Supreme Court New South Wales Medium Neutral Citation: Flynn v PPK Mining Equipment Pty Ltd (No 2) [2022] NSWSC 1640 Hearing dates: 18-22, 25-27 July 2022, 1-2 August 2022; final submissions received 26 August 2022. Date of orders: 2 December 2022 Decision date: 02 December 2022 Jurisdiction: Equity - Commercial List Before: Rees J Decision: Declare agreement as varied. Otherwise dismiss Summons with costs. Catchwords: CONTRACTS – share purchase agreement – earnout clause based on profit – oral agreement to change earnout to revenue – contract contains 'no oral modification' clause – principles at [96]-[97] –contract varied – variation effective on date of agreement to vary, at [105] – plaintiff did not satisfy earnout clause as varied in any event. EXPERT DETERMINATION – jurisdiction of the Court – dispute resolution clause requires parties to perform preliminary steps before expert determination – defendant fails to perform preliminary step – expert determination clause discharged by breach – Court has jurisdiction. WORDS AND PHRASES – 'generally accepted accounting principles' at [138] – 'business' and 'carry on business' at [186]. Legislation Cited: Corporations Act 2001 (Cth) pt 2M.3, ss 45A, 292(2) Electronic Transactions Act 2000 (NSW) Cases Cited: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416 Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd [2019] NSWCA 87; (2019) 373 ALR 591 Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1992] QB 656 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 GC NSW Pty Ltd v Galati [2020] NSWCA 326 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1; [2003] FCA 50 Green v AMP Life Ltd [2005] NSWCA 354 Hawcroft General Trading Co Pty Ltd v Hawcroft [2017] NSWCA 91 Hope v Bathurst City Council (1980) 144 CLR 1 Hungier v Grace & Bent (1972) 127 CLR 210 In the matter of Australian Mortgage Finance Limited (Administrator Appointed) [2021] FCA 189 Ipoh v TPS Property No 2 Pty Ltd [2004] NSWSC 289 Martin v Dee-Tech Pty Ltd [2021] NSWSC 434 Mathews Capital Partners Pty Ltd v Coal of Queensland Holdings Limited [2012] NSWSC 462 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Onley v Catlin Syndicate Ltd (as the underwriting member of Lloyd's Syndicate 2003) (2018) 360 ALR 92; [2018] FCAFC 119 Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 Queensland Phosphate Pty Limited v Korda and Shepard (as joint and several liquidators of Legend International Holdings Inc (in liq)) [2017] VSCA 269 Siam Steel International Plc v Compass (Australia) Pty Ltd (2014) 293 FCR 260; [2014] WASC 415 Smith v Capewell (1979) 142 CLR 509 Straits Exploration (Australia) Pty Ltd v Murchison United NL (2005) 31 WAR 187; [2005] WASCA 241 Strategic Publishing Group Pty Ltd v John Fairfax Publications Pty Ltd [2003] NSWSC 1134 WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) [2022] NSWSC 505 Westco Air Conditioning Ltd v Sui Chong Construction & Engineering Co Ltd [1998] HKCFI 946; [1998] 1 HKC 254 Texts Cited: Australian Accounting Standards Board, Standard 15 – "Revenue from Contracts with Customers" Australian Accounting Standards Board – Standard 102 – "Inventories" Australian Accounting Standards Board, Standard 118 – "Revenue" Bhimani, Alnoor, et al, Management Accounting and Cost Accounting (7th ed, 2018, Pearson) Encyclopaedic Australian Legal Dictionary McDougall, Robert, 'Recent Developments in Commercial Law' (Law Society Annual Specialist Accreditation Conference, 10 August 2018) Shim, Jae K, et al, CFO Fundamentals (2012, Wiley) Hansen, Don R, et al, Cost Management Accounting and Control (6th ed, 2007, South West College ISE) Category: Principal judgment Parties: Daniel Flynn (First Plaintiff) Flynfam Pty Ltd as trustee for the Flynn Family Trust (Second Plaintiff) PPK Mining Equipment Pty Ltd (First Defendant) PPK Group Ltd (Second Defendant) Representation: Counsel: Mr CD Wood SC / Mr AD Justice (Plaintiffs) Mr TM Faulkner SC / Mr AJ Bulley (Defendants) Solicitors: MRM Lawyers (Plaintiffs) Moray & Agnew (Defendants) File Number(s): 2019/11615 Judgment 1. The plaintiffs entered into a Share Purchase Agreement with the defendants, PPK Mining Equipment Pty Ltd and PPK Group Ltd, by which the plaintiffs sold their shares in Exlec Pty Ltd and Exlec Holdings Pty Ltd in return for cash, shares in PPK Group, and, subject to satisfaction of the "Second Performance Conditions", further shares in PPK Group. 2. The plaintiffs now sue for the further shares in PPK Group, together with unpaid dividends on those shares, said to total between $4.4 million and $6.4 million. The issues are whether the Share Purchase Agreement was varied and whether, as varied, the Second Performance Conditions have been fulfilled. A further issue arises as to whether the Court has jurisdiction, given the expert determination clause in the Share Purchase Agreement by which any dispute as to satisfaction of the Second Performance Conditions was to be resolved. Witnesses 1. The plaintiffs relied on the evidence of the first plaintiff, Daniel Flynn, and his wife, Rebekah Flynn, together with hydraulic designer Constantino Theodoridis and workshop foreman Heath Schiemer. Mrs Flynn and Mr Schiemer were not required for cross examination. Mr Theodoridis was cross-examined. He was straight forward and knowledgeable. I accept his evidence. 2. Mr Flynn gave evidence and was cross examined for two days. Mr Flynn said 'yes' or 'no' in answer to most questions, whether or not a more detailed answer was necessary to discharge the burden of the question. These answers became increasingly mis-matched as lines of cross-examination developed, problems emerged with Mr Flynn's previous answers and questions became more penetrating; it was hard, on occasion, to reconcile the answer with the question. Mr Flynn did not grapple with matters put to him which suggested that his evidence was inaccurate or untrue. Mr Flynn also appeared to select whether the answer was 'yes' or 'no' with an eye to whether the chosen answer would advance the plaintiffs' case as he then saw it, rather than whether it was the most accurate choice. 3. Mr Flynn was, on occasion, non-responsive and evasive, for example: Q. That's true isn't it, what you've said there, that there was Mr Maclean and Mr Ornelas who were the responsible persons to sign off on overhaul and repair work carried out at Port Kembla? A. Yes. Q. And it was not you, you accept that? A. Could you ask the question please? Q. It was not you? A. For what? Q. To sign off on overhaul and repair work at the Port Kembla workshop. A. Are you saying that I didn't have the ability to do it? Q. No. Just answer the question. You were not a responsible person to sign off on overhaul and repair work at the Port Kembla workshop were you? A. I was able to. 1. Mr Flynn contradicted and supplemented his four affidavits with reasonable frequency. Mr Flynn said he was not concerned about a drop in PPK Group's share price or the company's problems with a major product, Coaltram, and the implications for the earnout conditions, which was both unlikely and at odds with his affidavit. Mr Flynn said variously that he was not aware of the evidence of the defendants' witnesses, then said he had read it but did not respond to that evidence in his affidavits. His evidence about his involvement in an audit undertaken of the defendants' workshop was unlikely but Mr Flynn appeared untroubled in maintaining his increasingly untenable position. Ultimately, I formed the view that I could not rely on the evidence of this witness in the absence of corroboration from a contemporaneous document, a reliable witness or where his evidence was against interest. 2. The defendants relied on the evidence of chairperson Robin Levison, director Dale McNamara, former Chief Financial Officer and Chief Executive Officer Peter Barker, Group Financial Controller Fiona Wilson, former General Manager – Finance Jason Beddow, electrician Benjamin Phillips, electrical engineer Joshua Partridge, operations manager Mark Hall, electrical co-ordinator Richard McLean, engineering consultant Patrick Schweizer, electronics production supervisor Andrew Pearce, former General Manager of Engineering of Exlec's former client, Caledon Resources Ltd, Manfred Luttenberger and accountant Ginette Muller. Ms Muller was not required for cross-examination. 3. Mr McNamara was a nice fellow who liked a chat and gave very fulsome answers. He did take the opportunity to make unflattering comments about Mr Flynn and the financial health of his companies when purchased by the defendants. Indeed, Mr McNamara was clearly indignant about these proceedings, where he considered that he had done the right thing by Mr Flynn at the time and was now being sued. Overall, however, Mr McNamara was straight forward and sincere. I accept his evidence. 4. Mr Levison was honest, impressive and an experienced director. He did not pretend to have a good recall of meetings which occurred some years ago. Mr Barker was a careful and impressive witness. He was diplomatic, precise, professional and fair. Ms Wilson was impressive: precise, meticulous, open and knowledgeable. Mr Phillips, Mr Beddow, Mr Partridge, Mr McLean, Mr Schweizer and Mr Pearce were fair, careful and knowledgeable witnesses; I accept their evidence. Mr Hall gave evidence over video link as he then had Covid-19. He did not have a good recollection of events in 2015. I had no reason to doubt the evidence which he did give. Mr Luttenberger was an impressive and fair witness whose evidence I accept. 