Shandong Delisi Food Co Ltd v Yolarno Pty Ltd

1. [1]

   These proceedings arise out of a dispute involving the interpretation of a commercial contract. The plaintiff seeks recovery of $6 million paid pursuant to an agreement to make an investment in shares of the defendant. The investment did not proceed.

2. [2]

   The plaintiff, Shandong Delisi Food Co Limited, is a company incorporated in the People’s Republic of China. Its business includes manufacture and sale of frozen and chilled meat products. In this judgment I will refer to it as “Delisi”.

3. [3]

   The defendant, Yolarno Pty Limited, is an Australian company. It operates a feed-lot, an abattoir and meat processing plants. In this judgment I will refer to it as “Yolarno”.

4. [4]

   Yolarno is a member of a group of companies referred to in the evidence as the “Bindaree Group”. The Group is described as an integrated beef processing, sales and trading business.

Issues for determination

1. [5]

   There were two relevant contractual documents between the parties. The first was a written contract dated 25 October 2015 styled Share Sale Subscription Agreement (“SSSA”). The second was a written supplementary agreement in the form of a letter dated 28 February 2016 (“Extension Letter”).

2. [6]

   The SSSA provided for Delisi to acquire a 45 per cent shareholding in Yolarno. Three-fourteenths of the holding was to be purchased from the existing shareholders (“the Sellers”). The other eleven-fourteenths was to come from shares freshly issued by Yolarno.

3. [7]

   The Extension Letter provided for Delisi to pay a sum of $6 million, described in the Letter as the “Advanced Payment”. As its name suggests, this payment was to be made on account of the eventual purchase price for the investment. It was separate from the deposit of $5 million which was paid pursuant to the original terms of the SSSA.

4. [8]

   On 30 June 2016 Delisi purported to terminate the SSSA by notice to Yolarno. The purported termination was made pursuant to paragraph 5 of the Extension Letter, which had required the delivery of a specified set of audited accounts by 20 May 2016. Termination under paragraph 5 entitled Delisi to return of the Advanced Payment.

5. [9]

   On 5 July 2016 the solicitors for Yolarno wrote to Delisi asserting that the purported termination by Delisi was invalid. The solicitors purported to terminate the SSSA on Yolarno’s behalf.

6. [10]

   Almost two years went by during which both parties appear to have taken no further action. Yolarno negotiated a replacement deal with another Chinese investor. Then in March 2018 demand was made by Delisi for a refund of the Advanced Payment.

7. [11]

   The present proceedings were commenced by Delisi as plaintiff in April 2020. Yolarno is the sole defendant. The Sellers appear to have no interest in the dispute about the refund of the Advanced Payment and have not been joined as parties to the proceedings.

8. [12]

   Delisi claims judgment in debt for the amount of the Advanced Payment ($6 million) together with interest. Delisi has made no claim for the refund of the deposit.

9. [13]

   Yolarno cross-claimed for damages incurred in negotiating its replacement investment deal. But before the trial it was agreed between the parties that the cross-claim should be dismissed with no order as to costs. I will make that order in due course. The sole claim for determination is Delisi’s claim for the refund of the Advanced Payment.

10. [14]

    A few minutes before midnight (China Standard Time) on 20 May 2016, the date on which the audited accounts were due under paragraph 5 of the Extension Letter, they were emailed to Delisi. The email was, however, not delivered to Delisi until after midnight. Initially it was contended for Yolarno that the accounts had been provided within the time specified by the deadline. But in the end it was accepted that in fact the accounts had been due by 5:30 pm Sydney time (3:30 pm CST) on 20 May. This left two remaining issues which were presented by the parties at trial.

11. [15]

    The first issue concerned the construction of paragraph 5 of the Extension Letter. It was contended for Yolarno that on construction of that paragraph, the termination notice came too early. It could not, on Yolarno’s construction, validly have been issued before 1 July.

12. [16]

    The second issue concerned the process of preparing the accounts. Under paragraph 5 of the Extension Letter, the parties had obligations of good faith which required them to take all reasonable steps to facilitate the delivery of the accounts in time. For Yolarno it was contended that Delisi breached this obligation, and that disqualified it from exercising any right of termination under paragraph 5.

Chronology of key events

1. [17]

   Delisi entered into the SSSA following an appraisal carried out by Zhong Rui, a Chinese advisory firm. The appraisal was apparently required for Chinese government regulatory purposes. It put a value on the equity in Yolarno of at least $201 million, and a value on the proposed 45 per cent shareholding by Delisi (once fresh shares had been issued) of at least $140 million.

2. [18]

   Completion of the SSSA was subject to four conditions precedent, one of which I will refer to in more detail below. Either party had a right to terminate if the conditions were not satisfied or waived within 120 days (22 February 2016). I will refer to this as the “termination trigger date”.

3. [19]

   The price payable by Delisi was specified in the SSSA as $140 million. But this was subject to negotiation following an investigation procedure. The procedure had two main steps.

