WLD Practice Holdings Pty Limited v Sara Stockham

1. [1]

   Two separate questions have been posed for the Court by consent as follows:

2. [2]

   There is no factual material for the Court to determine. Indeed these questions are to be determined on the basis of a construction of what is described as the Unitholders Agreement dated 28 October 2016 taken together with the Unit Trust Deed for the WLD Practice Holdings Trust (dated 29 September 2015). The parties to and relevant background relating to the Unitholders’ Agreement and Unit Trust Deed are set out in one of my previous judgments ([2020] NSWSC 395 at [1]-[5]).

The Construction of the Unitholders’ Agreement and Unit Trust Deed

1. [3]

   The principles of contractual construction are well known. In Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, Gibbs J explained (at 109):

2. [4]

   This passage was adopted as authoritative by a majority of the High Court in Westfield Management v AMP Capital Property Nominees (2012) 247 CLR 129, 139-40 (French CJ, Crennan, Kiefel and Bell JJ).

3. [5]

   Further, as stated by the High Court in Electricity Generation Corporation v Woodside Energy Pty Ltd (2014) 251 CLR 640 at 656-657 (French CJ, Hayne, Crennan and Kiefel JJ):

4. [6]

   In Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (S99/2015; S102/2015) (2015) 256 CLR 104, French CJ, Nettle and Gordon JJ said (at [48]):

5. [7]

   However, at [51] their Honours further noted that:

6. [8]

   In Cherry v Steele-Park [2017] NSWCA 295 Leeming JA stated (at [72]):

7. [9]

   At [78] his Honour went on to say:

8. [10]

   The principles applicable to the construction of written contracts are generally applicable to the construction of deeds as well (J D Heydon, Heydon on Contract at [8.1470], citing Seddon v Senate (1810) 13 East 63; 104 ER 290 at 74 (East), 295 (ER)).

9. [11]

   In relation to whether a contractual expert determination is binding as between the parties to the contract, McHugh JA said in Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 (at 335-336):

10. [12]

    The cross-defendant points out that expert determinations have been invalidated in cases where for example an appointed person valued property himself instead of employing another person as “expert valuer” as expressly required (Jones v Jones [1971] 1 WLR 840 at 846, 853) or used one method of sampling and analysis instead of the specified “Method” expressly required (Verba Oil Supply & Trading GmbH v Petrograde Inc [2002] 1 All ER 703 at 706 [10], 713 [29], 716 [49]), while expert determinations have been upheld where appointed persons “have done precisely what they were asked to do” (Jones v Sherwood Services plc [1992] 1 WLR 277, 287) notwithstanding some mistake in the application of principles of valuation, failure to consider relevant matters or consideration of irrelevant matters (Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 331, 335-336), a deficiency of reasons relative to what is required of an arbitrator (Shoalhaven City Council v Firedam Civil Engineering Pty Ltd (2011) 244 CLR 305 at 316, 319) or a decision to make a speculative prediction of future inflation (Woolworths Ltd v Mefrost Pty Ltd (1988) 14 NSWLR 300, 307).

11. [13]

    On the other hand, the cross-claimants point out that in Holt v Cox (1997) 23 ACSR 590 an outgoing shareholder was required to sell his shares in a company “at a fair price determined by the auditor of the company” (591). Santow J at trial and Mason P and Priestley JA in the Court of Appeal (Cole JA dissenting) held that the valuation was not made in accordance with the contract because the “fair price” required consideration be given to the possibility of a winding up and distribution of net assets and the valuer had disregarded that possibility.

The Parties’ Submissions

1. [14]

   The cross-claimants submit that clause 7.8 means that any transaction falling within the “Major Policy Issues” in schedule 3 must be authorised by a Unanimous Resolution or, as between the parties to the Unitholders’ Agreement, it will be void and of no effect, meaning “devoid of any legal significance”. They submit that the effect of clause 7.8 is that every Unitholder must positively assent to every significant transaction or event.

2. [15]

   The cross-claimants submit that the subject of the valuation under clause 13 is a Unit in the Trust, which confers on the Unitholder certain rights and obligations created by the Unit Trust Deed as modified by the Unitholders’ Agreement and the general law. They submit that the Valuer cannot adopt any “method of valuation” (cl 13.2) which disregards any part of the Unitholders’ Agreement, including clause 7.8. They submit that to do so would lead to the “obviously” incorrect result that the financial statements of the Trust would be required to be prepared on the basis that clause 7.8 has full effect (whereby transactions conducted in breach of clause 7.8 would be “removed” from the accounts: T14.37) but the valuation of the outgoing Unitholder’s Units would be undertaken on a completely different footing.

3. [16]

   The cross-claimants submit that the financial information the Valuer, Mr Gwynne, was given discloses non-current liabilities well exceeding $50,000 which should have prompted an enquiry as to whether the requirements of clause 7.8 had been satisfied. They submit the failure of the Valuer to give effect to clause 7.8 in making his valuation means the valuation is invalid and must be set aside. However, during oral submissions counsel agreed that I was not required to determine factual questions for the purposes of answering the separate questions but if I determine the questions in favour of the cross-claimants a separate factual inquiry will be required (T4.9-33).