5. The plaintiffs also relied on expert evidence from mining engineer John Dunlop, forensic accountant Suzanne Delbridge of Delbridge Forensic Accounting and stockmarket analyst Roy Shackley. The defendant relied on the evidence of forensic accountant Campbell Jackson of Ernst & Young. No issues of credit arose. Mr Dunlop's evidence was not of great assistance given its general nature and where it was not clear what evidence he had relied on in reaching his conclusions or how he weighed the competing evidence. For example, he appears to have discarded Mr McNamara's views as those of a "truck salesman", which was hardly a fair summary of Mr McNamara's career. Exlec and Exlec Holdings 1. Exlec was incorporated in 2005 and engaged in the design, manufacture and overhaul of hazardous area electrical equipment in the mining industry. Mr Flynn was a director and shareholder, initially together with Eric de Zoeten. 2. Exlec had a licence from the NSW Department of Primary Industries (Mine Safety Division) to repair and overhaul explosion protected electrical plant at its workshop. As Mr Phillips explained, the installation of electrical equipment in hazardous areas such as underground coal mines is governed by Australian standards. All workshops that overhaul (service and repair) such equipment must be licensed to do so. 3. Exlec also had Certificates of Conformity permitting manufacture of flameproof components and products. As Mr Schweizer explained, in underground coal mining, any equipment that includes electrical componentry is required to be approved under a statutory regime to ensure that it is safe. Exlec products were primarily authorised as 'Ex d', which refers to flameproof and explosion proof enclosures and associated components. Essentially, these are large steel boxes designed so that, if there is a spark from one of the electrical components within the steel box, that spark is contained in the box so there is no possibility of igniting explosive gases within the mine. The Certificates of Conformity ensure that the product complied with safety requirements. 4. In April 2013, the second plaintiff, Flynfam Pty Ltd, was incorporated. Mr Flynn and his wife were directors and equal shareholders. The company was appointed trustee of The Flynn Family Trust, of which Mr and Mrs Flynn and their children were beneficiaries. Exlec Trading Pty Ltd and Exlec Holdings were also incorporated. Mr Flynn was the director and Flynfam was the sole shareholder of both companies. The respective function of each company was: 1. Exlec Trading was the trading entity which employed staff, entered into the lease of premises and incurred creditors. 2. Exlec owned the intellectual property, drawings, plant and equipment. 3. Exlec Holdings held the Certificates of Conformity for the drawings held by Exlec. 1. The Service Facility Licence was re-issued to Exlec Trading, again recognising the facility for Ex "d" or flameproof enclosures, and ultimately numbered ANZEx SF 14.1050. Exlec Trading obtained an ISO 9001 Certification. Mr Schweizer explained that an ISO 9001 accreditation is an overarching requirement. The Certificates of Conformity were progressively re-issued to Exlec Holdings. 2. In August 2013, Exlec went into administration. Creditors approved a deed of company arrangement (DOCA). By August 2014, the DOCA was wholly effectuated and the administration of Exlec ceased. As will be seen, Exlec continued to be in financial extremis: at [24]-[37]. PPK expands mining businesses 1. PPK Group is a publicly listed company which today has issued share capital of some $68 million. From 2013, PPK Group sought to expand its mining services and mining equipment businesses by acquiring other companies. As PPK Group's chairman, Mr Levison, later stated in an announcement to the Australian Stock Exchange (ASX), "PPK embarked on a growth strategy that was predicated on the view that the mining cycle was approaching its bottom and there was an opportunity to create value by acquiring assets which would … demonstrate significant growth in asset value as the mining equipment and technology cycle rebounded and strengthened." Mr Schweizer was engaged by PPK Group as Integrations Manager, to ensure that the businesses that PPK acquired were integrated into PPK's business from an operational perspective. 2. In an ASX announcement on 2 January 2014, PPK Group's chairman, Mr Levison, announced that PPK Group had acquired the Coaltram mining equipment business, which included the manufacture, service and support of Coaltram underground transport utility vehicles, together with the manufacture and distribution of a flameproof alternator used in methane gas prone underground environments. There were then 99 Coaltram vehicles in service in Australia. The vehicles were assembled in a facility in Tomago, being the same town where Exlec was located. A Coaltram vehicle is shown in the following photo: 1. On 24 January 2014, the first defendant, PPK Mining Equipment Pty Ltd was incorporated. (The parties referred to the defendants generally as "PPK", and I will do likewise unless it is necessary to be more specific.) 2. On 30 June 2014, PPK Group made a further ASX announcement on entry into heads of agreement to acquire full ownership of the MONEx Electronic Engine Management System (EMS) technology, this being an integral part of the Coltram vehicles now manufactured by PPK Mining Equipment at its Tomago production facility. Mr McNamara explained that the MONEx EMS reduced the emissions of Coaltram vehicles to operate in underground coal mines so that the vehicle was flameproof and explosion proof. A MONEx EMS is shown in the following photograph: 1. On 30 June 2014, Mr Levison also announced that PPK Mining Equipment had opened a new Port Kembla service and support facility for customer vehicles. PPK Mining Equipment then had two workshops at which it provided overhaul services for the Coaltram vehicles: the Tomago workshop serviced Coaltram vehicles in the Hunter region and the Port Kembla workshop serviced Coaltram vehicles in the Illawarra Basin. Each workshop was able to provide mechanical overhaul services. Neither workshop had the necessary Certificate of Recognition to provide electrical overhaul services and such work was subcontracted out. 2. PPK did not have an electrical engineering business nor electricians or auto-electricians to support the Coaltram vehicles. Mr McNamara began looking at options to acquire the appropriate electrical engineering support business to increase PPK's ability to support and develop the Coaltram vehicle and EMS technology. PPK acquires Exlec business 1. By September 2014, Mr Flynn was then looking to sell the Exlec business. On 11 September 2014, Mr de Zoeten sent an email to Mr McNamara, from which it is apparent that Mr de Zoeten was assisting Mr McNamara to assess which parts of the Exlec business may be of interest. Mr de Zoeten advised: (emphasis added) I did some further checks on Exlec and they are not in administration yet. The Owner, Daniel Flynn, … has to sell. I guess he is just one step short of going under. Anyhow, he has a good electrical package for shuttle cars … I indicated that you may be available to visit at 9am tomorrow and he was fine with that. I believe he intends to close out on the deal tomorrow. 1. On 18 September 2014, Mr Levison and Mr McNamara visited Exlec's premises. As Mr Levison later reported to director Jury Wowk, "Dale and I visited Exlec Pty Ltd – who are just down the road from our site in Tomago … Exlec have a range of current and future products that are highly complementary to us and (to quote Dale) 'if PPK doesn't buy this then I will'." 2. On 19 September 2014, the Chief Financial Officer of PPK Group, Mr Barker, commenced a due diligence process, assisted by Ms Muller of FTI Consulting. On 24 September 2014, Mr Barker put forward a proposed transaction structure based on then due diligence undertaken. The items of value were identified as "The IP, drawings, and OC's that are owned by Exlec … and Exlec Holdings … Daniel … and his 12 staff joining PPK and the PP&E in Exlec". It is apparent that Exlec was then in a poor state, as Mr Flynn "wants to pay the wages owed from last week [and] cannot currently source some product (though he maintains he can get by for "a week or so")". Mr Barker suggested PPK lend $85,000 to Exlec to pay out its secured creditor and assume its charge over the business, the "Goal being to secure the plans and COC's", and to pay $35,000 payroll directly. (After signing Heads of Agreement, PPK provided funds to payout Exlec's secured creditor and provide working capital.) 3. On 24 September 2014, Ms Muller provided her initial thoughts to Mr Barker, noting "the Company's Accountant told me yesterday that the information we have been given is rubbish and a long way from reality." Later that evening, Mr Flynn's accountant provided Ms Muller and Mr Barker with a draft balance sheet for Exlec Trading "with the closest known numbers at this present time. As explained previously the trial balance … is full of issues". The balance sheet recorded net assets of -$821,195.75. 4. Mr Schweizer also assisted by reviewing Exlec's Certificates of Conformity and engineering drawings. Exlec then held some 14 Certificates of Conformity, certifying Exlec to manufacture particular products. In addition, as mentioned, Exlec's workshop had a Service Facility Licence and ISO 9001 accreditation. In the acquisition of the Exlec business, steps needed to be taken to change the names of the licencee. On 25 September 2014, Mr Schweizer emailed a summary of Exlec's Certificates of Conformity to Mr Barker and Mr Wowk. Mr Schweizer said this was to ensure that PPK knew the intellectual property for the products it was buying from the Exlec business was approved and that PPK could manufacture these products in that facility. 