de L’Isle v Knight

1. [1]

   GLEESON J: The plaintiff, Ms Diane Briere de L’Isle (Ms de L’Isle), seeks to recover from the defendant, Mr Adrian Knight, the sum of £500,000 together with interest thereon pursuant to a deed of loan dated 17 March 2010. Mr Knight’s sole defence is that the debt was discharged or released by an accord and satisfaction in January 2019.

Facts

1. [2]

   Ms de L’Isle is the wife of Mr Henry Engelhardt; they married in 1982. Mr Engelhardt is the founder and former CEO of Admiral Group plc, a Welsh motor insurance company. He met Mr Knight at an insurance conference in the 1990s in the United Kingdom. Around late 2008/early 2009, Mr Engelhardt, Ms de L’Isle and their family travelled to Australia and New Zealand. They visited Mr Knight and his family on several occasions and a close friendship developed between Mr Engelhardt and Mr Knight.

2. [3]

   In November 2009, Mr Knight sent an email to Mr Engelhardt attaching a PowerPoint presentation detailing investment opportunities Mr Knight was pursuing in the agri-tech and early stage life science areas. He subsequently discussed the presentation at a meeting with Mr Engelhardt and an associate.

3. [4]

   On 17 February 2010, Mr Engelhardt replied to an email from Mr Knight providing an update on a proposed New Zealand investment fund. Mr Engelhardt said, “[w]e’re in, just let us know exactly what we’re in, what we need to sign and when/where you need the money”. Mr Knight’s proposal to establish a fund in New Zealand did not proceed.

4. [5]

   In early 2010, Mr Knight discussed with Mr Engelhardt another possible investment, this time in the United States. He also discussed borrowing money from Mr Engelhardt. There is a dispute concerning the purpose of this proposed loan and its relevance in this proceeding. These matters are addressed below.

5. [6]

   Mr Engelhardt informed Ms de L’Isle that Mr Knight had asked for a loan of between AUD$750,000 to AUD$1.5 million, and she said: “I am happy to do that if you are”. She left it to her husband to arrange the details.

6. [7]

   Ms de L’Isle and Mr Knight entered into a deed of loan dated 17 March 2010.

7. [8]

   Recital A to the deed of loan recorded:

8. [9]

   The deed provided for a loan of £500,000 and a repayment date of 17 March 2020. At maturity, the loan was repayable along with interest calculated and compounded at the rate of 5 per cent per annum.

9. [10]

   On 24 March 2010, Ms de L’Isle advanced £500,000 to Mr Knight. At the direction of Mr Knight, the money was paid into a bank account in Hong Kong with a customer name “Customer Asset Company”, which was Mr Knight’s business account in Hong Kong.

10. [11]

    In November 2010, Ms de L’Isle and 4 Futures Pty Ltd (4 Futures) entered into a joint venture agreement with Two Oceans Australia Pty Ltd (Two Oceans), as investment manager of the “Two Oceans Joint Venture” (2010 JV Agreement). The arrangement was an unincorporated joint venture. Mr Knight was the sole director and secretary of Two Oceans. 4 Futures was a company associated with Mr Knight. On 25 November 2010, Ms de L’Isle invested USD$1 million in the joint venture.

11. [12]

    There is no fully executed version of the 2010 JV Agreement and, in any event, it was replaced by a subsequent agreement in or around October and November 2011 (2011 JV Agreement) in which Ms de L’Isle is described as the “Investor”. The recitals relevantly record:

12. [13]

    The 2011 JV Agreement provided that Two Oceans was to manage the joint venture (cl 12.1) and hold the assets of the venture as bare trustee (cl 3). The investment policy of the joint venture was to invest in “Life Science categories of seed and venture capital” (Schedule 1). Clause 2 of the 2011 JV Agreement identified the manner in which profits and losses of the joint venture would be apportioned between the parties. Clause 5.1 provided that Ms de L’Isle and 4 Futures were each liable to make the following capital contributions:

13. [14]

    Between November 2011 and October 2015, Ms de L’Isle invested a further USD$13.26 million in the joint venture in addition to the initial investment of USD$1,000,000 made in November 2010. Two Oceans, on behalf of the joint venture, made various investments including in two companies: Zeakal Inc (Zeakal) and Somark Innovations Inc (SII).

14. [15]

    In 2012, Somark Innovations Group Pty Ltd (SIG) acquired SII. Mr Knight became the CEO of SIG in around December 2012. In 2016, Somark Group Limited (SGL) was incorporated as a subsidiary of SIG.

15. [16]

    On 22 November 2015, Mr Engelhardt sent an email to Mr Knight informing him that he would not be putting further funds into the joint venture, however, Ms de L’Isle would be happy to have a commercial arrangement directly with Somark. Mr Engelhardt indicated the terms on which Ms de L’Isle would loan money directly to Somark. In December 2015, Ms de L’Isle loaned USD$750,000 to SIG, which increased to USD$810,000 in April 2016. Contemporaneous with the first loan to SIG, Two Oceans executed a document with Ms de L’Isle agreeing that it held 5 per cent of the shares it owned in SIG on trust for her.