4. [20]

   The first step was the production of an audited set of accounts for Yolarno for the period ended 31 July 2015. These audited accounts, defined in the SSSA as the “Reference Audit Accounts”, will be referred to in this judgment as the “July Accounts”. They were to be completed by 25 December 2015. Any delay in completion was to result in a corresponding extension to the termination trigger date of 22 February 2016.

5. [21]

   The second step was the production of a “final appraisal report” by the “appraisal agency” (Zhong Rui). Once this had been delivered, there was to be a five-day period for the parties to renegotiate the price to be paid by Delisi. It is unusual, to say the least, to have a contract for the purchase of an asset where the operative price depends upon future negotiations between the parties and is not fixed by any machinery. But it was not suggested by either party before me that this affected the validity of the SSSA.

6. [22]

   According to Delisi’s evidence, which was not disputed, a favourable appraisal report was necessary not only for Chinese government regulatory purposes. It was also required for compliance with the rules of the Shenzen Stock Exchange, where Delisi’s shares are listed.

7. [23]

   The third condition precedent required: a favourable opinion from the directors of Delisi (to be submitted to the shareholders in general meeting); approval by the shareholdings in general meeting; and approval from Delisi’s board of directors. It seems strange to have a contractual agreement which is subject to a condition that the approval of one party’s board of directors be obtained; usually such approval would be required before there could be any binding agreement in the first place. But again, no objection was taken to the validity of the SSSA on this ground.

8. [24]

   The Chinese branch of the global accountancy firm PricewaterhouseCoopers (“PwC China”) was chosen to undertake the audit of the July Accounts. PwC China was formally retained by Delisi for this purpose in November 2015. The Australian branch of PricewaterhouseCoopers (“PwC Australia”) were the Bindaree Group’s accountants and it appears that this was the reason for PwC China’s retainer for the purposes of the SSSA.

9. [25]

   PwC China and PwC Australia were separate legal entities. Nevertheless, they used common management systems, and the Australian firm, in Yolarno’s interests, worked closely with the Chinese firm on the preparation of the Accounts. Yolarno’s executives also dealt directly with PwC China for that purpose. In this judgment I use the term “PwC” to mean both firms, unless it is necessary to be specific.

10. [26]

    Despite PwC’s efforts, the July Accounts were not produced in audited form by the deadline in the SSSA of 25 December. Extensions were obtained but the Accounts had still not been produced by the end of February 2016.

11. [27]

    The Extension Letter, as its name suggests, was entered into to deal with this delay. By February, accounts for the period up to 31 July 2015 were in any event out of date under the rules of the Shenzen Stock Exchange. The obligation instead became to produce audited accounts for the period to 31 December 2015 (defined in the Extension Letter as “Second Reference Audit Accounts”; I will refer to them as the “December Accounts”). They were to be produced by the date already mentioned, 20 May 2016. The termination trigger date was extended to 30 June 2016.

12. [28]

    The Extension Letter provided for the Advanced Payment to be made by early March 2016. This was done. Delisi formally retained PwC China to undertake the audit of the December Accounts soon afterwards.

13. [29]

    The audit of the Accounts was the principal responsibility of Ms Rita Li, an audit partner of PwC China based in Beijing. The lead partner for PwC Australia was Mr Adam Thompson.

14. [30]

    On Yolarno’s side, the transaction was principally the responsibility of Mr James Roger, who was the Chief Financial Officer. Mr Roger reported to Mr Andrew McDonald, who was the Chief Executive Officer and a director of the company.

15. [31]

    Those mainly responsible for the day to day management of the transaction on Delisi’s behalf were Mr Brian Zheng, who was a retained consultant of Delisi, and Mr Wang Song, Delisi’s company secretary. They reported ultimately to Ms Simin Zheng, referred to in the evidence as the “Chairlady”, who chaired Delisi’s board.

16. [32]

    Later in this judgment I will set out in detail the events leading up to the failure to deliver the December Accounts in audited form by 20 May. Following the late delivery of the Accounts, the parties continued to work towards the completion of the transaction (it was not suggested that this precluded Delisi from later acting under paragraph 5 if it had a contractual entitlement to do so).

17. [33]

    On 29 June 2016, Zhong Rui provided its final appraisal. In the final appraisal the minimum value of Yolarno’s equity was reduced from $201 million to $79 million.

18. [34]

    Delisi’s board took the view that, as a result, completion of the transaction was impossible. A notice of termination was issued on 30 June 2016. The notice relied upon non-satisfaction of the conditions precedent. This (it is now accepted) was premature; the termination trigger date was not reached until the end of the day. But the notice also relied upon paragraph 5 of the Extension Letter to justify the termination.

19. [35]

    Yolarno’s solicitors responded on 5 July. The response put two grounds for termination. One was that the purported termination by Delisi was invalid and repudiatory. The letter purported to accept the repudiation. Alternatively, the letter relied upon Yolarno’s right to terminate the SSSA on the basis that the conditions precedent had not been satisfied and the termination trigger date had passed.

Evidence

1. [36]

   Evidence was read from executives on both sides of the transaction. Neither side called Ms Li (or anyone else from PwC China). In the end there was no cross-examination of the witnesses who were called.

