most obvious and extreme of cases”.[20] It also bears emphasis, as the Supreme Court noted in Firm PI, that the commercial context may increase the weight to be placed on the provisional view formed from the words of the contract. That is because many commercial contracts have features that ordinary language lacks (particularly that they are negotiated in a detailed and formal manner that attempts to record consensus), may be relied on by third parties, or because of the nature of the particular contract at issue (such as a security document or an insurance contract).[21]
The issues
[25] The appeal raises three issues:
- Was Churchman J correct to find that Messrs Murrie, Bradshaw and Frame discussed the possibility of a sale of the company before the EBITDA Hurdle had been attained and agreed that cl 9.8 would be confined to that eventuality?
- Is the correct interpretation of the Agreement that the operation of cl 9.8 is limited by the Contingent Sunset Date?
- If not, is it an implied term of the Investment Agreement that the operation of cl 9.8 is limited by the Contingent Sunset Date?
The pre-contractual conversation
[26] As noted at [15] above, Rangatira pleaded that its interpretation of the contract was supported by “the Vendors’ communications with Rangatira regarding the need to protect against the EBITDA Hurdle being avoided due to a sale of shares before the EBITDA Hurdle was met”. This refers to communications between Mr Murrie, one of the founding shareholders of Tuatara (and a director and shareholder of TML), and Messrs Bradshaw and Frame, who led the negotiations on behalf of Rangatira; and in particular, an alleged conversation between them as to the detail of what became cl 9.8. In his brief of evidence, Mr Murrie denied ever discussing cl 9.8 with Messrs Bradshaw and Frame, and the lawyer who negotiated the agreement for Tuatara, Mr Bordignon, recalled only discussing it with Mr Murrie. In contrast, both Messrs Bradshaw and Frame deposed to multiple conversations about the point with Mr Murrie, with Mr Frame deposing that:
[Mr Murrie] was concerned that Rangatira might try to take advantage of a quick sale of shares to another buyer before the EBITDA Hurdle was met... a concern which [Mr Murrie] referred to frequently ...
[27] The Judge found that such conversations did happen, making adverse credibility findings against Mr Murrie in the process. He referred to an email sent by Mr Murrie which, in his view, indicated that Mr Murrie likely was alive to the prospect of Tuatara being bought out before the EBITDA Hurdle was met, and he found Mr Murrie’s claim that the email was related to another offer by Rangatira lacking in credibility.[22]
[28] Mr McIntosh, who appeared for TML, accepted that he could not realistically challenge the Judge’s credibility findings before us given the deference this Court gives to such findings on appeal.[23] However, he submitted that the Judge had drawn an impermissible inference from his finding that a conversation (or conversations) had taken place. It was one thing to find that a conversation about the issue addressed by cl 9.8 occurred; but quite another to reason that the conversation must inevitably have contained an understanding on the part of both sides that cl 9.8 was subject to the conditional sunset clause. He emphasised that it is the parties’ objective understanding about cl 9.8 that matters.
[29] We accept this submission. There is nothing in the evidence of Messrs Bradshaw and Frame to indicate that the conversations they recalled specifically addressed the issue whether what became cl 9.8 would be temporally limited to the same timeframe as the EBITDA Hurdle, the conditional sunset clause. Rather, they depose generally to concerns Mr Murrie had about not being able to reach the EBITDA Hurdle because of Tuatara being bought out before that date.
[30] There are indications that there was no discussion about a temporal limit. Mr Murrie said that he had limited knowledge or expertise in the mechanics of how the agreement operated and relied on his lawyers for such details, and Mr Bradshaw accepted that had there been such a conversation it would have led to discussions about how cl 9.8 would operate. He could not recall any such discussions.
[31] For Rangatira, Mr Gollin submitted that the conversation was relevant objective background evidence, because “an objective person knowing [of the conversation] ... would assume that cl 9.8 was intended solely to deal” with Mr Murrie’s concern that Tuatara could be bought out before the EBITDA Hurdle was met. We do not accept this submission. The clause may have been intended to protect the original shareholders in the event of a buy-out, but it does not follow that it must have been temporally limited in the way Rangatira now contends.