16. [17]

    In October 2017, and again in January and July 2018, Ms de L’Isle subscribed for convertible notes issued by SGL for a value of AUD$1,000,000 (Convertible Note 6), USD$1,000,000 (Convertible Note 9) and AUD$250,000 (Convertible Note 10) respectively.

17. [18]

    Mr Knight guaranteed SGL’s obligations to Ms de L’Isle under Convertible Note 6. In an email to Mr Engelhardt dated 5 October 2017, Mr Knight said regarding his personal guarantee: “My collateral would be the AUD$5M of property I own with a $2M debt against it”. Although no formal security was ever granted by Mr Knight, in subsequent communications both Mr Knight and Mr Engelhardt referred to Mr Knight’s offer of collateral as a “pledge” of his properties in Australia. Mr Knight owned a house in Sydney and a holiday house at Tallwoods Village, Hallidays Point, on the mid-north coast of New South Wales.

18. [19]

    In May 2018, Mr Engelhardt assisted SGL in obtaining further funding from third parties by giving personal guarantees in respect of loans made to SGL by Mr Rohrsheim for AUD$50,000 and Mr Thomson for AUD$240,000 (the guarantee in the latter case was limited to AUD$190,000). Mr Knight also gave similar guarantees to these lenders and, in the case of Mr Thomson, for the full debt of AUD$240,000.

19. [20]

    In July 2018, Ms de L’Isle and Mr Engelhardt decided not to invest any further money in the joint venture or the companies in which the joint venture had invested. Mr Engelhardt communicated their position to Mr Knight in an email of 11 July 2018:

20. [21]

    Between mid-July 2018 and December 2018, Mr Engelhardt and Mr Knight exchanged emails about how to dissolve the joint venture and how to return to Ms de L’Isle something for the monies she had invested in the joint venture and advanced directly to the Somark companies. Ms de L’Isle gave evidence, which I accept, that she left it to her husband to negotiate the arrangements with Mr Knight. Mr Engelhardt was Ms de L’Isle’s authorised agent with respect to negotiating the terms on which the joint venture would be terminated.

21. [22]

    On 12 January 2019, Ms de L’Isle, Mr Knight, Two Oceans, and 4 Futures entered into an agreement which terminated the joint venture (Termination Agreement). The terms of this agreement are referred to in detail below.

22. [23]

    Mr Knight did not repay the £500,000 loan at maturity or at any time after 17 March 2020. Subject to the defence of accord and satisfaction, it is common ground that as at 17 March 2020 the balance of the loan plus interest is £814,447.31.

Issues

1. [24]

   Mr Knight’s defence of accord and satisfaction relies upon cl 1 of the Termination Agreement, which relevantly provides that the transfer by Two Oceans to Ms de L’Isle of certain property in the form of shares in SIG was to be:

2. [25]

   No attention was given by the parties in submissions to whether cl 1 is properly characterised as an accord and satisfaction or an accord executory. The distinction is explained by Dixon J in McDermott v Black (1940) 63 CLR 161 at 183-185; [1940] HCA 4:

3. [26]

   Thus, in the case of an accord and satisfaction the cause of action is extinguished immediately by virtue of the acceptance of the new promise in satisfaction of the action. In the case of an accord executory, a mere promise to release, although effective in equity as a contract, does not extinguish the cause of action until the promise is performed.

4. [27]

   In my view, cl 1 operates as an accord executory; it is an agreement to accept performance of the promise by Two Oceans to transfer the specified property to Ms de L’Isle, and there is no discharge unless and until the promise is performed. However, nothing turns on this distinction in the present case because it is common ground that Two Oceans performed its promise to transfer the specified property to Ms de L’Isle by no later than the date of the Termination Agreement.

5. [28]

   The sole issue in the proceedings is whether, on the proper construction of cl 1 of the Termination Agreement, the loan to Mr Knight in 2010 was one of the obligations satisfied by the transfer of the shares to Ms de L’Isle.

6. [29]

   It is common ground that if the expression “all payment obligations” includes the loan, then Ms de L’Isle’s claim fails; if not, Ms de L’Isle is entitled to judgment on her claim.

Some further facts

1. [30]

   There is one factual dispute to be addressed. This concerns the purpose of the loan. Mr Knight objected to the admission of Mr Engelhardt’s evidence on this topic on two grounds: (a) Mr Engelhardt was not a party to the deed of loan, and (b) communications with Mr Knight cannot bear on the construction of the deed of loan or the Termination Agreement. The evidence was admitted over objection for two reasons.

2. [31]

   First, evidence of Mr Engelhardt’s communications with Mr Knight in early 2010 concerning the purpose of the loan is admissible as part of the background to the Termination Agreement insofar as it is evidence of facts mutually known to both parties: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 at [352] (Mason J).

3. [32]

   Second, Mr Engelhardt was Ms de L’Isle’s authorised agent in negotiating the loan to Mr Knight. So much was ultimately acknowledged by Mr Knight in closing submissions. All knowledge obtained by Mr Engelhardt as agent in the course of his duties is to be imputed to the principal, Ms de L’Isle, irrespective of whether it was communicated to the principal: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 658-659; [1974] HCA 40; Ford Excavations Pty Ltd v Do Carmo [1981] 2 NSWLR 253 at 266-267. The agency relationship is to be inferred from the conduct of the parties in relation to the deed of loan; Ms de L’Isle told Mr Engelhardt that she was happy to make the loan requested by Mr Knight if Mr Engelhardt was, and she left it to her husband to arrange the details. Ms de L’Isle was also copied in on Mr Engelhardt’s email to Mr Knight of 10 March 2010 stating the amount of the loan and that Ms de L’Isle would be the lender: see [41] below.

