Supreme Court New South Wales

• Medium Neutral Citation: V8 Supercars Holdings Pty Ltd v Lucas Dumbrell Investments Pty Ltd [2014] NSWSC 1391
• Hearing dates: 8 October 2014
• Decision date: 13 October 2014
• Before: Pembroke J

Decision

See paragraphs [18] & [20]

• Catchwords: CONTRACT - construction - commercial contract - absurdity - adherence to actual language and syntax utilised
• Cases Cited: Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7
• Category: Separate question
• Parties: V8 Supercars Holdings Pty Ltd - first plaintiff; Australian Motor Racing Partners Pty Ltd - second plaintiff; Lucas Dumbrell Investments Pty Ltd - first defendant; Sanpoint Pty Ltd - second defendant
• Representation: Counsel: P S Braham SC with M Izzo and T O'Brien - for the first and second plaintiffs; P Collinson QC with D L Cook - for the first defendant; A Henskens SC with D Koch - for the second defendant; Solicitors: Deutsch Miller - for the first and second plaintiffs; Marshalls & Dent - for the first defendant; Kalus Kenny Intelex - for the second defendant
• File Number(s): 2014/254679

Judgment

Introduction

1 This is the hearing of several separate questions relating to the proper construction of two contracts in the same form. Each contract is known as a 'Racing Entitlement Contract' (REC). The parties to the first contract include the first plaintiff (V8 Holdings), V8 Supercars Australia Pty Ltd (V8SCA) and the first defendant. The parties to the second contract include V8 Holdings, V8SCA and the second defendant. The first and second defendants each operate a motor racing team that, until the events that gave rise to this litigation, entered V8 Supercars in motor racing events conducted in accordance with Rules promulgated by V8SCA. The relationship between each Team and V8 Holdings and V8SCA is governed in all relevant respects by the terms of their respective REC.

Clause 5.1(d)

2 Clause 5.1(d) of each REC is in the following terms:

Subject to clause 5.1(e), the Team must (in respect of this Contract and each other subsisting Racing Entitlement Contract to which it is a party) commit to enter a car to Compete in all Events (by submitting to V8SCA an entry registration form attached at Annexure 1 or otherwise approved by a Special Majority of the V8Holdings Board (Entry Registration Form)) by 1 December of each year of the Term for the following year. Time will be of the essence in relation to submitting the Entry Registration Form. Should the Team fail to submit to V8SCA an Entry Registration Form in respect of this Contract by 1 December then the Team will surrender its Rights under this Contract on the first day of the following year for subsequent sale in accordance with clause 10 of this contract.

(emphasis added)

Clause 10.1

3 Clause 10.1 of each REC is in the following terms:

10.1 Surrender

In the event that the Team is required by this Contract to surrender its Rights, the Team must do so on the following basis:

a) the surrender or a sale of the Rights will be administered by a Special Majority of the V8 Holdings Board as agent for the Team in its absolute discretion;

b) V8 Holdings will ensure that the price paid for the Rights is as commercially advantageous as possible having regard to the current market situation by offering the Contract to the market by tender;

c) V8 Holdings may, in its absolute discretion, elect to compensate the Team for the surrender of its Rights for substantially the same price (with substantially the same conditions) as those negotiated with a proposed purchaser by tender (and will direct the Shares held by the Team to be transferred to its nominee);

d) any proceeds from the surrender or sale of the Rights will be paid by V8 Holdings to the Team, less any costs incurred by V8 Holdings. Costs incurred by V8 Holdings may include advertising, administrative and legal costs and all other outlays; and

e) the amount paid and the names of the parties involved in the sale of the Rights will be entered in the Register by the V8 Holdings Board.

4 The 'Rights' that are the subject of the compulsory process of surrender or sale pursuant to Clause 10.1, are the Team's rights and benefits under the REC and its Class A preference share in the capital of V8 Holdings.

The Issue

5 Clause 10.1 is enlivened when a Team has failed to submit an Entry Registration Form by 1 December. If that occurs, Clause 5.1(d) provides that the Team 'will surrender its Rights under this contract ... for subsequent sale in accordance with Clause 10.1'. Both defendants failed to submit Entry Registration Forms by 1 December 2013 and triggered Clause 10. There were apparently commercial reasons for making this election. The principal point of difference between the parties relates to the meaning of Clause 10.1(b). It is agreed that on the facts of this case, Clause 10.1(c) does not apply.