5. On 26 September 2014, Mr Levison pressed Mr Barker and Mr Wowk to move speedily with the acquisition "as I won't sleep soundly until the IP and COCs are owned by PPK?" Mr Barker provided an update to Mr Levison and Mr McNamara in respect of due diligence. Exlec was described as "a small operation located just round the corner from our site in Tomago." The "driving force" was Mr Flynn, who had "developed (and would like to develop more of) a range of intrinsically safe products that would offer multiple opportunities for PPK both domestically and internationally." As to why the business was for sale, Mr Barker observed: While Daniel's designs and ideas are (I understand) excellent – his financial skills are not. Put simply – the business was stretched coming out of the coal slowdown – and the group has run out of cash. The trading entity owes employee entitlements (eg LSL/AL), superannuation etc as well as $500k to the ATO. Mr Barker identified that what PPK wanted most were the drawings and intellectual property, together with the Certificates of Conformity. 1. On 27 September 2014, Mr Flynn signed a term sheet with PPK Mining Equipment and PPK Group. Mr Levison responded, "Great news guys. … Get deal done and get Exlec integrated into PPK. … Great find Dale." Mr Levison reported to his fellow directors: (emphasis added) Whilst this might look like a small transaction it brings significant "certified" underground technology to PPKME. It also bring PPKME full electrical certification for underground equipment which is a skill set we have previously had to contract in. In time we believe what we have bought will generate significant profits and will revolutionise a particular area of underground coal mining making us the market leader in coal shuttle equipment an[d] technology. … Immediately there will be benefits to PPKME as we can now use our own internal supplier (Exlec) for a range of products. The founder of the business Daniel Flynn is also a super smart 30 something who will be a great addition to the team. 1. On 30 September 2014, Ms Muller provided her report on the results of due diligence, observing "Exlec Trading … seems to be in financial distress evidenced by the inability to pay employee wages for the previous 3 weeks and it has a deficiency of net assets and appears insolvent". Further: It is our understanding that Daniel Flynn is acutely aware that this entity is insolvent or about to become insolvent and he has ceased to incur any further liabilities in fear of breaching insolvent trading sections of the Corporations Law. We concur with his position in this regard … 1. On 1 October 2014, Mr Flynn's accountant provided a depreciation schedule for Exlec, advising that plant and equipment on Exlec Trading's balance sheet of $49,216.63 was "a second hand shuttle car and feeder breaker acquired on or about 10/01/2014 as a netting off in relation to an outstanding debtor." (This piece of equipment gained some prominence in the proceedings as Mr Flynn pointed to it as evidence that Exlec's business included hydraulics overhaul work: see [184].) 2. On 7 October 2014, Mr Barker reported that he had received a call from Mr Flynn seeking an update on the timeline for completion. "Although he stated to me that nothing had specifically changed – he left me with the distinct impression that something had – he clearly is feeling some pressure and feels the need to liquidate Trading". Mr Barker pressed his colleagues to push to sign the contract by 10 October 2014. 3. On 8 October 2014, Mr Wowk circulated a list of tasks to be completed before signing a Share Purchase Agreement, including the issue of Certificates of Conformity naming Exlec as manufacturer and transferring any other licences held by Exlec Trading required for Exlec to carry on manufacture and business activities. Mr Schweizer spoke to Mr Flynn and reported to Mr Wowk that all paperwork for the change of manufacturer name had been submitted and reissued Certificates of Conformity were expected by 10 October 2014. All paperwork had been lodged to reissue the Service Facility Licence to Exlec, as had all paperwork in respect of an updated ISO-9001 certificate. Mr Schweizer noted, "Exlec won't be able to sign off any certified service repair work until the new [Service Facility] certificate is received. However, they currently do not have any contracted service repair work to complete during the next 14 days anyway". On 8 October 2014, the Service Facility Licence in Exlec Trading's name was re-issued to Exlec, being ANZEx SF 14.1050. 4. On 9 October 2014, Ms Muller asked her colleague to provide a list of assets and liabilities of Exlec to be annexed to the Share Purchase Agreement, to be signed by Mr Flynn that afternoon, "Also, he has sacked his solicitor." On 10 October 2014, Mr Barker advised that he had spoken with Mr Flynn, who was having a lawyer look at the share purchase agreement, "It's a mate of his doing it pro-bono". Mr Barker discussed the financial pressures that Mr Flynn was under, "he reckons it's just a case of 'every day goes by brings the inevitable closer' – and he is worried about the liquidation process if he doesn't instigate it". 5. On 13 October 2014, Mr Barker provided Mr Levison with a summary of the Share Purchase Agreement, having received an executed copy from Mr and Mrs Flynn. Mr Barker advised that there was a desire to move promptly driven by PPK's wishing to lock in Mr Flynn and his designs, and given Mr Flynn's personal financial position. The total purchase price was $1.2 million, comprising $200,000 in cash on settlement, $500,000 in PPK shares subject to performance conditions and a further $500,000 in PPK shares subject to a further performance condition of "NPAT [net profit after tax] in year two of $250K". Mr Levison sought approval from the board noting, "The technology we are getting is immense and will significantly add to [PPK Mining Equipment's] capabilities". 6. Mr Flynn also understood the price was $1.2 million. Mr Flynn was clearly keen to complete the sale of the Exlec business. He responded promptly to all communications by PPK. Mr Flynn and his wife signed and returned all documents sent to them without delay. Mr Flynn did not propose any drafting changes to the documents, including the Share Purchase Agreement. Share Purchase Agreement 1. The Share Purchase Agreement was executed on 15 October 2014. The Completion Date was 16 October 2014, when all Exlec and Exlec Holdings shares passed to PPK Mining Equipment (clause 3.3) and $200,000 was paid to Mr Flynn (clause 4.1). The plaintiffs were also obliged to give PPK Mining Equipment inter alia all drawings, schematics, CAD, models, software and source code related to the projects, products and other activities developed by or for Exlec and Exlec Holdings, together with the original Certificates of Conformity and associated documents related to those products: clause 6.2(a)(viii) and (ix). The 15 Certificates of Conformity were listed in Schedule 4. 2. The Share Purchase Agreement provided for PPK Group to issue two tranches shares to Flynfam – the First Performance Shares and the Second Performance Shares – if the First Performance Conditions and the Second Performance Conditions were satisfied: Clause 4.2. Schedule 2 specified the First and Second Performance Conditions: (emphasis added) Part A (First Performance Conditions) (a) The integration of the Business into the business carried on by the Buyer to the satisfaction of the Buyer (acting reasonably) not later than 12 months after Completion, including: (i) the transfer or re-issue of all the Certificates of Conformity and the Manufacturing Licences to the Buyer (or its nominee); (ii) the integration of all products manufactured and sold by the Exlec Group as at Completion into the Buyer's supply chain; and (iii) if requested by the Buyer, the relocation of the Business from the Leased Premises to the premises located at 13B Old Punt Road, Tomago, New South Wales occupied by the Buyer or such other premises as may be nominated by the Buyer; and (b) Daniel does not cease to be an employee … Part B (Second Performance Conditions) (a) The Business NPAT as specified in the NPAT Statement as accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4 being greater than $250,000; and (b) Daniel does not cease to be an employee … 1. Particularly relevant, the Second Performance Conditions included "The Business NPAT as specified in the NPAT Statement … being greater than $250,000". The NPAT Statement was calculated in accordance with Clause 9, which provided: 9. NPAT Statement 9.1 Preparation of NPAT Statement Not later than 10 Business Days after the second anniversary of the Completion Date, the Buyer must prepare and give to Flynfam a statement setting out the Business NPAT for the 12 month period ending on the day immediately before the second anniversary of the Completion Date including details of each adjustment (if any) made in accordance with the Agreed Adjustments (NPAT Statement). 9.2 Access PPK must procure that all reasonable, non-disruptive access to the business and accounting records, working papers and any other relevant documents of the Buyer, PPK and any other Related Body Corporate of PPK (including the Exlec Group) is given to Flynfam and its accountants and, if applicable, the Independent Accountant for the purpose of reviewing the NPAT Statement during normal business hours and on reasonable prior notice to the Buyer. 9.3 Review of NPAT Statement (a) If Flynfam disputes the NPAT Statement it must provide the Buyer with a written notice (Dispute Notice): (i) within 20 Business Days after the date on which it is given the NPAT Statement in accordance with clause 9.1 (Final Objection Date); (ii) setting out: (A) reasonable details of each matter in dispute; and (B) the reasons why each matter is disputed, in which case the dispute will be determined in accordance with clause 9.4. (b) If Flynfam does not dispute the NPAT Statement by the Final Objection Date Flynfam will be taken to have accepted the NPAT Statement as submitted by the Buyer and the amount of the Exlec Business NPAT specified in it. 9.4 Dispute Resolution Procedure (a) Within 10 Business Days after Flynfam gives the Buyer a Dispute Notice, the Buyer must give Flynfam a response in writing on the disputed matters (Response). (b) If the dispute has not been resolved within 10 Business Days after the Buyer gives the Response to Flynfam, the dispute must promptly be submitted for determination to the Independent Accountant to determine the matter or matters in dispute. … (e) The Independent Accountant must act as an expert and not as an arbitrator and his written determination will be final and binding on the parties in the absence of manifest error and the NPAT Statement will be deemed to be amended accordingly and will be taken to comprise the final NPAT Statement. … 1. Clauses 19.2 and 19.3 provided: 19.2 Variation A variation of any term of this agreement will be of no force or effect unless it is in writing and signed by each of the parties. 