4. [33]

   The conflicting evidence concerning the purpose of the loan is as follows.

5. [34]

   Mr Engelhardt deposed that Mr Knight asked him during a telephone conversation in early 2010 to borrow money to avoid having to sell a property in a depressed market (at [7]):

6. [35]

   Mr Knight deposed to a telephone conversation with Mr Engelhardt in early 2010 to the following effect (at [26]):

7. [36]

   Mr Knight disputed that he asked Mr Engelhardt for a loan in the way in which Mr Engelhardt related in his affidavit. He also said that he had not owned a property in Melbourne during the period from November 2009 to date.

8. [37]

   The contemporaneous email communications between Mr Knight and Mr Engelhardt, under the subject heading “Re: Loan & Investment”, record the following.

9. [38]

   On 3 March 2010, Mr Knight wrote to Mr Engelhardt by email:

10. [39]

    Mr Engelhardt replied to Mr Knight on 4 March 2010 stating that he would look at the contract and asked:

11. [40]

    Mr Knight responded to Mr Engelhardt on 6 March 2010:

12. [41]

    Mr Engelhardt replied to Mr Knight on 10 March 2010, copied to Ms de L’Isle, stating “[w]e’re happy to help”, that the draft loan agreement “looks fine” and that the agreement should be between Mr Knight and Ms de L’Isle. As to the amount of the loan, Mr Engelhardt said:

13. [42]

    In cross-examination, Mr Engelhardt accepted that his recollection of the conversation with Mr Knight in early 2010 was faulty in some respects. First, Mr Knight’s house was in Sydney, not Melbourne as recalled by Mr Engelhardt. This misconception by Mr Engelhardt seems to have been held since at least 2014 when, in an email to Mr Knight on 19 May 2014, he raised the possibility of Mr Knight selling his Melbourne property (see [53] below); it also seems that Mr Knight did not correct Mr Engelhardt’s misconception at the time. That Mr Engelhardt relied on his earlier email when incorrectly deposing in his affidavit in September 2020 that Mr Knight’s property was in Melbourne rather than Sydney is of little significance. Second, Mr Engelhardt also readily accepted when taken to various emails in cross-examination that he was mistaken when he stated in his affidavit that he and Mr Knight never spoke of the loan after 2010 and that he did not recall writing to Mr Knight about the loan until August 2019.

14. [43]

    The fallibility of human memory of what was said in a conversation, particularly a conversation over ten years ago, is well recognised: Watson v Foxman (1995) 49 NSWLR 315 at 319 (McLelland CJ in Eq). Whilst Mr Engelhardt’s recollection was faulty in respect of some details, such as the location of Mr Knight’s property and not discussing the loan until August 2019, I reject Mr Knight’s submission that Mr Engelhardt’s recollection of a conversation held ten years ago had become coloured by his own interests. Mr Engelhardt presented as a straight-forward, honest and credible witness who was trying to do his best to honestly recall conversations ten years earlier; he was not tailoring his evidence to support his wife’s case. He readily conceded that his recollection, in some respects, but not others, may have been faulty.

15. [44]

    Counsel for Mr Knight next submitted that the two versions of the conversation are not that dissimilar. I agree. Given the passage of time, and that in 2010 Mr Engelhardt was the CEO of a large insurance company, it is unsurprising that his recollection of some matters of detail was inaccurate. That, however, did not detract from the core aspects of Mr Engelhardt’s evidence, which I accept.

16. [45]

    I find that Mr Knight requested the loan. As to the purpose of the loan, I reject the submission of counsel for Mr Knight that the relevant background, purpose and genesis of the loan was to assist Mr Knight to get the Two Oceans fund up and running. That is a gloss on the evidence. I also reject counsel’s submission that Mr Engelhardt and Ms de L’Isle treated the loan as part of their investment in Mr Knight and his proposed structure.

17. [46]

    The background and genesis of the loan, known to both parties, was that Mr Knight did not have a regular income when he was attempting to set up an investment fund. The objective purpose of the loan was to assist Mr Knight personally in alleviating mortgage pressure over his primary residence and to avoid Mr Knight having to sell the property. This is made plain by Mr Knight’s email to Mr Engelhardt of 6 March 2010: see [40] above. Whether Mr Knight used some of the funds in relation to setting up the joint venture, as Mr Knight said in cross-examination (but not corroborated by any document), does not alter the character of the loan between him and Ms de L’Isle.

18. [47]

    The next important background fact is that Mr Engelhardt and Mr Knight both referred to the personal loan in their email communications in August 2012, June 2013, May 2014 and October 2017.

19. [48]

    The August 2012 reference to the personal loan was in the context of a suggestion by Mr Engelhardt that Mr Knight repay the loan early in order for Ms de L’Isle to invest that amount in the joint venture. On 1 August 2012, Mr Engelhardt sent an email to Mr Knight which said:

20. [49]

    Mr Knight replied by email to Mr Engelhardt on 5 August 2012 outlining his proposal in relation to an “additional 5M” guideline but did not respond on the topic of the “personal loan”.