2. [37]

   I deal with the course of events leading up to the completion of the audit in a separate section of the judgment below. The facts were relevantly undisputed. It is not necessary to discuss other aspects of the evidence any further.

Obligation to act in good faith

1. [38]

   On 1 March 2016, Delisi made an announcement to the Shenzen Stock Exchange about the Extension Letter. The announcement relevantly stated (in translation):

2. [39]

   On the same day as it issued the stock exchange announcement, Delisi issued its proposed engagement letter to PwC China. On 7 March, Mr Roger sent a hurry-up email asking Delisi to finalise the terms of the engagement by that day. This did not happen, but the fee arrangements were discussed and agreed on 11 March. Mr Roger sent further hurry-up emails to Delisi on 16 and 21 March. The terms of engagement were signed on Delisi’s behalf on 22 March. They did not specify a date according to which the Accounts should be delivered.

3. [40]

   Planning for the audit had commenced between PwC and Yolarno as early as 29 February. On 29 April, in an internal PwC email, Ms Li stated that Friday 6 May (two weeks before the deadline) was achievable, provided that various internal PwC sign-offs were achieved.

4. [41]

   But by 5 May, a further requirement had emerged. Yolarno’s lender, the Australian and New Zealand Banking Group (“ANZ”), had required the completion of an equity raising as a condition of continuing its financial support. PwC wanted Delisi to sign a “confirmation letter” to the effect that it intended to proceed with the acquisition. Apparently this was because, in light of ANZ’s attitude, Yolarno’s ability to continue as a going concern would be in question if Delisi did not proceed.

5. [42]

   On 5 May Mr Roger emailed Mr Zheng:

6. [43]

   On the following day, Friday 6 May, a telephone meeting took place between the parties’ representatives. Mr Wang stated that Delisi was “not comfortable” with signing the letter. He was asked to send a list of reasons and undertook to do so.

7. [44]

   Meanwhile, PwC Australia came up with an alternative plan. If Delisi would not provide the confirmation letter, ANZ could be asked to alter its requirements under the finance facilities. If that was not possible either, then the going concern issue could be referred to in the audit opinion as an “emphasis of matter” without formally qualifying the accounts.

8. [45]

   On Tuesday 10 May, Mr Thompson wrote to Mr Roger and Ms Li confirming the strategy. His email relevantly stated (emphasis added):

9. [46]

   On Thursday 12 May, Mr Roger emailed to Ms Li a letter signed by Mr McDonald for Yolarno concerning the conduct of PwC’s audit of the December Accounts. The letter relevantly stated:

10. [47]

    Counsel for Delisi observed that the tone of this letter, when Yolarno was not PwC China’s client, was surprising to say the least. It is not however necessary for the purposes of this judgment to go into the purposes behind the letter, or the effect it may have had on Ms Li. For present purposes, what the letter does show is that Yolarno was proposing to solve the going concern issue by obtaining an extension of the covenant from ANZ rather than a confirmation letter from Delisi.

11. [48]

    For this purpose, Mr Roger approached Mr Ian Hanrahan of the ANZ. The dealings between Yolarno and the ANZ are recorded in a letter from Mr Hanrahan sent the following week.

12. [49]

    The first step in the negotiations between Yolarno and the ANZ was a meeting which took place on Friday 13 May, the day after the email to Ms Li. Mr Hanrahan recorded in a subsequent letter to Mr Roger:

13. [50]

    Mr Hanrahan’s letter does not record that any direct request was made on behalf of Yolarno to ANZ for an extension of the covenant at the 13 May meeting. But following the meeting it seems that Yolarno’s executives decided to go back to trying to get the confirmation letter from Delisi.

14. [51]

    On Saturday 14 May, Mr McDonald emailed a formal letter to Delisi, addressed to its board of directors. The letter relevantly stated (emphasis added):

15. [52]

    Ms Li received a copy of this emailed letter. On the same day she wrote to Mr Wang commenting on it and Yolarno’s letter to her of 12 May (in translation):

16. [53]

    On the following day, Sunday 15 May, Mr Wang responded on Delisi’s behalf to Mr McDonald’s emailed letter. His email relevantly stated (in translation):

17. [54]

    On the following day (Monday 16 May) Mr Wang replied to Ms Li’s email of 14 May. He stated (in translation):

18. [55]

    On the same day Mr Wang formally wrote to Ms Li on behalf of Delisi, as he had promised in his email to Yolarno the previous day. This email was copied to Mr Roger and others at Yolarno. It stated (in translation):

19. [56]

    Also on Monday 16 May, a telephone meeting took place between representatives of PwC China, Yolarno and Delisi. This meeting revealed a change of approach from Ms Li (or at least an apparent change of approach). As interpreted by Yolarno’s representatives, Ms Li suggested that if the going concern issue could not be satisfactorily addressed, it would not be possible simply to refer to the issue by way of emphasis of matter. Instead, the accounts would, or at least might, have to be qualified.