4. [17]

   The cross-defendant submits that clause 7.8 is a contractual prohibition upon the Trustee giving effect to decisions in respect of Major Policy Issues in the absence of a Unanimous Resolution. However, clause 7.8 does not have the effect that the Trustee Company Accountant, in determining the Fair Market Value of a Unit under clause 13 of the Unitholders’ Agreement, must be satisfied that there is evidence before him or her that clause 7.8 has been complied with in respect of every Major Policy Issue. It submits that clause 7.8 much less sets up any such requirement as a condition to the validity of any determination produced under clause 13.

5. [18]

   The cross-defendant describes clause 13 as a “code” on the topic of what a Valuer must do to produce a valid valuation. It submits that where the parties intended to impose express obligations on the manner in which the Valuer carried out his task, they did so expressly all in one place (cl 13.2), which points against a construction that there is a further, non-express condition to the validity of a determination arising from a provision found elsewhere in the agreement. It submits that clause 13.2(a) signals a contractual intention to entrust to the Valuer all questions of methodology and that by clause 13.2(c) the parties indicated their intention to rely on the skill and judgment of the Valuer and be bound by his decision except in the case of manifest error. The cross-defendant further submits that clause 13.1(b) contemplates the valuation being conducted by reference to the actual past accounts that exist in fact, and that clause 13 contemplates the Valuer taking the accounts as he finds them (having regard to cll 9.2(a) and 9.2(b), s 129(1) of the Corporations Act 2001 (Cth) and cl 7.2 of the Unit Trust Deed). It submits the fact that clause 13.2(b) provides that the determination is to occur “within (1) month)” renders it highly unlikely the parties intended the determination to involve the extensive fact-finding inquiry contemplated by the cross-claimants.

6. [19]

   The cross-defendant submits that clause 7.8 relates to the entirely tangential issue of decision making by the Unitholders. It draws attention to the words “the Trustee Company must not effect any decision…” and submits the clause imposes an obligation binding on the Trustee, the consequence of a breach being that the Trustee will be in breach of contract and the Unitholders may sue the Trustee for damages. The cross-defendant submits that the words “void and of no effect” cannot have the construction the cross-claimants attribute to them (having regard to the Company Law Review Act 1998 (Cth) and s 125 of the Corporations Act 2001 (Cth). It submits that clause 7.8 does not speak in terms of “transactions” but removes the legal consequences of any “decision” to enter into the transaction.

7. [20]

   The cross-defendant further submits that the consequences of the cross-claimants’ construction are nonsensical and provides examples as to why that is so. It also submits that there is an express provision in the Unit Trust Deed (cl 7.2) which enables the taking of an audit into the correctness of the Trust funds and that is the manner in which the parties chose to deal with any inaccuracies in the accounts.

8. [21]

   In reply, the cross-claimants further submit that there is no express term that the Valuer can disregard clause 7.8 and such a term cannot be implied. They submit that the cross-defendant’s assertion that the contract “signals a contractual intention to entrust to the Valuer all questions of methodology” implies the parties are precluded from challenging the methodology the Valuer selects, which is incorrect (Holt v Cox (1997) 23 ACSR 590). They submit that “past earnings” and “net asset values” must mean the true past earnings and true net asset values. They submit that clause 7.8 by its opening words prevails over every other provision in the Unitholders’ Agreement and makes every decision “to effect”, “effectuating” or “carrying into effect” a Major Policy Issue (which means a “transaction”: T21.46) not approved by Unanimous Resolution “void and of no effect”. They emphasise that the Valuer is entitled to make enquiries (cl 13(2)(d)(i)) and the parties are entitled to make submissions (cl 13.2(d)(ii)). They submit that this case is concerned with an invalid valuation which by definition is a nullity, whether it “contains” a “manifest error” or not. They submit that s 128 of the Corporations Act is not relevant to the valuation of units in a trust and the doctrine of corporate ultra vires is not relevant to the administration of trusts. They deny that the consequences of their construction are nonsensical. They submit that if nobody raises a clause 7.8 issue the Valuer would be entitled to assume it had been complied with but if an issue is raised the Valuer must recognise it as potentially relevant and make an honest professional judgment about whether it is, or could refer that question to the Court.

9. [22]

   The cross-claimants also submit that the cross-defendant’s contention that a Unitholder’s only redress for false trust accounts is to seek an audit is inconsistent with the right of any beneficiary to invoke the jurisdiction of the Court at any time (Spellson v George (1987) 11 NSWLR 300); is inconsistent with clause 1.4 of the Unitholders’ Agreement which gives contractual rights under that agreement priority over inconsistent provisions in the Unit Trust Deed; ignores that an auditor has no power to correct erroneous accounts; and has no plausibility when accounts are provided 12 months after the end of the year to which they relate, where demands for information have been ignored, and where it is unclear whether one Unitholder alone can require an audit.

Consideration

1. [23]

   Clause 13 sets out a protocol which the Valuer is obliged to follow in determining the Fair Market Value of a Unit. The clause is set out above.

2. [24]

   A number of features of the clause deal with the nature of the activity undertaken, the activity itself and the role to be played by the Valuer in the process.

