In SSABR Pty Ltd v AMA Group Pty Limited [2024] NSWCA 175 (23 July 2024), the New South Wales Court of Appeal addressed, inter alia, the issue of whether the primary judge ought to have granted rectification in equity founded on the testimony of contrary intention of only one of the directors of the respondent company, which had entered into an agreement to purchase certain businesses from the appellant. There otherwise adduced in evidence a circular resolution signed by the directors approving the acquisition in terms consistent with the written agreement. The court – writing by Stern JA, with whom Ward P and Price AJA agreed – wrote:
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[2] The issues arising in this appeal under s 101(1)(a) of the Supreme Court Act 1970 (NSW) go to the proper construction of a Business Sale Agreement (the “BSA”), which was entered into on 3 October 2018, and, depending on the outcome as to construction, whether that agreement should be rectified as found by the primary judge: SSABR Pty Ltd v AMA Group Ltd [2023] NSWSC 1551 (the “primary judgment”). Under the BSA, the first respondent, AMA Group Limited (“AMA”), purchased two of the appellants’ businesses, Simply Smashing Auto Group Pty Ltd (“Simply Smashing”) and H&A Prestige Repair Group Pty Ltd (“Harris & Adams”) (together, the “Businesses”). The clause of the BSA of central relevance in these proceedings, cl 5.1, goes to the calculation of the amount to be paid by AMA to the appellants within 90 days of the second anniversary of completion of the BSA by way of deferred consideration for the purchase of the Businesses (the “Earn-Out”).
[3] The dispute which underlies these proceedings arose when AMA purported to calculate the Earn-Out, in November 2020, in a manner which the appellants contend did not comply with cl 5.1 of the BSA. The appellants served a dispute notice pursuant to cl 15(e) of the BSA on 23 November 2020 (the “Notice of Dispute”) and commenced proceedings on 8 September 2021 by summons seeking declaratory relief as to the proper construction of cl 5.1 of the BSA, or an order for specific performance, and damages or alternatively compensation pursuant to s 236 of Sch 2 to the Competition and Consumer Act 2010 (Cth). By cross-summons filed on 22 October 2021, the respondents also sought declaratory relief, including that cl 5.1 of the BSA be rectified, and an order that the appellants refund money that the respondents contended they had overpaid under the BSA.
[4] The crux of the dispute, as relevant to the appeal, turns on whether the Earn-Out should be calculated by reference to Earnings Before Interest and Tax (“EBIT”) over a period of two calendar years as defined in cl 1.1(bb) of the BSA (the “Earn-Out Period”), as the appellants contend, or by reference to the “average annual” EBIT for that period, as the respondents contend. On its face, the language of cl 5.1 is only consistent with the former. The respondents, however, contend that cl 5.1 should be rectified either as a matter of law by construction or in equity by adding words to specify that the formula for calculating the Earn-Out is based upon the “average annual” EBIT of the Businesses over the Earn-Out Period, and not (as stated in cl 5.1 of the BSA) upon the EBIT of the Businesses over the Earn-Out Period.
[5] The primary judge found against the respondents as to construction of cl 5.1 but found (at J[91]) that the respondents had shown, by clear and convincing proof, that cl 5.1 did not correctly record the common intention of the parties to the BSA. Her Honour ordered that cl 5.1 should be rectified, as sought by the respondents, to ensure that the BSA accurately recorded the parties’ bargain: J[92]. By subsequent decision, the primary judge ordered that the appellants pay the respondents’ costs on a party and party basis up to and including 12 October 2023 and on an indemnity basis thereafter: SSABR Pty Ltd v AMA Group Ltd (No 2) [2024] NSWSC 24 (the “costs judgment”).
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[14] The long-time solicitors of AMA were Nicholson Ryan Lawyers (“Nicholson Ryan”). Nicholson Ryan acted for AMA on the purchase of the appellants’ Businesses and were involved in drafting the BSA. Nicholson Ryan also acted for the respondents in the initial stages of this litigation, although other solicitors were instructed by September 2023. The principal of Nicholson Ryan was Leath Nicholson, who was also a non-executive director of AMA. Mr Nicholson was not part of AMA management. Mr Nicholson executed both the BHOA and the BSA on behalf of AMA. In his role with Nicholson Ryan, Mr Nicholson was responsible for “overseeing” work done on the BSA and was copied on some emails. The person “doing most of the work”, however, was Sophie Lefebvre, a solicitor at Nicholson Ryan. Mr Nicholson swore an affidavit and gave oral evidence at trial. The primary judge found that no issues of credit arose as regards Mr Nicholson’s evidence: J[7].