20. [57]

    This led Mr Roger to make urgent contact with the ANZ. Mr Hanrahan reported that ANZ was asked to consider providing Yolarno with an “unconditional letter of support” up to 1 January 2017. ANZ considered this over the following twenty-four hours, but advised that such a letter of support would require a full financial proposal, credit review and approvals process, which could not possibly be done by the time the accounts were due on Friday 20 May.

21. [58]

    On the following day, Tuesday 17 May, Mr McDonald emailed a letter to Delisi responding Mr Wang’s email of Sunday 15 May. The letter relevantly stated (emphasis added; the underlined section was admitted only as evidence of what was said, not as evidence of the fact):

22. [59]

    There was no response to the letter. On Thursday 19 May, Mr McDonald emailed a follow-up letter to Delisi:

23. [60]

    There was no immediate response from Delisi. Then at 2:09 pm on the afternoon of 20 May (Sydney time), Mr Zheng sent an email proposing a renegotiation of the deal.

24. [61]

    At 3:31 pm that afternoon, Mr McDonald emailed a further letter to Ms Zheng, addressed to the board of Delisi. The letter relevantly stated (emphasis added):

25. [62]

    Meanwhile, the letter from Mr Hanrahan of ANZ confirming the earlier discussions with Mr Roger had arrived (see [49] above). Mr Roger forwarded it to Mr Thompson at 3:29 pm, saying:

26. [63]

    Four minutes later, after Mr McDonald’s emailed letter had been sent, Mr Roger forwarded to Ms Li his email to Mr Thompson.

27. [64]

    No further action was taken on behalf of Delisi before 5:30 pm Sydney time, which is now agreed as the deadline for the provision of the December Accounts. Later in the evening, at 9:05 pm Sydney time, Mr Wang emailed to Ms Li what was described (in translation) as “our official statement regarding the audit report”.

28. [65]

    The “official statement” recorded that Delisi “always insists [sic] and has been urging” the production of an unqualified audit report as soon as possible. But it also stated that if the report did not “conform to the format recognised and required by the Chinese regulation authorities and stock exchanges” it would “substantially impede and adversely impact Delisi’s M&A transaction”. If an unqualified report could not be issued, PwC China was asked to issue a “commitment letter” accepting responsibility for all losses suffered by Delisi.

29. [66]

    The report was eventually issued by Ms Li in unqualified form, with an emphasis of matter only. Ms Li dispatched it by email to Mr Roger and Mr Wang at 11:57 pm China time (1:57 am on 21 May, Sydney time). It was received by Mr Roger at 11:58 pm China time but did not reach Mr Wang until 12:12 am China time.

30. [67]

    The first two sentences of paragraph 5 of the Extension Letter relevantly provided:

31. [68]

    Counsel for Yolarno also relied on cl 17.12 of the SSSA which provided:

32. [69]

    The obligation in paragraph 5 of the Extension Letter was to “work in good faith to procure” production of the Accounts by the deadline. Counsel for Delisi submitted that the obligation was not an absolute one which required Delisi to subordinate its own commercial interests to those of Yolarno; for practical purposes the obligation required only the taking of reasonable steps. Counsel relied upon Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 at [144]-[145]. Counsel for Yolarno expressly agreed with this analysis. I think that the obligation in cl 17.12 operated the same way.

33. [70]

    In determining whether the conduct of Delisi was reasonable, it is important to remember that the obligation in question was one of co-operation. It required the parties to work together towards the relevant objective.

34. [71]

    In such a context, there is a recognised distinction between a party being obliged to refrain from taking action to prevent the other party from achieving a benefit or advantage, and the first party being obliged to take positive action to confer such a benefit on the other party: see Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607 per Mason J. This distinction is hardly surprising. An obligation to take affirmative action is an imposition: it usually requires the diversion of resources which the first party would otherwise be deploying to advance other interests of its own.

35. [72]

    For this reason, cases in which reasonableness will require the first party to act without having been actually asked to do so are unlikely. Usually it will be sufficient to leave matters to the other party until some specified action is asked for. And where it is not obvious why the action in question is necessary, some sort of explanation may be necessary. A peremptory demand may not be enough to trigger the first party’s obligation.

36. [73]

    In their submissions at the hearing, counsel narrowed the challenge to Delisi’s conduct. Counsel did not press any contention that Delisi was obliged to execute the “confirmation letter” sought on 5 May and again in Mr McDonald’s letter of 14 May. Nor did counsel pursue the request in the email of 17 May for Delisi to ask PwC China to explain any differences between its approach and that of PwC Australia (see [58] above). Counsel’s submission was confined to Delisi’s failure to direct PwC China to issue an unqualified audit report by 5:30 pm on 20 May.

37. [74]

    So far as formally directing PwC China to issue the December Accounts was concerned, counsel for Delisi submitted that it lacked the power, and would not in any event have been proper, for it to have taken that step. I agree with this submission. In the end, it was up to Ms Li to exercise her own judgment. She could not be instructed by Delisi to form an opinion she did not in fact herself hold. It follows that, as Ms Li pointed out in her email to Mr Wang on 14 May (see [52] above), she could not be directed to issue an unqualified report.