19.3 Waiver (a) A party may not rely on the words or conduct (including a delay in the exercise, a non-exercise or a partial exercise of a right) of the other party as a waiver of any right arising under or in connection with this agreement (including a right to rely on this clause) unless the waiver is in writing and signed by the party granting the waiver. (b) In clause 19.3(a) the term 'waiver' is intended to include an election between rights and remedies as well as conduct which might otherwise give rise to an estoppel. (c) A waiver is only effective in relation to the particular obligation or breach in respect of which it is given and is not to be taken as an implied waiver of any other obligation or breach or as an implied waiver of that obligation or breach in relation to any other occasion. 1. On completion, Mr Flynn ceased to be a director of Exlec and Exlec Holdings and became an employee; his job title was Manager of Exlec. Exlec changed its name to PPK Exlec and, later, to PPK Electrics (although I will continue to refer to it as Exlec). Exlec relocated to PPK Mining Equipment's premises in Tomago. The Certificate of Recognition in respect of the service facilities, being ANZEx SF 14.1050, was re-issued to Exlec in the new location. A liquidator was appointed to Exlec Trading. 2. PPK's acquisitions continued. In December 2014, PPK acquired the business of Firefly International, which supplied underground mining products including drilling and boring, lubrication, ventilation, grouting, stone dusting and unit support. Accreditation of Port Kembla workshop 1. Before the acquisition of Exlec, PPK Mining Equipment had plans to obtain a Certificate of Recognition for the Port Kembla workshop. Sandvik had operated a workshop in Wollongong which was licenced to overhaul flame proof electrical equipment for use in coal mines. Mr Hall and Mr McLean had undertaken the process of obtaining the Certificate of Recognition for Sandvik's workshop. Sandvik was closing the workshop. PPK recruited Mr Hall, Mr McLean and other electrical employees from Sandvik. 2. When Mr Hall joined PPK at Port Kembla, he understood from PPK's quality manager at the time, Paul Croak, that PPK Mining Equipment planned to obtain electrical certifications for the Port Kembla workshop. Mr Hall spoke to Mr Croak and his replacement, Ashleigh Campbell, as well as Mr McLean about obtaining the relevant licences to do the overall and repair work of flameproof equipment. Mr Hall understood that it was the intention to obtain the same type of Service Facility Licence and electrical certification and licences as Sandvik had had. 3. In December 2014, Ashleigh Campbell of PPK Mining Equipment enquired of the certifier as to whether the PPK Group could make use of Exlec's current certified system at PPK Group's Port Kembla facility "so we can operate a branch out of there" or whether an audit was needed. The certifier advised that a certification audit was required, although a shorter audit process may be involved if the Port Kembla site was added to Exlec's existing ISO9001 certificate. This option was embraced and audit dates were arranged. The certifier informed Mr Flynn. 4. Mr Partridge said that the application form was prepared by Ms Campbell. This is consistent with the contemporaneous documents. Mr Partridge does not recall Mr Flynn having any involvement in the preparation of the forms other than to sign the forms. Mr Hall said it was only because Mr Flynn had the Service Facility Licence in Tomago that he signed the relevant forms. 5. The certifier did a site audit in February 2015 over three days. PPK was represented at the audit by Mr McLean, Mr Partridge and Ms Campbell, who answered the certifier's questions. Mr Flynn attended on one day. On 12 March 2015, Certificate of Recognition ANZEx SF 15.1054 was issued to Exlec in respect of the Port Kembla workshop. 6. Mr McLean was familiar with the documentation from his time at Sandvik and said he could have prepared the documentation without any Exlec documents. Having the Exlec documents assisted in obtaining the approvals slightly earlier, but he believed that PPK would have obtained the approvals anyway. Mr Hall said that PPK would have obtained the service facility licence and certifications for Port Kembla without any Exlec intellectual property by mid 2015 at the very latest. 7. The employees at the Port Kembla workshop who were nominated as the Responsible Persons for the purposes of the licence were Mr McLean and David Ornelas. Mr Hall denied that Mr Flynn was responsible for PPK's electrical overhaul and repair work conducted at the Port Kembla workshop. Nor did Mr Hall discuss any of the jobs or work that was undertaken at Port Kembla with Mr Flynn. Problems with Mr Flynn 1. As wholly owned subsidiaries of PPK Mining Equipment, Exlec and Exlec Holdings became "divisions" within the Mining Services Division of PPK Group. Some of the goods and services provided by Exlec were "internal work", where Exlec provided components or did work for another division of the PPK Group. A problem emerged with Exlec billing for internal work. 2. Mr Flynn was understandably keen to make sure that Exlec's NPAT met the Second Performance Condition. However, as Mr Barker described it, PPK was then trying to survive "the depths of the coal recession". There was a downturn in the price of coal. Work was scarce and every effort was made by PPK to secure whatever work was available in the then prevailing market. All executives, including Mr Flynn, took a 10% pay cut while Mr Barker took a 20% pay cut. There were significant staff redundancies at PPK Group. Mr Flynn agreed that the mining industry was in a downturn. 3. A few months after the acquisition of the Exlec business, Mr Barker had a number of discussions with the General Manager of PPK Mining Equipment, Greg Giles, who complained that Mr Flynn wanted to charge a "fully marked up price" for Exlec's products in internal sales. Mr Giles considered that this price exceeded the market price that could be achieved externally and would produce a situation where the Exlec division would make massive margins on internal sales when compared with the smaller margins Exlec could make on external sales. Mr Giles was concerned that, if Mr Flynn's approach was adopted then PPK would make little or no profit on the sale of equipment given the then current economic conditions, "The combined Coaltram product would lose money on everything except the Exlec lights." 4. Mr Flynn agreed that he was having difficulty getting on with Mr Giles, including in respect of the issue of internal costs. Mr Giles had told Mr Flynn, "We can't have mark-ups on top of mark-ups in between internal businesses". For his part, Mr Flynn was concerned as to how internal costs would affect his earnout. 5. Mr Barker recalled "Mr Giles was livid about the situation … so I took the opportunity to clarify how we should deal with these matters in an environment where … we had all taken pay cuts in order to try to keep the company afloat. That's how deep the coal recession was at the time." On 10 April 2015, Mr Barker emailed Mr Flynn in relation to PPK's policy as to how internal profit was recorded. The email was copied to Mr Levison, Mr Giles and General Manager – Finance, Mr Beddow. Mr Barker explained: With reference to the earnout clause within the contract for purchase of exlec, have discussed this with [Mr Levison] and [Mr Giles] and here is what we propose. Firstly, PPK's policy is that internally the profit is made at the end point of sale. Thus we don't have a heap of profit centres along the way escalating the final price, and out price ourselves in the market. All divisions (and in this example Exlec is a division) internally transfer materials and labour at cost against the particular project, so they recover all costs. 1. Mr Barker set out a worked example of how the policy applied in his email. In the example, Exlec manufactured the headlights for a Coaltram vehicle, which was sold for $1 million. Total costs (internally charged labour and materials) totalled $700,000, resulting in a margin of $300,000. If Exlec's component of the costs was $140,000 or 20%, then Exlec's share of the profit would be 20% of $300,000, being $60,000. Mr Barker said the policy applied throughout his time at PPK. 2. Mr Barker continued in his email to state that PPK was committed to Mr Flynn receiving the earnout. As PPK's systems did not 'track' earnouts, he proposed that the profitability of Exlec be tracked through results in the general ledger together with an offline spreadsheet that apportioned the profit on internal jobs. Mr Barker suggested that the offline spreadsheet be produced monthly, to be agreed and signed by Mr Flynn, Mr Giles and himself. If the parties could not agree, then the matter would be immediately escalated to Mr Levison. Mr Flynn was asked to confirm that he was in agreement or to otherwise to call Mr Barker. There was no response. Nor were any spreadsheets prepared. A variation? 