6 The defendants contend that paragraph (b) requires that the 'sale' contemplated by Clauses 10.1(a) and (b) must be by tender and by no other means. They submit that the qualifying words 'by offering the Contract to the market by tender' constitute a primary obligation. They suggest, in effect, that the paragraph should be read as if it required some syntactical variation, so as to transform the qualifying words into a primary obligation, as if those words appeared in imperative form at the commencement of the paragraph.

7 The plaintiffs on the other hand contend that paragraph (b) should be given effect in accordance with its terms. The paragraph does not state expressly or by necessary implication that the contemplated sale must be by tender. The only primary obligation expressly imposed by that paragraph is to 'ensure that the price paid for the Rights is as commercially advantageous as possible having regard to the current market situation'. The adverbial phrase 'by offering the Contract to the market by tender', prescribes the stipulated method of ensuring that the price paid for the Rights is as commercially advantageous as possible having regard to the current market situation. The plaintiffs emphasise that the language of paragraph (b) speaks of an 'offer' to the market by tender, rather than a sale to the market. The process of submitting the contract to tender is therefore, according to the plaintiffs, one that is designed to test the market and elicit a price that will serve as a benchmark. In turn, this benchmark is intended to facilitate the achievement of a price that is 'as commercially advantageous as possible having regard to the current market situation'.

The Facts

8 The relevant contextual facts are not in dispute. The first defendant purchased its REC for $1.5 million in November 2012. On 1 December 2013 it requested V8 Holdings to 'tender [the REC] for sale'. On 24 June 2014 V8 Holdings advertised the first defendant's REC for sale by tender, along with the REC belonging to the second defendant and a third REC surrendered by another party. On 1 August 2014 tenders closed with no bids for any REC. On 21 August 2014 V8 Holdings wrote to the first defendant to inform it that since no bids had been received, the deemed value of the REC was nil and that it would be sold for a nominal value to TEGA Nominees Pty Ltd, a related company of V8 Holdings.

9 On 28 August 2014, V8 Holdings, purporting to act as the agent of the first defendant, executed a share transfer in respect of the first defendant's preference share in V8 Holdings in favour of the second plaintiff, another related company of V8 Holdings. It also executed two further agreements by which the first defendant's rights under the REC were assigned to the second plaintiff. The consideration paid by the second plaintiff for the preference share and the rights under the REC was $20,000 or approximately 1.3% of the price paid by the first defendant.

10 The position relating to the second defendant is similar, except that the total amount paid by it for its REC in 2009 was $1,386,957.56. Following the unsuccessful tender process, the second plaintiff acquired the second defendant's rights under the REC as well as its preference share in V8 Holdings. Again, the consideration paid was $20,000 or approximately 1.4% of the price paid by the second defendant.

Proper Construction

11 The applicable legal principle is uncontroversial and was restated by the High Court of Australia in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at [35] as follows:

The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require 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. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties ... intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'.

12 Having regard to those considerations, I have reached the view that Clause 10.1(b) does not compel a sale by tender. The clause simply does not say that the Rights must be sold by tender. Relevantly, the obligation is confined to "offering the Contract to the market by tender". That can occur without the Rights actually being sold by tender. The defendants' competing construction requires that some additional restriction, implication or qualification be read into Clause 10.1. The plaintiffs' construction adheres more faithfully to the actual language and syntax used in the clause.

13 Implicit in the defendants' construction is that the process of submitting the REC to tender could be required in certain circumstances (such as in this case) to proceed indefinitely - until the tender is successful and a bid is submitted and accepted. That is because, on their case, there is only one permissible contractual outcome contemplated by Clause 10.1(b), namely a sale by tender. A private sale is not permitted. It is obvious that, if no bid is received during the initial tender process, the result of this construction might well be inconvenient and probably also commercially absurd. For example, a tender process could last weeks. The tender process in this case cost approximately $60,000. It would usually be pointless to stage another tender process immediately following one that has failed to produce a bid. A number of months might therefore pass by. In the meantime, the REC would remain unused. And during all that time, V8 Holdings would be precluded from negotiating with a potential purchaser that may be willing to enter a car immediately at a commercially advantageous price.