21. [50]

    On 6 August 2012, Mr Engelhardt sent an email to Mr Knight indicating that he would provide another USD$5 million and said:

22. [51]

    The June 2013 reference to the personal loan was in the context of Ms de L’Isle investing a further USD$2.5 million in the joint venture. Mr Engelhardt said in an email to Mr Knight dated 10 June 2013: “With the loan this takes us near $14m, right? I think that’s our limit.”

23. [52]

    Mr Knight responded to Mr Engelhardt on 11 June 2013 stating that the proposed additional investment would bring the investment funds into Two Oceans to USD$12.5 million “and then on top of that there is the GBP 500,000 (from memory) personal Loan”. The email continued with Mr Knight querying how Mr Engelhardt calculated the USD$14 million and, after referring to his recollection of the waterfall provisions in the joint venture agreement with respect to return of profits, the email noted: “The individual loan referred to above is in addition to this”.

24. [53]

    The May 2014 reference to the personal loan was in the context of a suggestion by Mr Engelhardt in an email to Mr Knight of 19 May 2014 that Mr Knight sell his Melbourne property and, instead of repaying the personal loan, put the money into Somark.

25. [54]

    The October 2017 reference to the personal loan was in the context of Mr Knight advising that he had a AUD$1.9million mortgage against his house and that he had an additional property near Forster with a AUD$1,000,000 valuation and no mortgage. Mr Engelhardt replied to Mr Knight on 9 October 2017:

26. [55]

    Mr Knight replied to Mr Engelhardt on 10 October 2017 by email:

27. [56]

    Mr Engelhardt responded to Mr Knight on 10 October 2017:

28. [57]

    Mr Knight replied to Mr Engelhardt on 12 October 2017:

29. [58]

    The significance of these communications is that they demonstrate that the personal loan was a known liability of Mr Knight at the time of the Termination Agreement.

30. [59]

    The four parties to the Termination Agreement are: Ms de L’Isle (referred to as the “Investor”), Mr Knight (referred to as “Adrian”), 4 Futures and Two Oceans.

31. [60]

    The first part of the agreement entitled “Background and Interpretation” contains a statement in the nature of a recital and a term about definitions contained in the Schedule to the agreement. The recital records:

32. [61]

    The defined terms which appear in the Schedule relevantly include:

33. [62]

    Clause 1 provided that Two Oceans would transfer to Ms De L’Isle the Zeakal Interest, the Investor’s SIG Interest and the Additional SIG Interest. It is necessary to set out its terms in full:

34. [63]

    Clause 2, which was conditional on Ms de L’Isle obtaining a 30 per cent interest in SIG and Mr Engelhardt’s release from his personal guarantees of loans to SGL, entitled 4 Futures to the remaining assets of the joint venture.

35. [64]

    Clause 3, which was also conditional on Mr Engelhardt’s release from his personal guarantees, required Ms de L’Isle to release or procure the release of “the Mortgage Security”. It is common ground that Mr Knight did not actually give any such mortgage to Ms de L’Isle or Mr Engelhardt and that this is a reference to what the parties described as a “pledge” of Mr Knight’s properties as collateral for his guarantee of SGL’s obligations to Ms de L’Isle under Convertible Note 6 (see [18] above).

36. [65]

    Clause 4 provided for the assignment by Ms de L’Isle to Two Oceans of her personal rights under the loans to SIG and the convertible notes.

37. [66]

    Clause 5 provided that, following the completion of the transactions contemplated by the agreement, the joint venture shall be terminated and Two Oceans could be liquidated by 4 Futures and Mr Knight.

38. [67]

    Clause 6 required Two Oceans and 4 Futures to provide all assistance necessary to facilitate the transfer to Ms de L’Isle of Two Oceans’ shareholding in Zeakal and the relevant shares to increase Ms de L’Isle’s shareholding in SIG to 30 per cent.

39. [68]

    Clause 7 provided that Two Oceans, 4 Futures and Mr Knight agree to jointly and severally indemnify Ms de L’Isle from all costs, losses and expenses suffered or incurred by her arising out of, or in connection with, the activities of Two Oceans at any time.

40. [69]

    It is common ground that the terms of the Termination Agreement were performed either prior to, or contemporaneously with, execution of the document. Specifically:

Submissions

1. [70]

   Ms de L’Isle says that cl 1 of the Termination Agreement is circumscribed in its operative effect to “rights, claims or interests” pertaining to “the Joint Venture” and all payment obligations of, relevantly, Mr Knight to Ms de L’Isle relating thereto. As such, cl 1 has no bearing on the loan, which was unrelated to the joint venture.