The correct interpretation of cl 9.8
Clause 9.8 itself
[32] We begin with the wording of cl 9.8, which we repeat for convenience:
9.8 Exit event: If any Exit event occurs which actually or by implication values the Business or the Company at greater than $12,000,000, then the Contingent Payments shall become immediately due and payable.
[33] We make two observations. First, the only obvious link cl 9.8 has to any other term in the agreement is that it uses the defined term “exit” event (found in cl 1.1). Once that is known, the clause operates clearly enough on its own terms: if an exit event occurs which values the business at $12 million, the contingent payments become immediately due and payable. The definition does not have a temporal element.
[34] Secondly, there is no need to gloss the mechanism adopted in the clause. In submissions before us, Mr Gollin submitted that the phrase “immediately due and payable” operated to accelerate the payment mechanisms in other parts of the agreement. That is a strained interpretation. The phrase “immediately due and payable” has a simple and orthodox meaning, namely that the contingent payment is to be made at once.
Clause 9.8 in the agreement as a whole
[35] Clause 9.1 sets out the alternative way the contingent payments can be paid, by reaching the EBITDA Hurdle before the contingent sunset date:
9.1 EBITDA Hurdle: The:
9.1.1 Contingent Subscription Price shall be payable to the Company in immediately available funds; and
9.1.2. Contingent Purchase Price shall be payable to the Vendors in immediately available funds;
within seven (7) days of the Company, the Purchaser, and the Vendor Representatives agreeing, or it being determined pursuant to clause 9, that the Company has met the EBITDA Hurdle, provided that the EBITDA Hurdle is met on or before the Contingent Sunset Date. For clarity, it is acknowledged that determination of whether the EBITDA Hurdle has been met need not necessarily occur prior to the Contingent Sunset Date.
[36] It will be seen that, in contrast to cl 9.8, cl 9.1 expressly refers to and is contingent on the Contingent Sunset Date being met. So the drafters of the contract turned their minds to making the Conditional Sunset Date an explicit requirement in cl 9.1, and equally could have (but did not) do so in cl 9.8. Importantly, as cl 9.1 recognises, there may be some difficulty in determining whether the EBITDA Hurdle has been met, which is addressed in the balance of cl 9. Clauses 9.2 and 9.3 set out the basic mechanisms for determining whether the EBITDA Hurdle has been met, with cl 9.4 setting out a detailed process for Rangatira to assess Tuatara’s claim that it has met the target. If the parties disagree, an outside expert is appointed to make the determination. Clause 9.7 links the Contingent Sunset Date to the EBITDA Hurdle:
9.7 Protection of Parties: Each Party agrees that from the Completion Date to the Contingent Sunset Date (or earlier agreement or determination of the EBITDA Hurdle being met):
9.7.1 it will act in good faith and in the best interests of the Company in respect of the Contingent Payments and will not take any action with the intent of reducing the EBITDA (or any other relevant inputs) of the Company for the purpose of reducing the Contingent Sunset Payments;
9.7.2 it will use all reasonable steps to promote the Business;
9.7.3 it will not take any steps with the intention of manipulating the application or circumventing the terms of this clause 9 to reduce the EBITDA and that it will comply with the spirit as well as the letter of these provisions of this clause 9; and
9.7.4 unless otherwise agreed (which may include dealing with how the departure will be treated for the purposes of determining the EBITDA Hurdle), it will not unreasonably depart from the assumptions underlying the Business Plan in relation to the territorial scope or nature of the Business or in a manner inconsistent with this clause 9.7.
It will be seen that the parties assumed specific obligations that continued until the EBITDA Hurdle was met or the Contingent Sunset Date had passed, whichever was earlier.
[37] In contrast, and as cl 9.8 recognises by its silence on the point, neither the obligations in cl 9.7 nor any of the other processes in cl 9 are necessary to value the company on an exit event. Clause 9.8 does not refer to the balance of cl 9, as cl 9.1 does, and it comes after those detailed machinery provisions. In oral argument, Mr McIntosh argued that this was because cl 9.8 was “bolted on” after the rest of the clause was drafted. Whether or not that is so, we agree that, when read in the context of cl 9 as a whole, cl 9.8 clearly operates independently.