38. [75]

    This leaves the question of the 5:30 pm deadline. As I understood the submission from counsel for Yolarno, even if Delisi had no power to direct Ms Li to issue the report, Delisi could at least have urged her to issue it by 5:30 pm Sydney time.

39. [76]

    The first difficulty with this contention is that it was not squarely put, and explained, to Delisi in correspondence. Yolarno’s letter of 14 May asked Delisi to request the issue of the accounts by PwC China “on or before 20 May”. Delisi’s response was to ask PwC China to issue the accounts “as soon as possible”. Yolarno’s letter of 17 May complained about Delisi’s response, but only in so far as that response may have suggested that completion of the July Accounts was regarded by Delisi as more important than the completion of the December Accounts. Yolarno’s letter repeated the request that Delisi asked to have the December accounts delivered “on or before 20 May 2016” (as well as taking priority over any other work related to the transaction).

40. [77]

    It was not until two hours before the Accounts were due that Mr McDonald emailed to Ms Zheng a letter asking Delisi to instruct PwC China to deliver the accounts at 5:30 pm on that day (see [61] above). But Mr McDonald’s letter did not explain the significance of the reference to 5:30 pm.

41. [78]

    Counsel’s contention assumes that there may have been some lack of understanding on the part of PwC China about when the Accounts were due. Of course, any statement about this from Delisi would only have represented its own opinion. As the course of these proceedings shows, when the deadline fell due was potentially contestable. But there is a more fundamental point.

42. [79]

    Both parties were aware that PwC China had its own copy of the SSSA and the Extension Letter and knew of the deadline. If there was any uncertainty about the timing of the deadline, PwC China could of course have obtained its own advice on the question. But there is no evidence that PwC ever said anything to any of the parties to indicate that there was any issue about it.

43. [80]

    Indeed, it seems that Delisi itself may not have been conscious that the deadline was 5:30 pm. The “formal statement” provided by Mr Wang, which was not sent until after that deadline, proceeded on the basis that it was still open for PwC to comply.

44. [81]

    Nor does the evidence explain why it was that on the afternoon of 20 May Mr McDonald mentioned a delivery time for the Accounts of 5:30 pm, when he had not previously, in his dealings with Delisi, referred to that particular deadline. If it suddenly occurred to Mr McDonald or Mr Roger that Ms Li might be proceeding on the basis that she had until midnight to issue the report, they did not confirm this with her. Mr Roger did communicate with Ms Li on the afternoon of 20 May, but only to raise an argument that the financial resources available to the McDonald family needed to be taken into account in forming her opinion (see [62] above).

45. [82]

    In this context, it should be recalled that the good faith obligation was a joint one. If Delisi owed an obligation to remind PwC China that the Accounts were to be delivered by 5:30 pm Sydney time, then Yolarno owed the same obligation and was equally in breach for failure to do so.

46. [83]

    Yolarno’s correspondence had raised a number of issues which had nothing to do with the timing of the deadline. In this context, I think it was incumbent on Yolarno, if it wished for Delisi to intervene, to explain why its request that the accounts be prepared “as soon as possible” was inadequate, and to explain in particular the significance of the 5:30 pm deadline. Yolarno did not do so. In my view, in these circumstances, it was not unreasonable for Delisi to take the position that having asked for PwC China to issue the accounts as soon as possible, it had done all that it was reasonably required to do.

47. [84]

    Furthermore, any reminder would have needed to be sent before the deadline expired. There was no evidence about where Ms Zheng was, and what her other commitments were, between 3:31 pm and 5:30 pm Sydney time (1:31 pm and 3:30 pm CST) on 20 May. There is accordingly no basis for concluding that, even if Mr McDonald’s request was reasonable, it was unreasonable for Delisi not to comply with it in time.

48. [85]

    There is a more fundamental point still. It is far from clear, on the evidence, whether a request from Delisi to issue the accounts by 5:30 pm would have made any difference.

49. [86]

    Counsel for Yolarno submitted that this question was not relevant. The argument was that the mere failure by Delisi to act in good faith disqualified it from exercising any right of termination it would otherwise have had under paragraph 5 of the Extension Letter. No causal connection between non-compliance and PwC China’s failure to deliver the Accounts was required.

50. [87]

    I reject counsel’s argument. The authorities suggest that usually, unless the contract expressly provides to the contrary, a causal connection is required between the failure to act in good faith and the termination relied upon: see Nina’s Bar Bistro v MBE Corporation [1984] 3 NSWLR 613 at 620E-F; City of Gosford v Marim Pty Ltd (1990) 6 BPR 13,871 at 13,874; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30 at [34]. In any event I think that the word “despite”, in its ordinary meaning, itself connotes a causal connection between the non-compliance and the subsequent event (failure to deliver the Accounts in time).

51. [88]

    Not only is that the natural meaning of the language but it is supported by commercial common sense. It would be absurd if a trivial breach, resulting in the loss of an hour, thereafter prevented Delisi from acting on a failure to deliver the Accounts which went on for a month. In my view a causal connection was required.

