AMA Group Limited v ASSK Investments Pty Limited

1. [1]

   BELL P: This appeal concerns the proper construction of an agreement entitled “Binding Heads of Agreement” (the HOA) that was entered into on 31 October 2019 between the appellant, AMA Group Limited (AMA) and the respondent, ASSK Investments Pty Limited (ASSK Investments). ASSK Investments operated a number of businesses which traded under the names ASSK Investments Pty Ltd (ACN 095 307 636) trading as “Northshore Classic Auto Body Centre”, “North Shore Classic Auto Body”, “NSC Collison Centre”, “NSC Collision Repairs” and “NSC Smash Repairs” (together, the NSC businesses).

2. [2]

   The HOA contemplated the sale by ASSK Investments to AMA of its smash repairs businesses. A copy of the HOA in its entirety is appended to these reasons.

3. [3]

   Following execution of the HOA, a due diligence process was undertaken by AMA, with the result that AMA concluded that the deal “in its current form” did not meet the requirements for its Board approval. As such, in a letter dated 10 January 2020, AMA communicated to ASSK Investments that “our client’s Board has not approved the purchase and has decided to not proceed with the purchase”, and that “[o]ur client accordingly terminates the HOA, and the matter is at an end”. AMA’s termination of the HOA was predicated on the fact that no Board approval had been obtained for the ultimate purchase of the businesses and, as such, a condition precedent to the agreement to enter into Business Sale Agreements had not been satisfied.

4. [4]

   In the proceedings below, ASSK Investments successfully sought an order for specific performance of the HOA. Hammerschlag J (the primary judge) did not consider that the approval of the Board of AMA was a condition precedent to performance of the HOA and consequently ordered that AMA specifically perform the HOA within 31 days of the Court’s order: ASSK Investments Pty Limited v AMA Group Limited [2020] NSWSC 1756 (PJ).

5. [5]

   The time for specific performance was extended, by consent, until 31 March 2021.

6. [6]

   Before turning to consider AMA’s grounds of appeal, a brief factual background to the proceedings and the HOA is necessary.

Background

1. [7]

   AMA is a publicly-listed company that has a group of companies mainly in the panel shop and car repair industry. One of these groups is known as Gemini Accident Repairs Centre Pty Ltd (Gemini). The Chief Financial Officer of AMA is Mr Stephen Harding-Smith (Mr Harding-Smith).

2. [8]

   ASSK Investments’ sole director is Mr Avedis Avik Kalloghlian (Mr Kalloghlian).

3. [9]

   As summarised by the primary judge, in around April 2018, a representative of Gemini approached Mr Kalloghlian about the possible sale of the NSC businesses to Gemini.

4. [10]

   On about 10 April 2018, ASSK Investments and Gemini entered into a Mutual Confidentiality Non-Disclosure Agreement.

5. [11]

   Over the period 4 May 2018 to September 2018, ASSK Investments made financial information available to AMA as part of the due diligence process.

6. [12]

   During the period September 2018 to October 2019, the parties continued negotiations for the potential purchase of the NSC businesses.

7. [13]

   On 31 October 2019, the parties executed the HOA. Mr Kalloghlian signed for ASSK Investments, and a director, Mr Andrew Hopkins, and the then company secretary, Ms Terri-Anne Bakos, signed for AMA, under the following notation:

8. [14]

   Clause 3 of the HOA recorded that “[t]he parties intend to complete the sale 31 days after the Binding Heads of Agreement is executed by all parties (Completion Date), or such other date as the parties agree to”. 2 December 2019 was 31 days after the HOA was executed.

9. [15]

   Also on 31 October 2019, ASSK Investments signed a Mutual Confidentiality Agreement and sent it to AMA for execution. The following day, AMA sent ASSK Investments a request for information in a document called “Due Diligence Checklist”. AMA made a number of other requests of ASSK Investments for information which, it seems, ASSK Investments met. AMA did not immediately send back an executed copy of the Mutual Confidentiality Agreement, but did ultimately sign it nearly a month later, on 26 November 2019.

10. [16]

    Following the provision of the signed Mutual Confidentiality Agreement on 26 November 2019, the parties continued to progress through the due diligence process. Concurrently with the due diligence process, draft business sale agreements were being exchanged between the parties.

11. [17]

    The sale was not completed by 2 December 2019.