3. [25]

   But before the detail of the Valuer’s role is considered the circumstances in which that expertise is required needs to be considered.

4. [26]

   Here the process was triggered by the service by the first defendant (cross-claimant) upon the plaintiff (cross-defendant) of a sale notice pursuant to clause 10.4. Pursuant to clause 10.4(e) the Trustee must obtain a valuation of the Fair Market Value of the Sale Units in accordance with clause 13. Certain events follow that determination not presently relevant.

5. [27]

   First the Valuer is to determine the value for a Unit at the relevant date “on a going concern basis” (cl 13.1). As is clear from the provisions of clause 13 a certain methodology and certain material are to be considered.

6. [28]

   But in the end it is entirely a matter for the Valuer to determine the method of valuation he or she considers “reasonably appropriate” (cl 13.2(a)) with the qualification that generally accepted valuation principles are to be applied (cl 13.2(a)(iii)).

7. [29]

   The Trustee must act within a tight timeframe (cl 13.2(b)) and the Valuer is to act as an expert not as an arbitrator (cl 13.2(c)).

8. [30]

   Apart from a reference to the need for the valuer to consider “past accounts and current management figures and forecasts” (cl 31.1(b)) and “past and prospective earnings and underlying net asset values” (cl 13.1(c)), the Unitholders are obliged to provide the valuer with any relevant “books and records” of any Unitholder required (cl 13.2(d)).

9. [31]

   Whilst it is agreed guidance as to some matters is provided a good deal of latitude is given to the Valuer in performing the task.

10. [32]

    What is clear is that the accountant is to rely on historical financial records, which is unsurprising, rather than to, for example, conduct an audit or an independent investigation of the underlying financial records. This again is unsurprising given the timeframe allocated to the Valuer.

11. [33]

    In addition there is an obligation on the Board of the Trustee to maintain financial records of the Trustee Company “in accordance with the Accounting Standards and all applicable laws” (cl 9.2(a)), which fortifies the reason why the Valuer is directed to have recourse to the items referred to in clause 13.1(b).

12. [34]

    Clause 7 on the other hand regulates in some detail decision making by the Unitholders and shareholders.

13. [35]

    Clause 7.8 deals with decision making on what is defined as “Major Policy Issues”. All 21 “Major Policy Issues” are set out in schedule 3 of the Unitholders’ Agreement. They deal comprehensively with all manner of the rights and obligations of Unitholders that may affect in broad terms their respective financial interests, requiring nothing less than a “Unanimous Resolution” to do so otherwise the “decision” is void and of no effect. This is the guarantee that important decisions will only be the subject of unanimity.

14. [36]

    But clause 7.8 speaks of effecting “any decision”. The word “effect” means in its natural and ordinary meaning some change which is a result or consequence of an action. Therefore this provision in my view is clearly and unambiguously directed to rendering void or of no effect a decision making process or the bringing into effect some decision which has not been the subject of unanimous decision of the Unitholders. It has nothing to do in my view with any valuation process conducted by a third party valuer at the direction of the Trustee pursuant to clause 13.

15. [37]

    Clause 7.8 does not refer to any transaction which follows an unconstitutional decision. That falls to be the subject either of an action for breach of agreement or breach of trust. The clause only renders void the decision not the transaction that follows it. One very obvious reason why this is so is that the agreement cannot affect the rights of third parties who treat with the Trustee for example at arm’s length.

16. [38]

    My view is that clause 13, if invoked, is intended expressly to place the Valuer in a position where they have by design very little room to move. They are given a dedicated path and material to use on the way. They are in effect directed to make certain assumptions about the financial status of the Trustee.

17. [39]

    It is clear from the above that clause 7.8 and clause 13 are independent and discrete provisions textually divorced from each other and dealing with entirely different aspects of trust administration. One, clause 7.8, is directed to ensuring unanimous decision making on agreed matters that require it, whereas the other, clause 13.1, deals with a mechanism where for whatever purpose a Fair Market Value is required to be determined.

18. [40]

    It would be strange if the Unitholders were intending by clause 13 to be handing over to third party valuer an obligation to interfere in the business of the trust by, for example, making rulings on values of transactions, especially those where the financial interests of one of the Unitholders could be negatively affected. There is nothing in the language of either clause 7.8 or clause 13 to suggest that outcome, nor could it be in my view reasonably implicit. While each Unitholder may make written submissions to the Valuer (cl 13.2(d)(ii), those submissions are to be made “in respect of the matter being determined” which is the Fair Market Value for a Relevant Unit not the accuracy of the underlying accounting records.

19. [41]

    The Unitholders’ Agreement cannot in my view be objectively construed to provide a mechanism by which decisions on Major Policy Issues are not finally determined by the unanimous decisions of the Unitholders but by a stranger after he or she has made corrections to the books and records of the Trust, whose decision, aside from in the case of manifest error, will be final and binding on the Unitholders (cl 13.2(c)).

20. [42]

    For those reasons I would answer the questions as follows:

21. [43]

    I would invite the parties to bring in short minutes of order to reflect these reasons. If need be and if it cannot be agreed I will determine the question of costs.