52. [89]

    Counsel accepted that if I reached this conclusion, the onus lay on Yolarno to establish that PwC China would have delivered the accounts at 5:30 pm if asked by Delisi. Counsel submitted that I could infer that PwC China was unaware of the 5:30 pm deadline. But even if I accept that, there is a question about whether, had PwC been told about it at some point after 3:31 pm, there would have been sufficient time to complete the internal procedures required to issue the Accounts by 5:30 pm. The issue is particularly acute because it would have to be addressed on the assumption that Delisi took the maximum reasonably permissible time to make the request of PwC China and there is no way of fixing what that maximum time would have been (see [84] above).

53. [90]

    There is a complete lack of evidence about what had to be done internally within PwC China on the afternoon and evening of 20 May to issue the Accounts. Counsel accepted that the evidence did not establish that Ms Li was in Delisi’s “camp” for the purposes of the rule in Jones v Dunkel. On the face of it, the gap could have been filled by Yolarno obtaining direct evidence from Ms Li or someone else at PwC China. I see no reason why I should speculate on the question.

54. [91]

    In these circumstances, I am not prepared to make the finding Yolarno seeks by inference. The necessary causal connection has not been established and Yolarno’s defence on this point fails for that reason alone.

Validity of 30 June termination notice

1. [92]

   I have already reproduced part of the second sentence of paragraph 5 of the Extension Letter (see [67] above). For the purposes of the present argument, the relevant parts of the paragraph are the second and third sentences. I now set those out in full:

2. [93]

   Of critical importance for present purposes is the phrase “and Completion does not occur pursuant to the terms of the [SSSA]” in the second sentence of the paragraph. Under cl 5.1 of the SSSA, “Completion” was conditional on satisfaction or waiver of each of the Conditions Precedent.

3. [94]

   Clause 5.2 provided:

4. [95]

   Clause 5.3 provided:

5. [96]

   Clause 6.1 dealt with when Completion was to occur. It provided:

6. [97]

   The definitions of “Completion” and “Completion Date” were:

7. [98]

   Clause 13.1 of the SSSA gave the parties a right to terminate if either the Conditions Precedent were not satisfied by the termination trigger date, or the final purchase price had not been determined between them following delivery of the final appraisal report. Subclauses (a) and (c) provided:

8. [99]

   Clause 13.3 provided for termination in the event that the Conditions Precedent were satisfied but a party did not complete. It provided:

9. [100]

   Clause 4.1 provided for the refund or forfeiture of the deposit, in whole or part, in various different scenarios “if Completion does not occur”. Subclause (a) applied where “completion does not occur for any reason other than default by [Yolarno] or one or more of the Sellers”. Subclause (b) applied where “completion does not occur due to default by [Yolarno] or one or more of the Sellers”. Subclauses (c), (d), and (e) applied where “completion does not occur and this agreement is terminated under clause 13.1 solely because” one or other of the Conditions Precedent was not satisfied.

10. [101]

    Paragraph 3 of the Extension Letter dealt with the extension of the termination trigger date to 30 June 2016. Paragraph 4 provided for the making of the Advanced Payment. Delisi’s agreement to make the Payment was stated to be in consideration of the extension.

11. [102]

    I have already quoted paragraph 5 of the Extension Letter (see [67] and [92] above). Paragraph 7 provided for PwC China’s costs in preparing the Second Reference Amended Accounts to be borne equally between the parties.

12. [103]

    Paragraphs 6 and 8 provided:

13. [104]

    There was no dispute between the parties about the principles to be applied in construing paragraph 5 of the Extension Letter. The parties accepted that the Court would apply the construction principles stated by the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-657 [35]; see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 116-117 [46]-[51].

14. [105]

    Counsel for Delisi particularly emphasised the reference to termination “at any time”. Counsel submitted that this language was in the widest terms and should not be constrained by any contrary implication.

15. [106]

    Counsel submitted that the phrase “and completion does not occur” was designed, looking forward from the date of the Extension Letter, to be applied to the situation after 20 May if the December Accounts had not been provided in accordance with the deadline. The natural meaning of the language was said to be that, as at that date, completion had not in fact occurred. In effect, counsel read the phrase as meaning “and completion shall not have occurred”. The result was that once the deadline was missed, Delisi could terminate at will at any point up until completion actually took place.

16. [107]

    Counsel for Yolarno criticised this reading on textual grounds. Counsel made four main points.

17. [108]

    First, counsel pointed out that, grammatically, the phrase “at any time” in paragraph 5 referred to termination if two conditions were not satisfied. The first condition was that the December accounts were not delivered in time. The second condition was that “completion does not occur”. It was only if both conditions were satisfied that there was a right to terminate “at any time”. Therefore, it was illogical to suggest that Delisi’s reading of the paragraph was supported by a need to give an unconstrained meaning to the phrase “at any time”.

18. [109]

    Counsel also emphasised that the Extension Letter was designed to be read together with the SSSA. Had the intention been that, if the December Accounts were not delivered in accordance with the deadline, Delisi could terminate at any time until completion occurred, paragraph 5 could readily have said so in terms. Indeed, that very language was used in cl 13.1.