2. [71]

   In support of this construction, Ms de L’Isle submitted that:

   1. (1)

      the genesis of the Termination Agreement was Mr Engelhardt’s refusal to advance any further money to the joint venture or directly to the investment ventures the joint venture had been pursuing, such as SIG and SGL, as recorded in the 11 July 2018 email (see [20] above);

   2. (2)

      the loan was “not on the radar”; none of the communications preceding the execution of the Termination Agreement referred to the loan;

   3. (3)

      the single recital to the Termination Agreement makes clear that the agreement is concerned with the termination of the joint venture;

   4. (4)

      whilst cl 1 operates as an accord and satisfaction in respect of all payment obligations owing to Ms de L’Isle, its character is akin to a general release and the general words of a release should be restrained by the particular occasion. Reference was made to Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112; [1954] HCA 23;

   5. (5)

      the only sensible and available contextual meaning of the word “all” in the expression “all payment obligations” is that deriving from the document itself, being that the “payment obligations” must have some connection with the joint venture;

   6. (6)

      this construction coheres with the objectively known circumstances in which the Termination Agreement was executed; the objective purpose of the Termination Agreement was to finalise the affairs of the joint venture and any associated commercial relationships attending the ventures in which the joint venture had invested;

   7. (7)

      the background circumstances reinforce that cl 1 was not intended to extinguish Mr Knight’s liability to repay the personal loan; and

   8. (8)

      the loan is unrelated and unconnected to the joint venture or any of its associated activities, such as Ms de L’Isle’s direct investments or advances to SIG and SGL, being joint venture investments.

3. [72]

   Mr Knight says that the language of cl 1 of the Termination Agreement extends expressly beyond obligations connected with the joint venture and that, in addition to the text, the context and background to the Termination Agreement made clear that the parties were dealing with, and bringing to an end, obligations owed to and by entities both connected and unconnected with the joint venture.

4. [73]

   In support of this construction, Mr Knight submitted that:

   1. (1)

      the word “and” in the critical expression in cl 1 creates two limbs of the release: the first directed at the joint venture, and the second extending beyond the joint venture because SIG, its subsidiaries, and Mr Knight, as well as “any person not party to this Agreement and associated with any of the foregoing”, were not parties to the joint venture;

   2. (2)

      given that the language of the first limb of cl 1 was sufficient to give effect to the recital in the Termination Agreement, the second limb of cl 1 is broader than the recital;

   3. (3)

      the objectively known facts derived from the negotiations preceding the Termination Agreement, to the extent that they are admissible for the purpose of construction, are of minimal relevance;

   4. (4)

      the most important contextual factor is the parties’ mutual knowledge that Mr Knight owed exactly two payment obligations to Ms de L’Isle; the loan and the guarantee that Mr Knight gave in respect of Convertible Note 6, which came to be described as a “mortgage”, and was separately discharged by cl 3. Both payment obligations were significant in amount and a reasonable person in the position of the parties would not read “payment obligations” as including only the guarantee given by Mr Knight but not the loan;

   5. (5)

      the background to the Termination Agreement makes clear that the parties were dealing with, and bringing to an end, obligations owed by and to entities both connected and unconnected with the joint venture; and

   6. (6)

      the aim of the Termination Agreement was to bring to an end the known relationships between Ms de L’Isle and Mr Knight and his companies, which principally included the joint venture, but to the knowledge of all parties, included a number of other obligations the subject of investments or advances made by Ms de L’Isle outside of the joint venture from about 2015.

Relevant principles

1. [74]

   The principles governing the construction of commercial contracts such as the present were not in dispute. An objective approach is to be adopted in determining the rights and liabilities of parties to a contract. The contract is to be construed by what a reasonable businessperson would understand it to mean. That requires consideration of the language used by the parties, the surrounding circumstances known to them, and the commercial purpose or objects to be secured by the contract: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; see also Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]–[52]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]; Simic v New South Wales Land and Housing Corporation (2016) 260 CLR 85; [2016] HCA 47 at [18] and [78].

2. [75]

   Regard can be had to the surrounding circumstances objectively known to the parties: Codelfa at 352 (Mason J). However, care must be exercised in considering evidence of negotiations between the parties. Evidence of negotiations is inadmissible for the purpose of construction insofar as it is no more than evidence of what the individual parties were subjectively trying to do when they negotiated the language of their agreement. Negotiations may be considered only to the extent that they identify mutually known facts which form part of the background to the transaction: Codelfa at 354. As Heydon and Crennan JJ said in Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 at [98]:

3. [76]

   Lord Wilberforce explained the rationale for excluding the parties’ subjective intentions in Prenn v Simmonds [1971] 1 WLR 1381 at 1385:

4. [77]

   The question whether there has been an accord and satisfaction (or accord executory) is one of fact: El-Mir v Risk [2005] NSWCA 215 at [54] (McColl JA, Handley and Ipp JJA agreeing), citing Day v McLea (1889) 22 QBD 610 at 613 (Lord Esher MR); Bagnall v National Tobacco Corporation of Australia Ltd (1934) 34 SR (NSW) 421 at 427 (Jordan CJ); and Neuchatel Ashphalte Co Ltd v Barnett [1957] 1 WLR 356. McColl JA continued at [54]:

5. [78]

   In Ballantyne v Phillott (1961) 105 CLR 379 at 384; [1961] HCA 17, Dixon CJ observed that “[a] question of accord and satisfaction is seldom easy …”.

Reasoning

1. [79]

   It is common ground that there are two limbs to the discharge given by Ms de L’Isle in cl 1 in consideration of the transfer of the Additional SIG Interest; this is indicated by the conjunction “and” in cl 1 of the Termination Agreement.