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[17] As discussed further below, the AMA board of directors, comprising Ray Malone, Mr Hopkins, Ray Smith-Roberts, Brian Austin and Mr Nicholson, signed a circular resolution, with a circulation date of 10 October 2018, approving the acquisition by AMA of the Businesses (the “Circular Resolution”). Beyond this, there are no board papers, nor are there any minutes of board meetings, or evidence as to what transpired in board meetings, in evidence. Of the board, only Mr Nicholson gave evidence at trial. The primary judge declined to draw any Jones v Dunkel inference against the respondents for failing to call evidence from any other member of the board: J[8], [84]–[85].
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[145] The appellants contend, in ground 2 of the notice of appeal, that the primary judge erred (at J[86]) in finding that Mr Nicholson’s intention could be attributed to AMA as to its intention when entering the BSA. The appellants contend that the relevant decision-makers, as regards the decision to enter the BSA and the terms of the BSA, were those in management at AMA and not the board. They contend that the board had only a formal role of ratification, and so deferred to the judgment of management and that it was those in management whose state of mind should be attributed to AMA. In any event, the appellants contend that Mr Nicholson’s state of mind should not have been attributed to either management or the AMA board.
[146] The respondents seek to uphold the primary judge’s finding, contending that the decision to go forward with the BSA rested with the AMA board and that, in any event, Mr Nicholson was involved at each step of the transaction and in those circumstances it was appropriate for the primary judge to attribute his intention to AMA. Moreover, the respondents place reliance upon the terms of the Circular Resolution as reflecting both the intention of management involved in the transaction and of the AMA board which approved the Circular Resolution. They contend that it was the board whose state of mind should be attributed to AMA, and that Mr Nicholson’s evidence sufficed to prove that state of mind.
[147] Before considering these submissions, it should be observed that there is some uncertainty as to the primary judge’s findings as to the knowledge of AMA. This is because the primary judge considers (at J[86]–[88]) both the intention of AMA management and of the board of AMA such that it is not entirely clear whether the primary judge found that it was the intention of the AMA board, or that of management, that was the relevant intention of AMA. On balance, as her Honour found (at J[86]) that Mr Nicholson’s intention could be attributed to the corporation “as to what the AMA Group intended to approve”, it appears that her Honour found that the relevant intention of AMA is that of the AMA board in approving the deal, rather than that of management involved in negotiation. Whilst the matter is not free from doubt, it appears to be on that basis that her Honour attributed Mr Nicholson’s intention to AMA, as to what AMA intended to approve. I propose to approach ground 2 on that basis.
[148] As an aside, to the extent that it might have been suggested that her Honour found the relevant intention to be that of AMA management, I would, in any event, have found that her Honour erred in finding that AMA intended cl 5.1 of the BSA to mean anything other than what it said. Her Honour’s conclusions as to the intention of management rested upon her Honour’s findings that the BHOA and the Circular Resolution reflected an intention on the part of management that the Earn-Out be calculated on the basis of “average annual” EBIT over the Earn-Out Period. It necessarily follows from my conclusions as to the BHOA and the Circular Resolution that neither of those documents support a conclusion that management intended cl 5.1 of the BSA to mean anything other than what it said.
[149] The leading authority as to the attribution of a state of mind to a company is the statement of Bright J in Brambles Holdings Ltd v Carey (1976) 15 SASR 270 at 279 , cited with approval by the majority in Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; [1995] HCA 68at 582 –583 (Brennan, Deane, Gaudron and McHugh JJ) (“Krakowski”):
Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company.
[150] As was found in Krakowski (at 582), in some circumstances the knowledge of the company must depend upon the knowledge of a particular person or persons who were most closely involved with the relevant transaction, in that case the “persons who were responsible for the initial negotiations and who set the scene in which the relevant representation had been made.”