19. [110]

    Furthermore, the phrase “Completion does not occur” appeared in cl 4.1 of the SSSA. Clearly in that context the phrase could not mean simply that Completion had not yet occurred. Counsel relied on the principle of construction that a term which appears in different places in the same contract is usually given the same meaning in both places.

20. [111]

    Finally, counsel emphasised that the phrase in question was “completion does not occur” not “completion has not occurred”. Before the termination trigger date completion might not have occurred, but it could still do so. Counsel submitted that it was not a natural use of language to say that a condition that “completion does not occur” could be satisfied at that point. Counsel submitted that textually the phrase could only naturally apply when it became clear that Completion not only had not occurred, but would not occur.

21. [112]

    There is force in these arguments. But it is also necessary to consider whether Yolarno’s construction, preferable as it might at first appear to be as a matter of language, operates in a commercially satisfying way.

22. [113]

    A peculiarity of the SSSA was that it did not explicitly provide a date for Completion. Completion was fixed to occur within a certain period of the satisfaction of the Conditions Precedent (the termination trigger date, being 30 June 2016, but subject to an extension for a period of up to thirty days under cl 11.1(c)). But failure to satisfy the Conditions Precedent by the termination trigger date did not automatically bring the contract to an end. If the Conditions Precedent were not satisfied, the contract would remain in force unless it was terminated, albeit that no completion date would be identifiable and accordingly the parties would not be obliged to proceed to completion under cl 6.

23. [114]

    One obvious way to accommodate this to the textual points made by counsel for Yolarno would be to read “Completion does not occur” as meaning “Completion does not occur because the contract is terminated”. Counsel for Delisi pointed out however that such a reading would give rise to absurdity. The purpose of paragraph 5 of the Extension Letter was to confer a right of termination on Delisi in certain circumstances. But if “Completion does not occur” required the contract to have been terminated already, the right would be meaningless.

24. [115]

    Counsel for Yolarno did not accept that it was necessary to read the contract in that way. Instead, in counsel’s submission, “Completion does not occur” was to be read as meaning “the conditions upon which Completion depends are not satisfied”. Thus the right to terminate could be exercised once the termination trigger date had been passed, without any need to wait for formal termination.

25. [116]

    But, as counsel for Delisi pointed out, at that point both parties would have a right to terminate under cl 13.1(a) in any event. Counsel submitted that the commercial consequences of this reading were unlikely to have been intended by commercial parties. In the first place, so far as Delisi was concerned the right of termination under the Extension Letter would be redundant. Secondly, according to the preferred construction of both parties (see [129]-[131] below), Delisi’s right of termination was liable to be defeated by Yolarno terminating first. If Delisi terminated one minute after the deadline for the satisfaction of the Conditions Precedent expired, it would recover $6 million under paragraph 5. But if Yolarno beat it to the punch by getting its notice of termination in thirty seconds after the deadline, the $6 million would be forfeited.

26. [117]

    Counsel’s submission invoked two principles which apply in the construction of contracts, especially commercial contracts. The first is that the court should in general adopt a construction which will avoid redundancy and achieve a harmonious construction of the termination provisions of the SSSA as modified by the Extension Letter; the second is that the court should avoid a construction which would give rise to a commercially capricious result: see Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-110.

27. [118]

    Counsel for Yolarno did not dispute the existence of these principles. But counsel contended that they had limited operation in the present case.

28. [119]

    As to the argument that Yolarno’s construction resulted in a right of termination which was redundant, counsel argued that in some circumstances paragraph 5 could give rise to a right of termination where none was expressly given under the SSSA: for example, if the Conditions Precedent were satisfied but Yolarno later failed to complete in accordance with its obligations under cl 6. I am not sure of this example, as it seems to me that in such circumstances the logic of Yolarno’s construction would require the cl 13.3 procedure to play out before termination would be possible. In any event the contingency posited by counsel is a relatively remote one. The parties may be presumed to have had more clearly in mind the possibility of the Conditions Precedent not being satisfied. There is no doubt of the redundancy which arises, on Yolarno’s construction, in those circumstances.

29. [120]

    As to the possibility of competing rights of termination, counsel for Yolarno submitted that this also arose under Delisi’s construction. It could happen if Delisi failed to terminate under paragraph 5 of the Extension Letter before Yolarno acquired a right of termination under cl 13.1(a). Counsel also submitted that the nature of the Conditions Precedent was such that it was unlikely that whether they had been satisfied would be contestable, and whether they had been satisfied as more likely to be known to Delisi than to Yolarno. For practical purposes, therefore, the likelihood of a “race to termination” was not very great. These submissions may be correct so far as they go, but they are only a partial response to the point being made by counsel for Delisi.

30. [121]

    On balance, the factor which weighs most heavily with me is this. Paragraph 5 of the Extension Letter could have been drafted so as to provide for repayment of the Advanced Payment upon termination of the SSSA. Instead, paragraph 5 gave to Delisi (alone) a new right of termination of the SSSA, with an accompanying right to recover the Advanced Payment. I think this has two consequences.