1. Mr Barker continued to receive complaints from Mr Giles about Mr Flynn. Mr Barker formed the view that Mr Flynn could no longer report to Mr Giles as the situation had become unworkable. For the good of the PPK business, Mr Barker decided to move Mr Flynn to a new role. 2. On 22 April 2015, Mr Barker emailed Mr Giles, Mr Schweizer, Mr McNamara and Mr Levison, proposing that Mr Partridge become manager of Exlec and Mr Flynn become "Manager Innovation". Mr Barker also proposed that Mr Flynn's earnout change from NPAT to "revenue earned". Assuming a 20% gross margin on sales, "I am going to propose that we weight 80% of the earnout on [a] sales target of $1,250K and 20% on the NPAT $250K." Mr Barker proposed to communicate this to Mr Flynn "as needs to be in person". 3. Mr Barker does not recall whether he discussed this proposal with Mr Flynn at the time. Mr Barker did discuss the matter with Mr Levison, Mr McNamara, Mr Schweizer and Mr Beddow, albeit none of them recalled it. According to Mr Barker, Mr Levison and Mr McNamara were supportive of the proposal to change Mr Flynn's role and to change the earnout requirement. 4. On 29 April 2015, Mr Barker became chief executive officer of PPK Group. Mr McNamara became a director. 5. On 5 May 2015, Mr Barker spoke to Mr Flynn. Mr Barker said he wanted to move Mr Flynn to a new role as Head of Innovation for the PPK Group. Mr Barker said he had discussed the matter with the board, which agreed that Mr Flynn would be more valuable to the business in a role where his skills could be used more broadly. Mr Barker also said: We have also discussed the earnout under the Share Purchase Agreement and we proposed to vary the earnout to $1 million in revenue rather than the $250,000 net profit. 1. Mr Flynn was agreeable to both the new role and the proposed change to the earnout target. They did not specifically discuss how revenue would be calculated. Mr Flynn said he would not have agreed to take the position of Head of Innovation unless the earnout requirement was changed to revenue as he could not leave satisfaction of the Second Performance Conditions in the hands of someone else running the business to ensure that a sufficient profit margin was met. 2. On 6 May 2015, Mr Barker sent an email to Mr Flynn, copied to Mr McNamara and Mr Schweizer, confirming their discussion. Mr Flynn's role would become Head of Innovation of PPK Group. Mr Partridge would manage Exlec. Further, "Your earnout (year 2) we will change to a revenue target. The current earnout hurdle is NPAT $250,000. Would look to change this revenue of $1,000,000.00". Mr Flynn simply replied, "All good." On 16 May 2015, Mr Barker announced the change in Mr Flynn's role to all PPK staff, noting that Mr Flynn "will be spending more time on the road with customers, PPK folks at all sites, and other stakeholders." 3. In June 2015, Mr Barker received a call from Mr Flynn who asked, "Is there any further paperwork associated with the moving of the earnout target to $1 million sales revenue?" Mr Barker said he had sent him an email of what they discussed but would resend it. On 28 June 2015, Mr Barker forwarded his earlier email exchange with Mr Flynn, "This is what we discussed. Fit for purpose or would you like more?" As I read it, Mr Barker was enquiring whether an exchange of emails was sufficient from Mr Flynn's point of view to record the amendment to the Share Purchase Agreement, or whether Mr Flynn needed something further in writing. There was no reply. 4. Mr Flynn said that he understood, after his conversation with Mr Barker and this email, that any obligations to formalise the variation had been complied with and would be honoured by PPK. He understood that Mr Barker, as chief executive officer, had authority to make decisions and changes like this. Mr Flynn did nothing further as he believed the variation had been given effect. For his part, Mr Barker also understood that he had then done everything he needed to do to effect a change to the earnout in the Share Purchase Agreement. Problems with Coaltram vehicles 1. In March 2015, problems emerged with the Coaltram vehicles. PPK Group issued safety bulletins in respect of erratic accelerator operation and unplanned engine cranking. The Department of Trade & Investment (Mine Safety) issued a Prohibition Notice to each mine using a Coaltram vehicle, requiring that it be "parked up" until proven safe to operate. This was a matter of serious concern to PPK Group's board and urgent action was needed. PPK Group advised that it would rectify the problem within ten days, upgrading all 90 Coaltram vehicles operating in New South Wales and Queensland. PPK upgraded the accelerator pedal position sensor. This did not solve the problem. In May 2015, a Coaltram vehicle experienced "uninitiated engine response". 2. By now, PPK Group has stopped acquiring new businesses. Mr Schweizer had become the Engineering Manager of the PPK Group. He oversaw and co-ordinated the solution to the "unplanned movement", which became known as "FLP-1". The solution was devised by PPK's Head Engineer, Michael Kearsey, who was responsible for looking after Coaltram vehicles. The solution was to add a second throttle sensor which would intervene to shut down the engine and stop unplanned movement. The solution required a flameproof enclosure to house the FLP-1 solution. Mr Schweizer knew that Exlec had a box in their range that was big enough to house the FLP-1 solution. He selected an Exlec enclosure to save cost by manufacturing the enclosure in-house rather than purchasing an enclosure from a third party at full retail sale price. (Mr Flynn estimated that the commercial rate for the enclosure used was between $11,000 and $20,000.) 3. Mr Schweizer said it was never intended to charge the client for the FLP-1 solution, but to fix the problem so that the Mines Department would re-certify the Coaltram vehicle for use in underground mines. Mr Schweizer understood from PPK customers that they would not be prepared to spend any money to fix the problem; at the time the whole coal industry was in a downturn. Mr Schweizer said providing the FLP-1 solution at commercial rates would have made PPK's Coaltram business uncommercial. It was developed to rectify a defect with PPK's Coaltram product. At the time, Mr Schweizer expected that PPK would have to bear the cost of making the FLP-1 and fixing it on all Coaltram vehicles. 4. By now, Mr Flynn was no longer the Manager of Exlec, having moved to Head of Innovation. Mr Schweizer dealt with Mr Partridge. At the outset, Mr Schweizer did not know how many flameproof enclosures would be needed. He asked Mr Partridge to plan for 100 units, this being enough for each Coaltram vehicle in the field. Exlec was to manufacture one of its standard products, the Type HA110 flameproof box. As it turned out, the FLP-1 solution did not need to be installed on all Coaltram vehicles and the request for Exlec enclosures was reduced to 85 and then to 50. Ultimately, 41 enclosures were made by Exlec at a cost of $131,539, being $3,208.27 per enclosure. On 15 September 2016, the enclosures were despatched to "PPK Store" as stock build. Ms Wilson explained that stock build items are stored at one of the PPK premises, until required and utilised by one of the PPK divisions. In fact, six of the enclosures were sold during the twelve month period with which the NPAT Statement is concerned (the NPAT period), to which I will return at [156]. Touting for new business: hydraulics workshop 1. Another company in the PPK Group, PPK Firefly, had a good commercial relationship with Spartan Mining Services Pty Ltd, a mining equipment supply company. Whilst PPK Firefly already performed some work for Spartan Mining, it did not overhaul Spartan Mining's hydraulic equipment. Mr McNamara thought of a plan to win work by overhauling Spartan Mining's hydraulic machines. He spoke to Eddie Algie, a director of Spartan Mining, who was happy to give the work to PPK if it acquired hydraulic testing equipment. 2. Mr McNamara arranged for PPK to spend some $100,000 installing a hydraulic test bench at its Tomago workshop. Mr Theodoridis was now employed by PPK and designed the test bench. Mr Theodoridis reported to Mr Giles on 16 May 2015: … the Hydraulic test bench was used to power the hydraulics to get the results required. Without the test bench this would not have been possible which gives PPK an opportunity to do various types of work in the industry now. With this being done it gives great satisfaction to the customer and future business on various projects. 1. Mr Theodoridis said the test bench "was a large power unit … this is a big thing. … in any business structure you're trying to impress your customers. … So we tried to build a system that is capable of large flows and pressures to attract our customers. … it was more about trying to have the availability of a piece of equipment that we could bring in a variety of type of work to build our revenue stream … in the long term" or to create a new revenue stream. 2. Mr Theodoridis agreed that Exlec did not have a facility until it was established in 2015: "there was no facility there - there was no hydraulic department for that type of repair in that, in that building, on that site. So this was a new, this was a new area that we were allocated to set up our, the bolting operation. We were given a particular area of the building. From this we then designed and built - we got signs made up to go in the bay, I got benches designed and manufactured so we had benches to be able to work with. There was nothing there. We were basically setting up a hydraulic department that had nothing there, so that we could perform that work." 3. Mr McNamara arranged for Mr Algie to inspect the new installations. Mr Algie was suitably impressed and sent Spartan's hydraulic machines to PPK for overhaul. Mr McNamara also employed Mark Cooper to operate "that section that PPK has set up to do air tracks, hydraulic rigs, and his role was to hopefully we would grow and develop that spot". 