[38] Mr Gollin sought to link cl 9.1 and cl 9.8 in two other ways. First, he argued that the use of the word “contingent” in both “Contingent Payments” and “Contingent Sunset Date” indicated that the contingent payments were always intended to operate on the basis of that date. We do not agree. The work “contingent” was used because liability to pay the additional sums was contingent on meeting the EBITDA hurdle or a sale of the company for more than $12 million, as the case may be.
[39] Secondly, Mr Gollin argued that the payments could only be made through the payment mechanisms in cls 3.5 and 4.5 in the agreement. Clause 3.5 states that the contingent payments were payable “upon the EBITDA Hurdle being met... [as] specified in cl 9.1”, and cl 4.5 states that Rangatira “will pay each Vendor its proportionate entitlement to the Contingent Payment Price upon the EBITDA Hurdle being met... [as] specified in cl 9.1”. The short answer to that submission is that cl 9.8 itself provided that the additional payment had to be made immediately and it is clear from the agreement itself to whom the payment was due. There is no lacuna in the agreement.
[40] It follows that, when considered in the context of this carefully-negotiated agreement, the absence of any reference in cl 9.8 to the Contingent Sunset Date appears deliberate. The natural meaning of the agreement, on this considered reading, is that cl 9.8 is not limited in time to the Contingent Sunset Date.
The objective background evidence
[41] We have already referred to the Judge’s finding about the conversation between Mr Murrie and Messrs Bradshaw and Frame, and at [29]–[31] above we explained that we consider it provides no relevant evidence on this interpretation issue. The parties referred to other potential objective background evidence however and to that we now turn by way of cross-check.
[42] First, Mr Gollin referred us to evidence, accepted by Messrs Murrie and Bordignon, that the purpose of cl 9 as a whole was to “bridge the gap on value”. This refers to the fact that, during the negotiations, Tuatara and Rangatira were at an impasse as to how valuable the company was, and tying the Contingent Payments to the EBITDA Hurdle was a compromise designed to achieve a higher sale price if the company performed as well as Tuatara expected it would. The difficulty with this submission is that it simply directs us to the purpose of cl 9.1 and the EBITDA Hurdle, not cl 9.8.
[43] Mr Gollin argued that, in light of this context, cl 9.8 was intended to have “financial equivalence” with cl 9.1. This was so, he said, because the $12 million referred to in the wording of cl 9.1 was the value placed Tuatara placed on its business, and since either reaching the EBITDA Hurdle or a sale for that amount would value the company at $12 million, the objective purpose of the clause was to allow Tuatara to prove its business was worth as much as it said it was.
[44] It does not follow, however, that financial equivalence required that the valuation must occur within the same timeframe specified in cl 9.1 (the Contingent Sunset Date). Mr Gollin pointed to evidence, again accepted by Messrs Murrie and Bordignon under cross-examination, that Tuatara subjectively only agreed to the $12 million valuation if the EBITDA Hurdle was met “promptly”. That might be so, but it says nothing about the timeframe the parties agreed on for cl 9.8.
[45] Mr Gollin also referred to an exit terms sheet that stated: “Deferred payment Payable when 12 month moving average EBIT is $2.0 million or more and subject to this be achieved before 31 March 2015”. This is evidence of how the parties intended cl 9.1 to operate, not cl 9.8. Mr Gollin also stressed that no party mentioned that the Contingent Payments were payable at any time if Tuatara was sold for more than $12 million, but that silence is weak evidence at best in favour of Rangatira’s interpretation.