31. [122]

    First, it makes textual consistency with the phraseology of the SSSA less important. The parties can be presumed to have been focusing on the new right of termination created by the Extension Letter rather than on the language used for the purposes of different rights of termination in the SSSA. Indeed, Yolarno’s construction of the phrase “Completion does not occur” in paragraph 5, namely that it means “after the termination trigger point has been reached” does not really sit comfortably with cl 4.1 of the SSSA any more than Delisi’s does. That clause was clearly designed to operate after the termination of the SSSA pursuant to cl 13, looking backwards.

32. [123]

    The second point is that, if nothing else, the parties agreed that Delisi, and Delisi alone, was to have the benefit of the new right of termination. This makes it particularly important that the right of termination should have had some practical commercial utility. Despite the submissions from counsel for Yolarno, I think that Yolarno’s construction undermines that right by subjecting it to a “race to terminate” which could operate capriciously so as to deprive Delisi of the opportunity to terminate and to recover the Advanced Payment.

33. [124]

    Delisi’s construction does have the textual drawbacks identified by counsel for Yolarno. But Yolarno’s construction likewise involves some departure from the text, by reading in words which are not there. I conclude on balance that the construction advanced by Delisi is the preferable one. The notice was not invalid because it was issued before the termination trigger date and Delisi’s claim succeeds.

34. [125]

    My conclusion makes it unnecessary to decide whether the notice, if not validly issued on 30 June, had some sort of continuing operation which allowed it to take effect on 1 July. In deference to counsel’s arguments, however, I will make some brief observations.

35. [126]

    Counsel for Yolarno emphasised that a contractual right to terminate must strictly match the contractual terms granting that right. Counsel cited what Lord Hoffman said in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 776:

36. [127]

    Counsel also relied on the statement by the learned author of Contract Law in Australia (7th ed, 2018, LexisNexis Butterworths) at [30-09]:

37. [128]

    In the present case, this principle was not in doubt. The question is whether, on its true construction, paragraph 5 required that notice of termination could only be given after the termination trigger date. As this is purely a question of construction, which does not depend upon any contested issue of fact, I do not propose to address it further in the present judgment. If I am wrong in my conclusion that Delisi’s notice was validly issued on 30 June, then the point, and the authorities relied upon by counsel, can be considered by the Court of Appeal.

38. [129]

    For completeness, I should mention one further possible argument. Paragraph 5 of the Extension Letter does not expressly deal with a situation (which on Yolarno’s case applied here) whether the conditions in the paragraph are satisfied but Yolarno terminates rather than Delisi. Paragraph 5 refers to termination by Delisi “upon which” the Advanced Payment is repayable. Both parties’ primary position was that the words “upon which” referred to a termination by Delisi, so that there was no right of repayment of the $6 million in the case such as the present where (on the hypothesis I am considering) Delisi’s purported termination was invalid and Yolarno’s termination brought the contract to an end. Counsel for Yolarno relied on the provisions of paragraph 6 of the Extension Letter (see [103] above), which, counsel submitted, expressly provided to the contrary.

39. [130]

    But I am not completely sure of this. It might be possible to read the words “upon which” as simply referring to termination rather than necessarily being confined to termination by Delisi. If the redundancy and “race to terminate” considerations discussed above are insufficient to establish the correctness of Delisi’s construction argument about the termination trigger date, they may nevertheless arguably support such an interpretation. That might be a strained reading of paragraph 5, but it might be considered necessary to ensure that the court reached a result which did not flout business common sense: see Antaios Cia Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock.

40. [131]

    With some diffidence counsel for Delisi adopted this as their final fall-back argument. Counsel for Yolarno did not contend that there was any prejudice in the argument being available. But again, given my conclusion, it is not necessary to address the issue further.

Conclusions and orders

1. [132]

   I have concluded that:

   1. (1)

      there was no breach by Delisi of its obligation of good faith which deprived it of any right it had to terminate the SSSA under paragraph 5 of the Extension Letter;

   2. (2)

      Delisi’s notice of termination was validly issued on 30 June 2016, notwithstanding that at that point the termination trigger date had not been reached.

2. [133]

   Delisi is therefore entitled to recover the Advanced Payment from Yolarno. In due course I will enter judgment in favour of Delisi on its claim. It will be necessary to calculate the interest to which Delisi is entitled. I will adjourn the proceedings for a short period to allow that to happen. It will also be necessary to deal with the costs of Delisi’s claim.

3. [134]

   In accordance with the agreement of the parties, the cross-claim will be dismissed with no order as to costs. I will defer making this order until I make the final orders on Delisi’s claim.

4. [135]

   The orders of the Court are:

   1. (1)

      Adjourn the proceedings to 9:45 am on 7 February 2022 or such other time as may be arranged with my Associate.

   2. (2)

      Direct that the parties confer on the form of orders to be made to give effect to this judgment and to deal with costs, and, no later than 24 hours before the adjourned hearing, submit proposed orders for this purpose.