4. Financial conditions did not improve. On 11 June 2015, PPK Group made an announcement to the ASX, reporting an underperformance in the mining equipment business due to "extremely difficult economic conditions for our customers". A number of customers had put their mines into care and maintenance. For customers whose mines were operating, capital constraints prevented purchases of capital equipment. 5. In September 2015, PPK Group requested voluntary suspension of its shares on the ASX, pending finalisation of its financial report for the 2015 financial year. PPK Group company secretary, Andrew Cooke, advised the ASX that the company was assessing issues that had arisen in and the possible merger, joint venture or divestment of its Mining Services Division. On 28 October 2015, PPK issued 666,667 shares to Flynfam in accordance with clause 7.1 of the Share Purchase Agreement. Loss of corporate memory 1. In January 2016, Mr Barker left PPK Group. Mr Barker said that PPK was then losing money in most months. After discussing the matter with Mr Levison, they decided that the best thing he could do to help PPK survive the coal recession was to leave the company and for Mr Levison to step back into the role of executive chairman. 2. In May 2016, Mr Flynn told Mr Beddow that Mr Barker had agreed to change the earnout under the Share Purchase Agreement from NPAT to revenue. On 12 May 2016, Mr Flynn forwarded his earlier email exchanges with Mr Barker to Mr Beddow. Mr Beddow told Mr Flynn that he was not aware of this and would have to speak to Mr Levison and Mr Wowk. On Mr Beddow's return to Brisbane, he raised the matter with Mr Levison and they called Mr Wowk. Mr Beddow recalled that Mr Levison and Mr Wowk "were surprised". Mr Beddow believed that both were unaware of the matter that Mr Flynn had raised. Mr Wowk advised that, if Mr Flynn raised the matter again, to let him know that the inquiry had been referred to the board and he would be advised in due course. 3. On 24 May 2016, Mr Beddow received a telephone call from Mr Flynn, following up on his email of 12 May 2016. Mr Beddow advised that Mr Flynn's enquiry had been referred to the board. On 5 July 2016, Mr Flynn followed up Mr Beddow, requesting "an interim figure and status of my earn-out" as the second performance date was fast approaching "and I would like to know where I stand at present". Mr Flynn followed up his request, copied to Mr Levison and Mr McNamara, on 5 August 2016. Mr Beddow did not respond to either email as he understood that PPK was then facing more urgent issues. He told Mr Flynn, when next he saw him, that the earnout statement would be prepared once the earnout period was complete. NPAT Statement 1. The second anniversary of Completion of the Share Purchase Agreement was 16 October 2016. PPK Mining Equipment was obliged to give Flynfam a statement not later than ten business days after the anniversary. The statement was not provided until 10 November 2016, when Mr Beddow provided an NPAT Statement to Mr Flynn. The statement was prepared on the basis of the Share Purchase Agreement as executed, that is, calculating Exlec's NPAT for its second year of operations, rather than revenue. After adjustments, net profit after tax was -$541,779. Extensive spreadsheets were provided in support of the calculation. 2. Flynfam was obliged to provide a written notice, if it disputed the statement, within 20 business days of receipt: clause 9.3(a). On 15 November 2016, Mr Flynn advised Mr Beddow, copied to Mr Flynn's accountant Wayne Masters, that he did not accept the NPAT Statement, in particular: 1. The second performance share was varied from $250K NPAT to revenue of $1M. 2. Exlec stock booked out to internal jobs (Tomago & Port Kembla) under alternate part numbers. The part sales figures are incorrect. 3. ALL hours & materials for internal work must be calculated at market rate for the purposes of revenue figures. 4. Exlec jobs seems to be missing a lot of revenue for example NEX00020 shows $0 however the job was invoiced at $41.5K, NEX00020 shows $0 but invoiced at $4.8K, NEX00110 also shows $0 but invoiced at $12.5K, NEX 00159 shows $73K but invoiced at $99K, NEX 00216 shows $179K but invoiced at $231K. There are many more in this area. 1. Flynfam's notice did not comply with clause 18 of the Share Purchase Agreement, where the email was not sent to Mr Levison: clause 18.3(b). In any event, Mr Beddow investigated these issues with the assistance of Group Financial Controller, Ms Wilson. On 29 November 2016, Mr Beddow provided Mr Flynn with a revised NPAT Statement in the amount of -$577,339. Mr Beddow also advised, "I'm instructed by the PPK Board of Directors that PPK disputes that the Second Performance Condition … has been varied as contended by you." 2. Mr Beddow also explained how the NPAT Statement had been calculated in respect of internal work. The internal accounting policy was said to be compliant with accounting standards such as Australian Accounting Standards Board (AASB) 15, Revenue from Contracts with Customers, and AASB 102, Inventories, being: a) In the first instance, all internal divisions receive a cost recovery only for the goods and services they provide and retain proportional rights to the asset created (eg work in progress asset or stock item) b) Revenue and profit on sale is recognised amongst the internal divisions when the final sale to the external customer is made c) Percentage share for the allocation of profit is made with respect to share of costs. 1. Mr Beddow noted that the adjustment for internal work added $103,227 in revenue and $14,544 gross profit, representing a 14% gross margin. The average gross margin on Exlec jobs for external customers was 19%. Even if the NPAT calculation was amended to add a 19% gross margin on internal sales, only a further $6,000 to $7,000 would be added to revenue and profit. 2. As for item 4 – "missing" Exlec job revenue – Mr Beddow advised that there was no 'missing' revenue as only revenue recognised during the NPAT period was taken into consideration. Finally, Mr Beddow advised: New "Hydraulic" business It was noted by PPK that the Exlec management accounts reflects the establishment of a new 'hydraulics' business whilst under PPK ownership. As part of establishing this new source of business, new equipment was procured (e.g. Hydraulics test bench) and new employees hired (e.g. Mark Cooper, Steven Ross). In accordance with the terms of the Share Purchase Agreement, the NPAT statement is calculated with reference to the definition of the business that was "carried on by Exlec immediately before" acquisition by PPK. Accordingly, any new businesses streams created under PPK would be excluded from the NPAT Statement calculation. As a result a further adjustment[s] has been made (refer tab 8 of the calculation). 1. Mr Flynn resigned the next day, referring to "the recent events surrounding my earnout". On 8 December 2016, Mr Flynn requested data in respect of revenue generated by Exlec, including internal revenue not included in PPK's calculations. On 9 December 2016, Mr Beddow obliged, providing Mr Flynn and his accountant with general ledger data, together with an explanation of how the spreadsheets previously supplied supported the revised NPAT Statement. Mr Beddow offered to generate the reports again from the accounting system with Mr Flynn or his accountant present and to "walk your accountant through the calculations". 2. On 20 December 2016, Mr Flynn's accountant completed his calculation of gross turnover, being $1,002,914. An important component was $161,794 for the "New Hydraulics Business". The accountant advised that the hydraulics business was not a new business as Exlec, under Mr Flynn's ownership, had employed a hydraulics engineer for some 18 months prior to the PPK acquisition and had various sales in this particular field prior to PPK ownership. In addition, Mr Flynn's accountant took a different approach to calculating revenue for internal jobs. Rather than include any profit margin, the accountant considered "a full cost recovery is the minimum that would be charged to an external customer". 3. On 5 January 2017, Mr Flynn's solicitor advised the defendants' solicitor that Mr Flynn continued to dispute the updated NPAT Statement. Full details of Mr Flynn's objection would be provided in due course. The letter from Mr Flynn's solicitor was outside the 20 business days required by clause 9.3(a). Nor, for that matter, was the solicitor's letter addressed to Mr Levison, nor even the defendants' then solicitors. Arguably, having failed to dispute the statement within 20 business days, Flynfam could be taken to have accepted the statement as submitted by PPK Mining Equipment and the amount specified in it: clause 9.3(b). 4. On 31 January 2017, Mr Flynn's solicitor advised Mr Beddow that the objections to the NPAT Statement were maintained. As the Second Performance Conditions had been varied to a revenue target, the NPAT Statement should reflect gross revenue of the Exlec business. Mr Master's calculations were provided. If a revised NPAT statement could not be agreed, Mr Flynn's solicitor noted the dispute resolution procedure to be followed, as set out in clause 9.4 of the Share Purchase Agreement. 5. On 17 February 2017, Mr Beddow denied that the Share Purchase Agreement had been varied as suggested, or that "whether the NPA earnout provision has been amended" was an issue to which the dispute resolution procedures applied. Mr Beddow suggested that PPK would address the accounting matters raised by Mr Masters "if a Court decides that the share purchase agreement has been amended as your client alleges". 