12. [18]

    As summarised by the primary judge at PJ [17]:

13. [19]

    In his affidavit affirmed 13 October 2020, Mr Harding-Smith gave evidence that:

14. [20]

    On 9 January 2020, Mr Steve Bubulj, the Chief Executive Officer of AMA, phoned Mr Kalloghlian and told him that AMA could no longer proceed with the deal. In his affidavit sworn 31 August 2020, Mr Kalloghlian gave his evidence of the phone conversation as follows:

15. [21]

    On 10 January 2020, the solicitors for AMA sent the following letter to the solicitors for ASSK Investments:

16. [22]

    Later on 10 January 2020, Mr Harding-Smith wrote to Mr Steve Becker, Chief Financial Officer of AMA, to advise him that AMA would not be proceeding with the acquisition of NSC, because:

The Binding Heads of Agreement

1. [23]

   It is necessary to highlight some clauses of the HOA which are of particular relevance to the present appeal.

2. [24]

   Clause 2 of the HOA, headed “Introduction”, provided as follows:

3. [25]

   As already referred to at [14] above, cl 3 of the HOA provided that the “parties intend to complete the sale 31 days after the Binding Heads of Agreement is executed by all parties (Completion Date), or such other date as the parties agree to”. Clause 3 was not so much a definition as a statement of intention. The term “[c]ompletion” was in fact defined in cl 13 of the HOA as follows:

4. [26]

   Clause 4 of the HOA provided for a purchase price comprised of $6 million payable on completion, together with a deferred settlement component of up to $3 million, depending on the EBIT achieved by the business in the 12-month period after completion. Certain adjustments to the purchase price were required to be made, in accordance with cl 4(c) of the HOA, with such adjustments to be calculated as at the completion date.

5. [27]

   Clause 6 of the HOA, headed “Due Diligence and Documentation”, provided as follows:

6. [28]

   Clause 7 of the HOA was headed “Conditions Precedent”. It was a lengthy clause, the full text of which can be seen in the Appendix to these reasons. Of central importance to the present appeal was cl 7(b) which simply provided:

7. [29]

   As the primary judge observed at PJ [6], there was no “chapeau” to cl 7, although each of the 11 sub-paragraphs to cl 7 were defined collectively as “the Conditions Precedent”. That was a defined term in the HOA albeit the definition in cl 13 contained an obvious mistake (cf. HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296), in that it stated that “Conditions Precedent” was defined in cl 8. The reference to cl 8 should have been to cl 7. Also to be noted is that cl 7 concluded with the following:

8. [30]

   Clause 8(a) stated that “[t]he Vendor will transfer the Businesses and the Assets to the Purchaser free from all encumbrances on the Completion Date”.

9. [31]

   Clause 9, headed “Warranties”, provided as follows:

10. [32]

    Clause 1.1 of Sch 1 was in the following terms:

11. [33]

    The “transactions contemplated by this Agreement” were the sale of the various businesses pursuant to the contemplated Business Sale Agreements.

The primary judgment

1. [34]

   The primary judge summarised the respective arguments of AMA and ASSK Investments at PJ [25]-[28], as follows:

2. [35]

   The primary judge noted, consistently with conventional authority, that the HOA was a commercial contract which was to be given a business-like interpretation: at PJ [29].

3. [36]

   The primary judge disagreed with AMA’s characterisation of the HOA as his Honour had identified it at [26], stating (at PJ [31]-[32]) that:

4. [37]

   The primary judge’s reference to “an unfettered, unilateral option” at PJ [26] and to “the defendant’s whim” at PJ [31] referred, to a certain extent, to how Senior Counsel for AMA had advanced his construction argument before the primary judge. As will be explained below, that was not quite how the matter was put in AMA’s written submissions at first instance nor on appeal.

5. [38]

   The primary judge’s dispositive reasoning at PJ [34]-[41] was succinct. It is set out below:

6. [39]

   The primary judge ordered specific performance of the HOA, noting that “[t]he defendant does not rely on the non-fulfilment of any other supposed conditions precedent [other than cl 7(b)] and it does not suggest that any others (so far as they are conditions precedent) have not been, or will not be, fulfilled”: at PJ [44]. His Honour stated at PJ [45]-[46] that:

Grounds of appeal

1. [40]

   AMA has challenged the primary judgment on the following two grounds:

Applicable principles of contractual construction

1. [41]

   There was no real dispute between the parties as to the basic principles of contractual construction that applied.

2. [42]

   These principles are familiar and were identified by the primary judge by reference to Australian Broadcasting Commission v Australasian Performing Right Association Limited (1973) 129 CLR 99 at 109; [1973] HCA 36 (Australian Broadcasting Commission); McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589; [2000] HCA 65 at [22]; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462; [2004] HCA 35 at [22]; Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 at 559; [2004] HCA 56 at [82]; Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 528-529; [2005] HCA 17 at [15]; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 656-657; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited (2015) 256 CLR 104 at 117; [2015] HCA 37.