2. [80]

   The first limb concerns “all rights, claims or interests the Investor may have in respect of the Joint Venture”.

3. [81]

   The phrase “in respect of” is a relational term: Waugh Hotel Management Pty Ltd v Marrickville Council [2009] NSWCA 390 at [51], referring to Wonall Pty Ltd v Clarence Property Corporation Ltd (2003) 58 NSWLR 23; [2003] NSWSC 497 at [41]-[43]. The phrase indicates a connection or relation between the two subjects to which the words refer, the “rights, claims or interests” of Ms de L’Isle and the joint venture. The connection or relation between the two subjects to which the words refer is a broad one. It is generally not desirable to go further than is necessary to determine their application in a particular case or class of case: R v Khazaal (2012) 246 CLR 601; [2012] HCA 26 at [30] (French CJ), speaking in the context of statutory construction. The same may be said in the case of construction of a contract.

4. [82]

   In this case, it is enough to say that the “rights, claims or interests” which Ms de L’Isle may have “in respect of the Joint Venture” include those rights, claims or interests arising under the 2011 JV Agreement. That includes the right to the distribution of capital and return of profits (cl 2.1), the interest in the joint venture assets held by Two Oceans “as nominee and bare trustee for the joint venture Parties” (cl 3), and any claims that Ms de L’Isle may have in respect of the joint venture, such as for mismanagement of the joint venture (cl 12) or a claim for warranty or indemnification (cl 14).

5. [83]

   In addition, the first limb extends to any rights or claims Ms de L’Isle may have against the other joint venture party, 4 Futures, in respect of the joint venture, even if not arising under the 2011 JV Agreement.

6. [84]

   The second limb concerns “all payment obligations which any of 4 Futures, [Mr Knight], Two Oceans, SIG and any subsidiary of SIG (or any person not party to this Agreement and associated with any of the foregoing) may have to the Investor and/or to any person not party to this Agreement and associated with the Investor”.

7. [85]

   The subject matter of the second limb is directed to a different class of obligation than the catch-all class of “all rights, claims or interests” in the first limb; specifically, the second limb is directed to “payment obligations” which any of 4 Futures, Mr Knight, Two Oceans, SIG and any subsidiary of SIG (and any associated non-parties) may have to Ms de L’Isle. The scope of the “payment obligations” extends beyond the joint venture, given that Mr Knight, SIG and any subsidiary of SIG (as well as any associated non-parties) are not parties to the joint venture. The second limb does not require the payment obligations to have some sort of connection with the joint venture and its termination.

8. [86]

   Payment obligations can be either existing or contingent. As stated in Goode on Payment Obligations in Commercial and Financial Transactions (4th ed, 2020, Sweet & Maxwell) at [2-37]:

9. [87]

   The second limb contemplates both existing and contingent payment obligations, given the use of the words “may have”. Both the loan and the guarantee answer the description of a “payment obligation” which Mr Knight “may have” to Ms de L’Isle.

10. [88]

    The loan was an existing payment obligation being one to which Mr Knight was committed, even though it had not yet matured; the loan was due for payment on 17 March 2020.

11. [89]

    The guarantee in respect of Convertible Note 6 was a contingent obligation; the payment obligation was contingent because it only became effective on the occurrence of a particular event that may never occur: Hawkins v Bank of China (1992) 26 NSWLR 562 at 572 (Gleeson CJ) and 578 (Sheller JA), a case involving a guarantee; Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514 at 532; [1992] HCA 55, a case involving an indemnity.

12. [90]

    Ms de L’Isle says that the word “all” in the expression “all payment obligations” cannot be read literally as meaning absolutely everything. That is correct insofar as it goes. The words must be read in context. Ms de L’Isle says that the word “all” is confined contextually to those payment obligations “of and concerning the joint venture and its termination”. A major difficulty with this submission is that the subject matter of the second limb of cl 1 is directed to a different class of obligation than in the first limb: see [85] above.

13. [91]

    Another major difficulty with this submission is the generality and expansiveness of the language of the first limb of cl 1: it refers to “all rights, claims or interests … in respect of the Joint Venture” (emphasis added). Neither party contended that the word “all” in the first limb should not be given its natural and ordinary meaning. In the first limb, “all” is qualified by the reference to the subject matter being “in respect of the Joint Venture”.

14. [92]

    The second limb of cl 1 also employs general and expansive language, referring to “all payment obligations” (emphasis added). The expression “payment obligations” is qualified by reference only to those obligations owed by 4 Futures, Mr Knight, Two Oceans, SIG or any subsidiary of SIG (or any associated non-parties) to Ms de L’Isle (or any associated non-parties). Ms de L’Isle’s construction seeks to imply the express qualification contained in the first limb (“in respect of the Joint Venture”) into the second limb. As explained below, there is no warrant in the genesis, background or purpose of the agreement, including the recital, to read down the word “all” by confining the payment obligations to only those of and concerning the joint venture and its termination.

15. [93]

    It is not in dispute that the genesis of the Termination Agreement was the decision by Mr Engelhardt and Ms de L’Isle in July 2018 not to invest any further money in the joint venture or the investments the joint venture had been pursuing, such as SIG and SGL. Nevertheless, it does not follow that the operative provisions of the agreement are to be read as Ms de L’Isle submitted.