[46] Finally, he referred us to a drafting note inserted alongside the original version of cl 9.8 by Mr Bordignon that said: “Drafting note: not anticipated but inserted for completeness”. The obvious explanation for this is that that the Tuatara side (for which Mr Bordignon was negotiating) expected to reach the EBITDA threshold, so would not expect to need to rely on what became cl 9.8. We respectfully disagree with the Judge’s view that “not anticipated” refers to the likelihood of a sale before the EBITDA Hurdle being met.[24]
[47] It follows that we do not consider any of the background evidence pointed to by the parties sheds any real light on the meaning of cl 9.8. We also emphasise that, even if we are wrong in those findings, we would have expected clear explicit objective evidence on this timing issue to balance the natural, well-drafted meaning we have attributed to cl 9.8 above. We have not been directed to any such evidence.
The commercial objectives of the agreement
[48] The first commercial objective pointed to by Rangatira, and relied on by the Judge, was that the contract was intended to value the company at 2013, when it was entered. Allowing for a sale at any date in the future would be inconsistent with this premise; it would allow for an open-ended term which would make no commercial common sense. Instead, the better commercial view was simply that cl 9.8 protected Tuatara in the event of an early sale. Mr Gollin explained in his submissions that “reaching a value of $12 million in two years is a very different return on investment from reaching a value of $12 million in 10 or 15 years”.
[49] The Judge agreed with this analysis, reasoning that:
[106] The reason that the earn-out provision was subject to a Sunset Date was so that it captured the value of the company at a point in time that had a connection with the date that the value of the company was to be ascertained. It would make no commercial sense at all, in terms of ascertaining the value of the company in mid-2013, for an Exit event at a date far in the future to automatically trigger liability. There would be a disconnect between such an event and the parties’ commercial objective of providing a mechanism to ascertain a fair value of the company as at 2013.
...
[108] The critical commercial objective of this transaction was to establish a fair value of the shares to facilitate the sale. ... Ascertaining the fair value had to be linked to the value at a particular date — in this case the value at or relatively soon after mid-2013.
[50] As noted above, only in a very clear case should a court depart from the plain meaning of a closely negotiated commercial contract to achieve a commercial purpose. We respectfully disagree that it was appropriate to do so here. The commercial purpose contended for by Rangatira is far from self-evident.
[51] Mr McIntosh pointed to a plausible alternative commercial purpose. He explained that, from Tuatara’s perspective, cl 9.8 would operate as a backstop to protect it if the EBITDA Hurdle was not met, it being an “all or nothing” hurdle which would not be met if the EBITDA was even $1 less than the target. Though openended, the longer it took for a sale to arrive, the lower the cost (in real terms) of the $1 million in contingent payments Rangatira would have to pay, because the payment was not adjusted for use of money.
[52] Mr McIntosh did not submit that this was the commercial objective of cl 9.8, and it may not be. It sufficed for his purposes that Rangatira cannot show that the objective for which it contends is plainly correct. That being so, the inquiry as to business common sense takes us no further. We accept this argument.
[53] In any event, and as this Court recently explained in Ward Equipment Ltd v Preston, there is nothing troubling about a potentially open-ended contractual obligation, because on inquiry it is unlikely to cause trouble in practice.[25] In that case, the contract at issue (a license agreement) had a natural life despite being openended, because it was for patents that would eventually expire. In this case, both parties expected that Tuatara would be sold; that was the ultimate objective of their agreement.
[54] Mr Gollin argued that to find cl 9.8 was not dependent on the Contingent Sunset Date would be to convert “contingent” payments into guaranteed payments, which would flout business common sense. The short answer to that point, as Mr McIntosh submitted, is that the Contingent Payments still depend on the company growing and achieving a sale at or above $12 million.
[55] Accordingly, we do not consider that the interpretation we have adopted is contrary to the evident commercial purpose of the agreement. We respectfully consider that the Judge was wrong to take a contrary view.
Rangatira’s implied term argument
[56] As noted above at [17], Rangatira contended in the alternative that a term should be implied into cl 9.8 to make it subject to the Conditional Sunset Date. It is unnecessary for us to consider the law in implied terms in detail; the Supreme Court in Mobil Oil New Zealand Ltd v Development Auckland Ltd (Mobil) has left open whether recent developments in England should be followed here.[26] In that case the Court noted that it had addressed similar “contextual considerations” applicable to the implication argument in that case when dealing with the interpretation arguments, but “for the sake of completeness” addressed some of the factors from the classic statement of Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (BP Refinery).[27] We accordingly apply the BP Refinery test.