3. [43]

   The primary judge isolated the following principles from these decisions:

Consideration

1. [44]

   With great respect, I am unable to agree with the primary judge’s construction of the HOA, and his Honour’s consequent decision to order specific performance. In my view, the approval of the Board of AMA was a condition precedent to AMA’s obligation to purchase the businesses of ASSK Investments, and the HOA itself did not effect a sale of those businesses.

2. [45]

   I accept the Appellant’s submission that:

3. [46]

   The starting point is, of course, the language of the HOA. The primary judge’s statement in the final sentence of PJ [31] (see [36] above), namely that “[t]he instrument records that the parties agree to enter into Business Sale Agreements” is an incomplete statement of cl 2 of the HOA which makes it explicit that such an agreement was conditional upon the terms and conditions set out in the HOA. This is the ordinary and natural meaning of the phrase “subject to” as contained in cl 2(b) of the HOA.

4. [47]

   The words contained in cl 2(b), namely “subject to the terms and conditions set out in this Heads of Agreement” immediately point to the other terms and conditions of the HOA. They necessarily included cl 7(b). That clause referred to “all necessary third party consents, authorisations and approvals being obtained (including the Purchaser’s Board approval)”.

5. [48]

   A number of observations should be made about this sub-clause:

6. [49]

   At PJ [37], the primary judge said:

7. [50]

   The primary judge was driven to conclude that “the sale transaction is governed by the HOA on its own”: PJ [37]. This conclusion, together with the statement at PJ [34] that the HOA “legislates comprehensively for the sale and purchase of the Business” cannot, in my view, be sustained.

8. [51]

   There is a fundamental distinction between an agreement to sell and a sale. The distinction is even more pronounced when the agreement to sell is conditional, as it was in the present case, and as cl 2(b) made clear.

9. [52]

   Moreover, the HOA did not “legislate comprehensively for the sale and purchase of the Business”. For example, no Material Contracts had been identified, nor had any Key Personnel – these were to be identified in the writing in the Business Sale Agreement: see the definition of “Key Personnel” in cl 13 of the HOA. Additional warranties were also contemplated as a possibility: see cl 9(a) of the HOA.

10. [53]

    If, by the expression used at PJ [37], namely that the “sale transaction is governed by the HOA on its own”, the primary judge intended to convey that the sale would stand notwithstanding that no Business Sale Agreements of the kind contemplated by the HOA would eventuate, that would not seem to me to accord with commercial common-sense. It would mean that both parties understood that the sale of multiple businesses was being entered into without any comprehensive due diligence being undertaken, no Material Contracts or Key Personnel identified and no completion date agreed. This last proposition follows from the definition of “Completion Date” in cl 3 of the HOA. It also sits uncomfortably with the different definition of “Completion Date” in cl 13 of the HOA where that date is defined as the date of Completion of the Business Sale Agreements. The definitions of “Completion” and “Completion Date” in cl 13 of the HOA are defined by reference to, and presuppose execution of, the Business Sale Agreements. The Business Sale Agreements were quite separate from the HOA. Amongst other matters, there were to be Business Sale Agreements; there was only one HOA.

11. [54]

    In this context, I accept AMA’s submission that:

12. [55]

    Furthermore, to treat the HOA as giving effect to a sale of the business for $6 million would be to denude the reference to AMA’s Board approval in cl 7(b) of any meaning. That would be inconsistent with Australian Broadcasting Commission at 109. It would also be quite inconsistent with the expression “the transactions contemplated by this Agreement” used in the warranties contained in cl 1.1 of Sch 1 to the HOA: see [32] above.

13. [56]

    In the course of argument, Mr Young submitted that the comprehensive due diligence expressly provided for in cl 6 of the HOA was so as to allow further negotiation of the terms of the warranties, as contemplated by cl 9 of the HOA, part of which has been set out at [31] above. Whilst this argument had some force, and a connection may be drawn between the due diligence contemplated by cl 6 and the subsequent amendment of warranties pursuant to cl 9, the fundamental purpose of due diligence was to ascertain whether the businesses were worth the amount of $6 million contained in the HOA. If AMA concluded that they were not, an amendment to warranties would not cure or accommodate this discovery. As AMA submitted:

14. [57]

    The next point to be considered is that made at PJ [38], namely that:

15. [58]

    In his submissions on appeal, Mr Young contended that such a construction would also have the consequence that any consideration that moved from AMA to sustain the enforceability of the HOA was illusory. But this submission proves too much. Unless the HOA was supported by consideration, it would not be specifically enforceable and an order for specific performance ought not to have been made.