16. [94]

    Turning to the surrounding circumstances, the circumstances mutually known to Ms de L’Isle and Mr Knight when entering the Termination Agreement were:

    1. (1)

       Ms de L’Isle, 4 Futures and Two Oceans had entered into a joint venture which Ms De L’Isle had invested a total of USD$14,260,000;

    2. (2)

       Ms de L’Isle had also invested monies directly in her own name, and not in the name of the joint venture, by loans to SIG in December 2015 and April 2016 totalling USD$810,000, and three convertible notes issued by SGL for AUD$1,000,000 in October 2017, USD$1,000,000 in January 2018 and AUD$250,000 in June 2018;

    3. (3)

       in May 2018, Mr Engelhardt had separately from the joint venture given two personal guarantees of up to AUD$240,000 for loans totalling AUD$300,000 to SGL;

    4. (4)

       in July 2018, Mr Engelhardt, on behalf of Ms de L’Isle, had indicated to Mr Knight an unwillingness to invest any more monies in the joint venture or directly in underlying assets of the joint venture; and

    5. (5)

       Mr Knight had two known payment obligations to Ms de L’Isle which were both significant: (a) the £500,000 personal loan due for repayment together with interest on 17 March 2020, and (b) the personal guarantee given to Ms de L’Isle in respect of Convertible Note 6 for AUD$1,000,000.

17. [95]

    There are two difficulties with Ms de L’Isle’s submission that the loan was not “on the radar”. First, it relies upon the absence of reference to the loan in the pre-contractual negotiations, but the content of those negotiations is not determinative of the construction of the agreement. Second, one of the surrounding circumstances mutually known to the parties was that the loan was a known payment obligation of Mr Knight to Ms de L’Isle.

18. [96]

    Both parties referred to statements in Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, including statements by Lord Hoffman, who dissented on the facts, at [64]-[65], where Lord Hoffman distinguished between a literal meaning and a contextual meaning, the latter being the correct approach.

19. [97]

    Counsel for Ms de L’Isle also referred to the statement in BCCI v Ali by Lord Bingham (Lord Browne-Wilkinson agreeing) at [10]:

20. [98]

    Although not expressly mentioned during the negotiations between July and December 2018, the loan had not been forgotten. It was a matter that had been periodically raised in correspondence between Mr Engelhardt and Mr Knight in August 2012, June 2013, May 2014 and October 2017, usually in the context about funding the joint venture or SIG: see [48]-[58] above. The loan was a known payment obligation when the parties entered into the Termination Agreement.

21. [99]

    Ms de L’Isle’s says that the general words of the discharge in the second limb of cl 1 are to be read down because the loan was not specifically in the contemplation of the parties when they entered the Termination Agreement.

22. [100]

    Ms de L’Isle called in aid authorities that apply in appropriate circumstances to read down the general terms of a release. In Grant, Dixon CJ, Fullagar, Kitto and Taylor JJ referred to two principles of construction and an equitable principle: (a) that general words of a release can be read down by reference to the particular occasion, which might be indicated in a recital (at 123), (b) that general words of a release can be read down by reference to what was specifically in contemplation of the parties (at 123), and (c) that a general release should be construed by the knowledge and intent of the parties (at 124-125). As to the equitable principle, McLelland J said in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 818D-E, that a substantially similar principle operates at common law.

23. [101]

    In Sarina v Fairfax Media Publications Pty Ltd [2018] FCAFC 190 at [20], the Full Court of the Federal Court observed:

24. [102]

    In this case, there is no room for the equitable principle referred to in Grant since the loan had not been forgotten: see [98] above. Ms de L’Isle did not contend that it would be unconscientious of Mr Knight to rely upon the wide and general words of the second limb of cl 1 by examining each party’s actual knowledge and intention at the time of entering into the agreement: cf Grant at 124-125.

25. [103]

    As to the recital, the proper approach to recitals is explained in Schwartz v Hadid [2013] NSWCA 89, where Meagher JA said at [80], referring to the analysis of Campbell JA in Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407 at [379]-[380]:

26. [104]

    Subsequently, in Lachlan v HP Mercantile Pty Ltd (2015) 89 NSWLR 198; [2015] NSWCA 130, the Court of Appeal (Bathurst CJ, Beazley P and McColl JA) said at [52]-[53]:

27. [105]

    If the language of a release is broader than indicated by a recital, then it should not be read down: Crossman v Sheahan [2016] NSWCA 200 at [235]-[236] (Ward JA, Payne JA agreeing); Chacmol Holdings Pty Ltd v Handberg [2005] FCAFC 40 at [91]-[92]; Karam v ANZ Banking Group Ltd [2001] NSWSC 709 at [406] (appeal allowed on other issues: Australia and New Zealand Banking Group Ltd v Karam (2005) 64 NSWLR 149; [2005] NSWCA 344).

28. [106]

    In this case, the recital is of limited relevance because it is in the form of a statement of what only two of the four parties to the Termination Agreement had agreed; that Ms de L’Isle and 4 Futures had agreed to the termination of the joint venture on the terms set out in the agreement. The recital is silent as to the agreement, intention or object of Ms de L’Isle and Mr Knight. In the circumstances, the discharge in the second limb of cl 1 is not to be read down by reference to the particular occasion indicated by the recital.