6. The matter appears to have rested there for six months. On 31 July 2017, Mr Flynn's solicitor re-stated his position to Mr Levison. On 27 September 2017, Mr Levison advised that he had spoken to Mr Theodoridis, based on which he was satisfied that Exlec did not have a hydraulic business before being acquired by PPK. Further: Using the "Calculation of Gross Turnover of Exlec PPK Pty Ltd", we advise of the following adjustments that need to be made based on a quick analysis performed over the past few days: Gross Turnover as calculated by [Mr Flynn's] Accountants $1,002,914 Less adjustments per the spreadsheet of 29.11.16: New (Hydraulic) business tab (161,794) Cost recovery internal jobs tab (9,844) ● Int URC (Note 1) (4,461) ● Internal (Note 2) Amended Gross Turnover $ 826,815 … At this point, we believe it is not the best use of our resources to continue to investigate disputed matters as raised by your client as it is apparent that there is considerable difference of opinion as to: ● What was the agreed determination of the Second Performance Condition ● What should be included in the calculation of the gross turnover as estimated by your client As such, we acknowledge that, as you have noted, clause 9.4 of the Share Purchase Agreement sets out the dispute resolution procedures and it may be the most practical method to resolve this matter. 1. That is, Mr Levison did not take any point that Flynfam had failed to serve a notice of dispute within 20 business days of the revised statement, or that some six months had passed, but sought to engage with the substance of Mr Flynn's complaint. That is, even if the Second Performance Conditions had been varied as suggested, Exlec still did not satisfy the conditions. Mr Levison also suggested that the dispute resolution procedures "may be the most practical method to resolve this matter", at odds with Mr Beddow's contention, in February 2017, that the dispute resolution procedures did not apply to the central dispute as to whether the Share Purchase Agreement had been varied. 2. On 1 December 2017, Mr Flynn emailed Mr Levison, advising that he was still waiting for "the promised reply" regarding the Second Performance Shares and asked what was causing the delay. On 6 December 2017, PPK Group's solicitor replied to Mr Flynn in firm terms, disputing that the Share Purchase Agreement had been varied from Business NPAT to revenue. Mr Flynn's position was said to be inconsistent with his reliance on the dispute resolution procedure in the Share Purchase Agreement, which was said to only apply to disputes in respect of the methodology employed by the Share Purchase Agreement and not to the suggested varied methodology. It was also said that Mr Flynn had failed to provide a valid dispute notice as he had failed to comply with clauses 18.1 and 18.3 of the Share Purchase Agreement. Accordingly, it was said that the NPAT statement was not subject to the dispute resolution procedure "and you are taken to have accepted the NPAT Statement and the amount of the Exlec Business NPAT in accordance with clause 9.3(b)." The solicitor advised that PPK Group would not entertain any further attempts or discussions regarding the matter and would proceed to comply with its obligations under the Share Purchase Agreement. In January 2019, these proceedings were commenced. Variation of Share Purchase Agreement 1. The first issue is whether the Share Purchase Agreement was varied. 2. The defendants accepted that Mr Barker and Mr Flynn agreed to amend the Share Purchase Agreement, but submitted that this did not have the result of amending the Share Purchase Agreement: clauses 19.2 and 19.3. These clauses made it more difficult to infer that the parties intended their words and emails to vary the Share Purchase Agreement: Mathews Capital Partners Pty Ltd v Coal of Queensland Holdings Limited [2012] NSWSC 462 at [39] (per Black J). It was not to the point whether emails were capable of constituting writing and signature under the Electronic Transactions Act 2000 (NSW) if, objectively viewed, that was not what the parties intended. Whether a binding agreement was reached in May 2015 may be informed by the parties' subsequent conduct: Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; [2001] NSWCA 61 at [25] (per Heydon JA). The parties' conduct after May 2015 was said to be consistent with there being no binding contract until the agreed requirement for signed writing was met, which never happened. Mr Flynn specifically raised the issue with Mr Barker, which would have been unnecessary if Mr Flynn thought that a binding agreement already existed. Mr Flynn's actions in June 2015 were said to indicate that he understood that more may be required to amend the Share Purchase Agreement. Consideration 1. A "no oral modification" clause cannot prevent the parties to a contract from agreeing to orally vary it: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1; [2003] FCA 50 at [217]-[221] (per Finn J); Hawcroft General Trading Co Pty Ltd v Hawcroft [2017] NSWCA 91 at [35] (per Leeming JA); Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd [2019] NSWCA 87; (2019) 373 ALR 591 at [122] (per Gleeson JA, with whom Meagher and McCallum JJA agreed); Martin v Dee-Tech Pty Ltd [2021] NSWSC 434 at [101] (per Gleeson JA); In the matter of Australian Mortgage Finance Limited (Administrator Appointed) [2021] FCA 189 at [44] (per Nicholas J). As summarised by Black J in Mathews Capital Partners at [39]-[40]: [39] … Such a provision would not exclude the effect of a subsequent implied or oral contract which varied the … Agreement, if that contract were otherwise established; however, the fact that the clause exists is to be taken into account in interpreting the subsequent conduct of the parties, and it makes it more difficult to draw an inference that the parties did intend, by an oral agreement or by emails between their advisers, to vary the terms of the Amended Shareholders Agreement: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 at [215]ff. [40] In order for such a variation agreement to have contractual effect, whether it was established by prior discussions of the parties or the exchange of emails, it would be necessary … to show the other requirements of a valid contract, including that there must be real consideration for the agreement: Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95; (2002) 187 ALR 92 at 99; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd above at [216] … 1. Writing extra-judicially, McDougall J explained ("Recent Developments in Commercial Law", Law Society Annual Specialist Accreditation Conference, 10 August 2018): In Australia, No Oral Modification clauses do not have the conclusive legal effect which they purport to have. Instead, although they have an evidentiary role in determining whether a variation was actually agreed to, they have no capacity to exclude that variation if it is actually proven to have occurred. That the law appears to disregard the very purpose of inserting such a clause may come as a surprise. However, the practical impact of this position should be recognised by all: no matter how hard diligent lawyers attempt to exclude or limit the scope of oral variations, those tasked with administering the contract can agree orally to the contrary, and the law will prioritise their later agreement. 1. Other than the requirements of clause 19.2 and 19.3, the elements of a contract are satisfied in respect of the variation. There was clear offer and acceptance in the conversation between Mr Barker and Mr Flynn. PPK wanted Mr Flynn to move from his current role to another. Mr Flynn agreed to do so. The change to the earnout arrangement was part of the deal, where Mr Flynn would no longer be in charge of Exlec with oversight of its operations and, thus, any ability to influence whether the NPAT figure was met. In his new role, Mr Flynn's contribution to PPK Group was both more diffuse and speculative, where the Head of Innovation was "to envisage, concept design and market the first version of our next generation of products." Mr Flynn was largely left to his own devices to come up with ideas and work on his own designs. 2. Mr Barker agreed that, on becoming Head of Innovation, Mr Flynn would no longer have management of the Exlec division, adding "He would not be accountable for what was a loss making division." That is, this was a good deal for the plaintiffs. (The plaintiffs accept that the Second Performance Conditions were not satisfied in their original form, where both experts agreed that Exlec sustained a loss in the NPAT period). From the defendants' point of view, PPK also received valuable consideration as it was able to move Mr Flynn from a role in which it appears that he was causing difficulties to a role outside of Exlec, leaving PPK to run Exlec's business unimpeded. 3. As chief executive officer, I consider that Mr Barker had authority to bind the plaintiffs, particularly where he consulted with chairman Mr Levison and director Mr McNamara before speaking to Mr Flynn about the proposed changes. Whilst these gentlemen did not now recall any discussion, the contemporaneous emails indicate that there was one. Mr Levison said he understood that any change in the structure of the deal would have to be approved by PPK's board. He did not recall any discussion at board level regarding the change to the Share Purchase Agreement, nor was there any mention of the matter in board meeting minutes. That may be so, but does not prevent a binding agreement where the offer was not said to be conditional on board approval. 