16. [59]

    There would be force in the observation made by the primary judge at PJ [38] if cl 7(b) was required to be construed so as to permit the capricious or unreasonable withholding of approval. I do not, however, think that it should be so construed although, in fairness to the primary judge, it should be recorded that in the course of the hearing before his Honour, Senior Counsel for AMA moved away from what he had originally submitted in writing and appeared to embrace a proposition put to him by the primary judge to that effect, namely that Board approval could be withheld capriciously.

17. [60]

    At first instance, AMA had submitted in writing, citing Meehan v Jones (1982) 149 CLR 571 at 591 and 598; [1982] HCA 52 (Meehan v Jones), that:

18. [61]

    Contracts which afford to one party a discretion, or which are subject to a condition that one of the parties approves an element relevant to performance, are conventionally construed as being subject to an implied requirement of at least honesty or, sometimes, honesty and reasonableness. In this context, it has been observed (JD Heydon, Heydon on Contract (2019, Lawbook Co) at [21.430]) that:

19. [62]

    The learned author also draws attention to a line of cases which stands as authority for the proposition that where a contract for the sale of goods stipulates that delivery is subject to the buyer’s approval, the buyer may disapprove so long as this is done honestly: see Repetto v Friary Steamship Co Ltd (1901) 17 TLR 265; Haegerstrand v Anne Thomas Steamship Co Ltd (1904) 10 Com Cas 67 at 70; affd Haegerstrand v Anne Thomas Steamship Co Ltd (1904) 10 Com Cas 71; Diggle v Ogston Motor Co Ltd [1915] WN 37; Canada Egg Products Ltd v Canadian Doughnut Co Ltd [1955] 3 DLR 1; Niarchos (London) Ltd v Shell Tankers Ltd [1961] 2 Lloyd’s Rep 496 at 507-509.

20. [63]

    In Meehan v Jones at 590, Mason J said:

21. [64]

    At 597-598, Wilson J said:

22. [65]

    As in Meehan v Jones, it is not necessary in the present case to reach a concluded view as to whether, in respect of the HOA, any withholding of Board approval as referred to in cl 7(b) had to be simply honest and bona fide, or objectively reasonable as well. It was not an issue in the present case at least on appeal that it was either not bona fide or not reasonable and, as has been noted, there was evidence that stood in the way of such a contention.

23. [66]

    The key point is that, contrary to PJ [38], whilst I agree with the primary judge that the parties to the HOA should not be taken to have intended to permit the Board of AMA to act capriciously, such a construction of cl 7(b) is not required. Consistent with authorities such as Meehan v Jones and those referred to at [62] above, cl 7(b), insofar as it refers to Board approval as a condition precedent, can be construed in such a way not only so that the promise in cl 2(b) to enter into the Business Sale Agreements is not illusory (cf. Thorby v Goldberg (1964) 112 CLR 597 at 605; [1964] HCA 41), but in a way that allows it to operate as a condition precedent, consistent with the language of cl 7. This is also consistent with the principle that a construction should be favoured which preserves the validity of the transaction rather than rendering it void or ineffective (see P Herzfeld and T Prince, Interpretation (2nd ed, 2020, Thomson Reuters) at [25.60] and the cases there cited).

24. [67]

    Some complaint was made as to the shift away by AMA as to what had been submitted, at least orally, to the primary judge. The shift was unfortunate and what AMA’s Senior Counsel put orally to the primary judge may have led his Honour into error. This Court is required, however, to conduct a rehearing of the matter pursuant to s 75A of the Supreme Court Act 1970 (NSW), and no question of prejudice arises which could not be cured by an exercise of the costs discretion so as to preclude the argument and analysis set out above.

25. [68]

    Finally, the primary judge’s observation at PJ [41] that “[h]aving committed itself to the transaction by a director and company secretary with the authority of the directors, further Board Approval was not ‘necessary’” with respect is in the face of the language of cl 7(b), on its proper construction. As AMA asked rhetorically in its written submissions:

26. [69]

    Moreover, the statement that AMA had “committed itself to the transaction by a director and company secretary with the authority of the directors” begs the question. It may be accepted that Mr Hopkins and Ms Bakos who executed the HOA were authorised by the Board to do so, but what they were authorised to do was to agree to the entry into of the Business Sale Agreements subject to the terms and conditions of the HOA. The reasoning in PJ [41] is, with respect to the primary judge, somewhat circular.