29. [107]

    The difficulty with Ms de L’Isle’s submission that the common objective of the Termination Agreement was limited to the dissolution of the joint venture and associated relationships, is that it is based on statements of the parties’ intentions in email communications as to what they were attempting to achieve, starting with Mr Engelhardt’s email to Mr Knight of 11 July 2018: “I would like to get something back, but I accept that there will be sizeable losses”: see [20] above. Statements of the parties’ subjective intentions are not relevant on a question of construction.

30. [108]

    Ms de L’Isle also pointed to the negotiations between Mr Engelhardt and Mr Knight recorded in five email communications between 25 November 2018 and 6 December 2018 (Exhibit A, pp 221-223), as establishing that the mutually agreed objectives of the Termination Agreement were to accomplish six matters: (a) the transfer to Ms de L’Isle of Two Oceans’ shareholding in Zeakal; (b) the transfer to Ms de L’Isle of a 30 per cent shareholding in SIG; (c) the extinguishment of all debts owed by Two Oceans, SIG and SGL to Ms de L’Isle, whether owed by way of convertible note or loan; (d) the extinguishment of the guarantees that Mr Engelhardt had given in favour of SGL in respect of monies borrowed by that entity from Mr Rohrsheim and Mr Thomson; (e) the releases of any mortgage given by Mr Knight in favour of Ms de L’Isle arising from Mr Knight’s guarantee to Ms de L’Isle for the AUD$1 million advanced to SGL pursuant to Convertible Note 6; and (f) otherwise to dissolve the joint venture, with Mr Knight (and his associated entities) to own what assets remained in the joint venture.

31. [109]

    The major difficulty with this submission, as counsel for Mr Knight correctly submitted, is that those email communications identify negotiation – back and forth – and the assertion of subjective positions. It is wrong in principle to draw conclusions about “mutually agreed” objectives from these negotiations. The common objectives of the Termination Agreement are best identified by the agreement itself.

32. [110]

    A further difficulty is that the submission ignored what was specifically in the contemplation of the parties, as reflected in the terms of cl 1, relevantly, the extinguishment of all payment obligations owed by, among others, Mr Knight to Ms de L’Isle. Plainly, the extinguishment of all known payment obligations was a mutual objective of the parties.

33. [111]

    When regard is had, as it must be, to the subject matter of Termination Agreement which extends beyond the dissolution of the joint venture and associated relationships, the discharge effected in the second limb of cl 1 is not to be read down by reference to payment obligations “of, and concerning the joint venture and its termination”. It includes the known payment obligations of Mr Knight to Ms de L’Isle

34. [112]

    The loan, like the guarantee, was a known payment obligation of Mr Knight; both were significant. That the loan was not expressly mentioned in the pre-contractual negotiations is not determinative of the common objectives sought to be accomplished by the agreement. These are best identified in the agreement itself, relevantly, cl 1 which contains two limbs, directed to the discharge of different subject matter. The first limb concerns the discharge of all “rights, claims or interests” in respect of the joint venture, whereas the second limb concerns the discharge of all “payment obligations”. The scope of the second limb extends beyond the joint venture, given that Mr Knight, SIG and any subsidiary of SIG (as well as any associated non-parties) are not parties to the joint venture.

35. [113]

    The word “all” in both limbs of cl 1, should be given its natural and ordinary meaning as general and expansive language. In the second limb of cl 1, “all” includes the known payment obligations of Mr Knight to Ms de L’Isle, being the loan and the guarantee. Both obligations of Mr Knight were personal obligations; both arose outside the joint venture – the loan arose prior to the joint venture, whilst the guarantee arose after Ms de L’Isle determined in 2015 not to invest any further money in the joint venture. The temporal distinction between these two obligations is not a relevant point of distinction for the scope of the discharge in cl 1. Nor is the fact that the purpose of the loan was personal and not part of Ms de L’Isle’s investment in the joint venture, a relevant point of distinction.

36. [114]

    Nor is the genesis of the Termination Agreement, being the decision of Mr Engelhardt and Ms de L’Isle not to invest any further money in the joint venture or the investments the joint venture had been pursuing, a reason to read down the word “all” in the second limb of cl 1 as limited to payment obligations of, or concerning, the joint venture and its termination. That is a constrained meaning. It gains no support from the recital which says nothing of the agreement, the intention or object of Ms de L’Isle and Mr Knight in relation to the second limb of cl 1. Nor is there anything in the surrounding circumstances that indicates that the parties intended that the loan, which was a known payment obligation, was outside the scope of the discharge intended by cl 1.

37. [115]

    In my view, on the proper construction of the Termination Agreement, the loan answers the description of a “payment obligation” in cl 1 which was discharged by the accord executory when Two Oceans performed its obligations under the agreement. That satisfaction occurred no later than the date of the agreement when Two Oceans transferred the Additional SIG Interest to Ms de L’Isle. It follows that Mr Knight has established the defence of accord and satisfaction to Ms de L’Isle’s claim. There is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

Orders

1. [116]

   The Court makes the following orders:

   1. (1)

      Statement of claim filed 15 June 2020 be dismissed.

   2. (2)

      Plaintiff to pay the defendant’s costs of the proceedings.