14 All of this seems unlikely; certainly not what a reasonable person of business would have contemplated. And, as I have observed, it is not compelled by the express language of the clause, let alone by its syntax or apparent commercial purpose and object. Having a market tender is a useful mechanism for ascertaining a market price. But an actual sale by tender is not required. The function of the tender process is to invite interested buyers to submit offers for the Rights. But when an offer is received, the Special Majority of the V8 Holdings Board (which includes a Teams representative) is not obliged by Clause 10.1(b) to accept the offer. Conversely, if no bid is received, the Special Majority is not precluded from selling to a third party, as long as the requirements of Clause 10.1(b) have been satisfied.

15 Clause 10.1(c) is however different. Its language is unambiguous. And it deals with a different subject matter, namely the surrender or forfeiture of the Rights rather than their sale to a third party. The process of surrender or forfeiture by V8 Holdings involves the Class A preference share held by the Team being transferred to a nominee of V8 Holdings. The object of paragraph (b) is not quite the same as that contemplated by paragraph (c). And the choice of language in each paragraph is markedly different. Under paragraph (b), there need only be a process of 'offering the Contract to the market by tender'. In contrast, paragraph (c) requires that there must be a price 'negotiated with a proposer purchaser by tender'.

16 I do not think that the plaintiffs' construction is 'extraordinary or unreasonable'. By its terms, Clause 10.1(b) operates to provide protection for the Team and flexibility for V8 Holdings in the selling process. On the other hand, when Clause 10.1(c) is activated, it will result in additional protection for the Team and less flexibility for V8 Holdings. There is no basis for assuming that this dichotomy is unfair; or that it necessarily enables V8 Holdings to undertake the sale process under paragraph (b) in a manner that may be opportunistic or unfairly prejudicial to the legitimate interests of the Team.

17 Finally, there is no foundation for the defendants' contention that, as a matter of construction, the only sale contemplated by Clause 10.1(b) is one that excludes a sale to a related entity of V8 Holdings. The safeguards that protect the interests of the Team are express and have two components. V8 Holdings must ensure that the price is as commercially advantageous as possible having regard to the current market situation. It must do so by offering the Contract to the market by tender. There is no hint in the actual or contextual language of the contract of any basis for imposing, as a matter of construction, some further limitation or protection by reference to the identity of the buyer. There is no requirement that the sale be arms length and no warrant, as a matter of construction, for concluding that a sale to a related entity of V8 Holdings is not otherwise a sale within the meaning of Clause 10.1(b).

Orders and Costs

18 The result is that the defendants fail on the separate questions of construction. In the circumstances, I dismiss the claims for relief in prayers 1 and 2 of the second cross summons and prayers 1, 2, 4 and 6 of the first cross summons. The remaining prayers for relief that are the subject of the separate questions may possibly arise for consideration in connection with the defendants' proposed substantive challenges to the validity of the tender process. I therefore simply decline to make those declarations and orders at this stage.

19 Although the plaintiffs have succeeded on the separate questions of construction, there is, I suspect, some way to go in the litigation. The nominal price at which the RECs were sold to the second plaintiff invites suspicion and warrants investigation. And the ultimate result may possibly be that the defendants are successful.

20 However, despite the plaintiffs' success on the limited issues of construction that I have determined, I do not propose to award them the costs of the hearing of the separate questions. The underlying reason for the dispute as to the meaning and effect of Clause 10.1 is the wholly amateur quality of the drafting of the RECs, for which V8 Holdings must take responsibility. They could not possibly have been drafted by a competent and qualified lawyer. The documents as a whole bear the hallmark of carelessness or lack of experience or both. There should not have been a dispute as to the meaning of Clause 10.1(b) if the drafting had been competent. The fault lies with V8 Holdings. And the defendants were justified in taking the stance that they did. Each party should therefore pay its own costs of the separate hearing.

Decision last updated: 15 October 2014