27. [70]

    For the above reasons, the contract was not specifically enforceable because a condition precedent, namely the approval of the AMA Board, had not been satisfied. In the absence of any suggestion that the withholding or non-granting of that approval was itself a breach of the contract, on its proper construction, AMA’s principal but conditional obligations under the HOA were not engaged, and could not be enforced by an order for specific performance.

28. [71]

    The appeal must be allowed and the orders of the primary judge set aside.

29. [72]

    In lieu thereof, the proceedings at first instance should be dismissed with costs.

30. [73]

    Because of the shift in argument at first instance which appears to have contributed significantly to the primary judge’s reasoning (see [62]-[63] above), I would only be inclined to award AMA 50% of its costs on appeal but would give the parties 7 days to file submissions of no more than 3 pages if they oppose such an order.

31. [74]

    LEEMING JA: I agree with Bell P.

32. [75]

    EMMETT AJA: This appeal is concerned with heads of agreement signed on 31 October 2019 (the Heads of Agreement) by ASSK Investments Pty Limited (the Vendor), AMA Group Limited (the Purchaser) and Mr AA Kalloghlian (the Covenantor). The Heads of Agreement related to the sale of the Vendor’s smash repairs businesses (the Business) to the Purchaser. On 18 December 2020, a judge of the Equity Division sitting in the Commercial List (the primary judge) made orders (the Orders) in proceedings brought in the Commercial List of the Equity Division by the Vendor.

33. [76]

    By the Orders, the primary judge ordered that the Heads of Agreement be specifically performed and carried into execution, that the Vendor and the Purchaser complete the sale of “the businesses” and “assets” described in the Heads of Agreement at the price and on the terms set out in the Heads of Agreement and that the sale be completed by the Vendor and the Purchaser no later than 5 February 2021 or such other date as the parties agree to. His Honour also ordered that the Vendor and the Purchaser perform in a timely fashion all acts and execute all documents necessary to comply with those orders. By notice of appeal filed on 25 January 2021, the Purchaser appeals from the Orders.

34. [77]

    It was not in dispute before the primary judge that the Heads of Agreement constituted a binding contract. The question was what it bound the parties to do. The Purchaser’s position was that the Heads of Agreement did not bind it to buy and was not a contract for the sale of the Business. Rather, it argued, the sale of the Business was to be effected by the Business Sale Agreements referred to in the Heads of Agreement. The Purchaser contended that the coming into effect of the Business Sale Agreements was subject to certain conditions precedent, including a condition that all necessary third party consents, authorisations and approvals be obtained, including “the Purchaser’s Board approval”, as referred to in Item 7(b).

35. [78]

    The primary judge considered that the Purchaser’s characterisation of the Heads of Agreement was inaccurate and that it constituted far more than an agreement for the provision of information, coupled with an option in its favour, as the Purchaser contended. His Honour considered that the object that the Heads of Agreement was intended to secure was the sale and purchase of the Business, not the gathering of information by the Purchaser to enable it to make a decision. In any event, his Honour concluded, Item 7(b) incorporated the word “necessary” and further approval by the Purchaser’s board of directors (the Board) was not “necessary”, since the Purchaser had committed itself to the transaction by a director and company secretary with the authority of the directors.

36. [79]

    In its notice of appeal, the Purchaser raises grounds that may be restated as follows:

37. [80]

    Clearly enough, the parties contemplated that further instruments would be brought into existence. On one view, it did no more than require them to enter into the “Business Sale Agreements”. Since there were no such agreements in existence, it is at least arguable that the obligation imposed was to act reasonably in the formation of those agreements. In that case, it may be that any order for specific performance should be limited to requiring the parties to perform that obligation.

38. [81]

    However, the Purchaser informed the Vendor that it did not propose to proceed further with the proposed transaction since the condition precedent, consisting of approval by its Board, would not be satisfied. The primary judge concluded that the condition precedent was in fact satisfied. However, his Honour’s conclusion that any such condition precedent had been satisfied by the signature of the Heads of Agreement ignores the fact that the obligation of the parties to the Heads of Agreement was to enter into the proposed Business Sale Agreements. The approval of the Board was a condition precedent to the performance of that obligation.

39. [82]

    I have had the advantage of reading in draft form the reasons of Bell P for concluding that the appeal should be allowed. I agree with the orders proposed by his Honour for the reasons given.