[57] The BP Refinery test sets out five conditions for implying a term: it must be reasonable and equitable; it must be necessary to give business efficacy to the contract; it must be so obvious as to “go without saying”; it must be capable of clear expression; and it must not contradict any express term of the contract.[28] In this case Rangatira would have us add “in the timeframe specified in clause 9.1” after “if an Exit event occurs” in cl 9.8.
[58] We do not consider that it would be appropriate to imply such a term. First, as the reasoning above demonstrates, to imply a term to that effect would change the balance of the bargain the parties struck. Rangatira contended that not having cl 9.8 depend on the Contingent Sunset Date would change the nature of Rangatira’s investment. That is to argue for rectification.
[59] Secondly, and as we indicated when analysing the natural meaning of cl 9.8 in the agreement as a whole, there is no need for additional machinery such as the term sought to make cl 9.8 efficacious. On the contrary, it operates comfortably as written. Rangatira pointed to similar arguments to those it made under its interpretation argument (for example it referred to the payment mechanisms in cls 3.5 and 4.5), but we have addressed those.
[60] Thirdly, for the reasons already given the implied term is far from being so obvious as to go without saying. It is unnecessary to consider the other BP Refinery factors.
Result
[61] The appeal is allowed. Judgment is entered for the appellant on its claim.
[62] The respondent must pay the appellant costs for a standard appeal on a band A basis and usual disbursements.
[63] Subsequent to the delivery of its substantive judgment, the High Court has issued a costs judgment awarding costs to Rangatira based on its success in that Court.[29] That judgment cannot stand in light of the outcome of this appeal. Accordingly, costs in the High Court are quashed and should be fixed in light of this judgment.
Solicitors:
Dew & Company Ltd,
Blenheim for Appellant
MinterEllisonRuddWatts, Auckland for Respondent
[1] The Malthouse Ltd v Rangatira Ltd [2017] NZHC 2070.
[2] At [92].
[3] At [96].
[4] At [113].
[5] The Malthouse Ltd v Rangatira Ltd [2018] NZHC 816 [HC judgment].
[6] At [90]–[91], [98] and [102].
[7] At [98], [104]–[106] and [108].
[8] At [140]–[143].
[9] At [82]–[91].
[10] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 [Vector].
[11] Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 [Firm PI].
[12] Vector, above n 10, at [19]–[20] per Tipping J; and Firm PI, above n 11, at [60] per McGrath, Glazebrook and Arnold JJ.
[13] Vector, above n 10, at [5]–[6] per Blanchard J, [22] per Tipping J and [56]–[57] per McGrath J.
[14] Firm PI, above n 11, at [63].
[15] Vector, above n 10, at [24].
[16] Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101 at [25].
[17] As Tipping J noted in Vector, above n 10, at [26], the parties could also contract such that, for them, “black means white”, but the likelihood of them doing so “will no doubt be a powerful factor when it comes to questions of proof”.
[18] At [23].
[19] At [23].
[20] Firm PI, above n 11, at [93] per McGrath, Glazebrook and Arnold JJ.
[21] At [62] per McGrath, Glazebrook and Arnold JJ.
[22] HC judgment, above n 5, at [82]–[92].
[23] Green v Green [2016] NZCA 486, [2017] 2 NZLR 321 at [31]–[32].
[24] At [97].
[25] Ward Equipment Ltd v Preston [2017] NZCA 444, [2018] NZCCLR 15 at [73].
[26] Mobil Oil New Zealand Ltd v Development Auckland Ltd [2016] NZSC 89, [2017] 1 NZLR 48 at [81].
[27] At [81]–[82], citing BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
[28] BP Refinery (Westernport) Pty Ltd v Shire of Hastings, above n 27, at 283.
[29] The Malthouse Ltd v Rangatira Ltd [2018] NZHC 1293.
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