[151] Lord Hoffman in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 506 –511 explained that the test for attribution of a state of mind to a company will always depend upon context, and the purpose for which that attribution is sought. As his Lordship explained, it was never intended that the “directing mind and will” test would be the universal rule for the purposes of attribution. As Leeming JA observed in Anderson v Canaccord Genuity Financial Ltd [2023] NSWCA 294 at [234] , the position as set out by Lord Hoffman has attracted a considerable weight of Australian appellate authority. As Beach J observed in Australian Securities and Investments Commission v Westpac Banking Corporation (No 2) (2018) 266 FCR 147; [2018] FCA 751 at [1660] , the appropriate test for attribution of a state of mind to a company depends upon the interpretation of the relevant rule of responsibility having regard to its context and purpose.
[152] In the context of rectification in equity, the relevant enquiry is as to the actual subjective state of mind of a corporation in entering into a particular contract, namely the relevant decision-maker. As held by Patten LJ in Hawksford Trustees Jersey Ltd v Stella Global UK Ltd [2012] 2 All ER (Comm) 748 at [35] , [39] , [41] –[43] , cited with approval by Mann J in Murray Holdings Ltd v Oscatello Investments Ltd [2018] EWHC 162 (Ch) at [195] –[198] (“Murray Holdings”), and which the primary judge relied upon (at J[85]), that person will be the person who had the authority to bind the company to the contract, albeit that there may be circumstances where, in practice, the formal decision-maker has so deferred to the judgment of someone else that that person is in reality the person whose judgment was critical to the company entering the agreement. Relying upon Murray Holdings, McDonald J in Fonterra Brands (Australia) Pty Ltd v Bega Cheese Ltd [2021] VSC 75; (2021) 159 IPR 494 at [86] held that the relevant state of mind to be attributed to a corporation in a rectification case is the person “whose job it was to make the required business judgment as to the terms upon which the corporation should contract.”
[153] Turning to the application of these principles on the facts here, it should be inferred that, whilst the Circular Resolution was entered after the BSA was executed, the AMA board nonetheless retained a decision-making role as regards entry into the BSA. Completion of the transaction was conditional upon the board’s consent. That consent was obtained by the Circular Resolution, which sought to inform the AMA board of key aspects of the transaction. In these circumstances, whilst it would be inferred that Mr Hopkins and Mr Nicholson had authority to execute the BSA, I would not infer that they thereby had effective decision-making authority as regards the decision that the transaction should go ahead. Nor would I conclude that those in management at AMA who were involved in the negotiation of the BSA, had effective decision-making authority. There is nothing to suggest that the role of the AMA board was merely formal as opposed to it being the substantive decision-maker as regards the decision whether to enter the BSA.
[154] I would also conclude that the primary judge erred in attributing Mr Nicholson’s intention to the AMA board. Mr Nicholson could not give evidence as to what other members of the board thought, and he did not purport to do so. As set out above, his evidence was limited to his own understanding and intention. In the absence of any evidence from any of the other board members, or of the substance of any communications about the BSA either between management and board members or between the directors themselves, the intention of AMA should have been inferred from the terms of the Circular Resolution which each of the AMA directors approved. As set out above, the Circular Resolution clearly set out that the Earn-Out was to be calculated by multiplying EBIT over the two year Earn-Out Period by 4. There is no proper basis to infer that any member of the board other than Mr Nicholson had any other intention.
[155] Further, there is no evidence that any member of the AMA board, other than Mr Nicholson, and likely Mr Hopkins, had seen the BHOA and there was no mention of the BHOA in the Circular Resolution. It is not known what Mr Hopkins thought as to the meaning or effect of cl 5.1. There is thus no basis to infer that any of the directors other than Mr Nicholson intended cl 5.1 to be construed by reference to the worked example in cl 4 of the BHOA.
[156] Even on the hypothesis that the board was not the effective decision-maker as regards the decision to enter the BSA, there is no proper basis to attribute Mr Nicholson’s intention to AMA. He says that he read the BSA before it was finalised, and he clearly executed the BSA on behalf of AMA. There is, however, no evidence that he had any role in negotiating or giving instructions as to the content or intended effect of cl 5.1, and there is no evidence as to what if any role he had in relation to cl 5.1 as supervisor of Ms Lefebvre. In these circumstances, which I discuss more fully at [82]–[91] above, contrary to the primary judge’s finding (at J[86]), Mr Nicholson’s role as AMA’s solicitor did not support a finding that his intention should be attributed to AMA as regards the decision to enter the BSA.
[157] It follows that I would uphold ground 2 of the notice of appeal.
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The full decision is to be found here.