4. Post-contractual conduct is admissible on the question of whether a contract was formed: Brambles Holdings at [25]-[26] (per Heydon JA). It is relevant to consider subsequent conduct in ascertaining whether the parties intended to immediately enter into binding legal relations: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 547-550 (per Gleeson CJ, with whom Hope and Mahoney JJA agreed); Queensland Phosphate Pty Limited v Korda and Shepard (as joint and several liquidators of Legend International Holdings Inc (in liq)) [2017] VSCA 269 at [37]. In particular, post-contractual conduct may shed light on the proper interpretation of earlier communications alleged to constitute a contract, for example, subsequent communications may show that, at the time of the allegedly contractual communications, there were other uncompleted negotiations between the parties such that the allegedly contractual dealings could not properly be interpreted as mutual assent to be bound: GC NSW Pty Ltd v Galati [2020] NSWCA 326 at [93] (per Gleeson JA, with whom White JA and Emmett AJA agreed), citing Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9255. Further, subsequent communications may be used by a party as an admission by conduct of the existence or non-existence of a subsisting contract: GC NSW at [95], citing Film Bars. 5. I do not consider that Mr Flynn's follow up call to Mr Barker in June 2015 – asking whether any further paperwork was needed to record the variation – tells against the existence of a binding agreement to vary the Share Purchase Agreement. The post-contractual conduct indicates that Mr Flynn periodically, and consistently, pressed for the earnout to be calculated on the basis of Exlec's revenue rather than NPAT, including by informing Mr Beddow of the variation after Mr Barker had left PPK and on receipt of the NPAT Statement calculated without regard to the variation. If anything, the post-contractual conduct confirms the existence of the variation. 6. I conclude that the Share Purchase Agreement was varied in the terms agreed by Mr Barker and Mr Flynn on 6 May 2015. As varied, the Second Performance Conditions in Schedule 2, Part B, sub-paragraph (a) relevantly provides: (emphasis added) The Business revenue NPAT as specified in the NPAT Statement as accepted by Flynfam or taken to be accepted under clause 9.3(b) or, if applicable, finally determined under clause 9.4 being greater than $250,000 $1,000,000 … 1. The plaintiffs added the adjective "gross" revenue. As "gross revenue" was not referred to by Mr Barker or Mr Flynn in their conversations or emails, I do not consider the variation included this adjective. Nor is it clear what "gross" added to the Second Performance Conditions. 2. To be of any utility, the variation had to take effect before accounting began for the NPAT period. In any event, I consider that the parties intended that the variation would take effect from the date of the agreement to vary, being 6 May 2015: Green v AMP Life Ltd [2005] NSWCA 354 at [19] (per Basten JA, with whom Spigelman CJ and Giles JA agreed). PPK wanted to get on with its change in personnel. There is no reason to think that the variation was intended to take effect other than immediately. 3. In light of my conclusion in respect of the variation of the Share Purchase Agreement, it is not necessary to consider whether the defendants are estopped from suggesting otherwise. 4. Although not pleaded, the plaintiffs' closing submissions set out a range of consequential amendments to the Share Purchase Agreement, generally replacing "NPAT" with "revenue" wherever appearing. I did not understand the defendants to demur from these consequential amendments, presumably because the mechanisms established by the Share Purchase Agreement to calculate, dispute and determine whether the Second Performance Conditions have been satisfied would otherwise break down entirely. 5. Applying the principles for construing commercial contracts to the Share Purchase Agreement as varied, the Court is entitled to assume that the parties intended to produce a commercial result, construing the contract so as to avoid making commercial nonsense or working commercial inconvenience: Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] (per French CJ, Hayne, Crennan and Kiefel JJ), citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350 (per Mason J). As Allsop CJ, Lee and Derrington JJ observed in Onley v Catlin Syndicate Ltd (as the underwriting member of Lloyd's Syndicate 2003) (2018) 360 ALR 92; [2018] FCAFC 119, "It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit": at [33]. 6. When agreeing to change the earnout threshold from NPAT to revenue, there was no suggestion that the process by which the parties would determine whether the threshold had been reached would change. The threshold changed. The process did not. It is not strictly necessary to make each consequential amendment posited by the plaintiffs but rather to construe Clause 9 and the reference to NPAT Statement as the process for, and the calculation of, revenue. Indeed, the parties continued to refer to the NPAT Statement, as will I. Expert determination clauses and jurisdiction 1. The plaintiffs seek a declaration that revenue was greater than $1 million in the NPAT period together with a declaration that the plaintiffs are entitled to 3,441,039 shares and any dividends paid on the shares. The second issue is whether the Court has jurisdiction to determine whether the Second Performance Conditions were satisfied, given the expert determination clause in the Share Purchase Agreement by which any dispute as to satisfaction of the conditions was to be resolved. 2. The plaintiffs contended that, under the Share Purchase Agreement as varied, PPK Mining Equipment was required to issue a statement of the revenue of Exlec's Business under clause 9.1. The defendants issued two statements, neither of which did so, and both of which were disputed by Mr Flynn. PPK breached the Share Purchase Agreement on 6 December 2016 by denying that the Share Purchase Agreement had been varied or that the dispute resolution procedure applied. By refusing to participate in the dispute resolution procedure, the defendants were said to have breached the Share Purchase Agreement and caused the process in clause 9.4 to fail. 3. The defendants submitted that the Second Performance Conditions do not refer to revenue as a general concept but refer to revenue "as specified" in the statement issued by PPK under clause 9.1 "as accepted … or taken to be accepted … or … finally determined". Agreement on Business revenue as contemplated by the clause has not occurred where PPK has given two statements, to which the plaintiffs have objected, such that there is no statement "as accepted by Flynfam or taken to be accepted under clause 9.3(b)". Nor is there a statement "finally determined under clause 9.4" as neither party has taken steps to appoint the Independent Accountant as contemplated by clause 9.4(c). The defendants did not accept that the dispute resolution procedure had failed by reason of their breaches of contract. Rather, the plaintiffs were entitled at all times to appoint of the Independent Accountant under clause 9.4(c)(ii). 4. The defendants submitted that the Second Performance Conditions had not been satisfied and, on one view of it, the Court ought simply dismiss the plaintiffs' case as, absent the final determination of Business revenue, none of the claimed relief was available. That said, the defendants did not oppose the Court determining the Business revenue, as proposed by the plaintiffs. However, under clause 7.2, the time to issue the Second Performance Shares did not arise until three Business Days after the date on which Business revenue is finally determined. Even if the Court makes the final determination in these proceedings, that is yet to occur. Consideration 1. Clause 9.4, "Dispute Resolution Procedure", is an expert determination clause. Clause 9.4(e) provides that the Independent Accountant "must act as an expert … and his (sic) written determination will be final and binding on the parties in the absence of manifest error". Such clauses are construed, where possible, in a way that enables the expert determination clause to work as the parties intended so that parties are held to their bargain: Straits Exploration (Australia) Pty Ltd v Murchison United NL (2005) 31 WAR 187; [2005] WASCA 241 at [14] (per Wheeler JA). 2. Beyond this, clause 19.5 provides that the agreement is governed by the laws of New South Wales, with each party submitting to the non-exclusive jurisdiction of its courts "in respect of any proceedings arising out of or in connection with this agreement". Clause 19.12 provides that "except as provided by this agreement … the rights, powers and remedies provided in this agreement are cumulative with and not exclusive of the rights, powers or remedies provided by the law independently of this agreement". 3. A problem such as this most often arises where a dispute resolution clause contains various steps, or tiers, and one party commences legal proceedings before having completed each step, prompting a stay application by the other contracting party: see WCX M4-M5 Link AT Pty Ltd v Acciona Infrastructure Projects Australia Pty Ltd (No 2) [2022] NSWSC 505 at [106]-[121] and the authorities there cited. The courts are reluctant to enable a party to bypass their contractual bargain to submit their disputes to alternative dispute resolution by commencing proceedings before all preliminary steps have been completed: WCX at [119] citing Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1992] QB 656 at 669 (per Staughton LJ); Westco Air Conditioning Ltd v Sui Chong Construction & Engineering Co Ltd [1998] HKCFI 946; [1998] 1 HKC 254 at [11] (per Findlay J); Siam Steel International Plc v Compass (Australia) Pty Ltd (2014) 293 FCR 260; [2014] WASC 415 at [45] (per Le Miere J). 4. This is not a case where either party has sought to frustrate a dispute resolution procedure by rushing to Court. Rather, before either party was entitled to activate the dispute resolution procedure in clause 9.4, each was obliged to discharge preliminary obligations defined in clauses 9.1 to 9.3. 5. Clauses 9.1 and 9.2 impose two obligations on the defendants at the outset. First, PPK Mining Equipment must prepare an NPAT Statement within a specified timeframe. Second, the defendants must make their records available to Flynfam and its accountants for the purpose of reviewing the NPAT Statement. Clause 9.3 then imposes an obligation on Flynfam to issue a Dispute Notice within a specified timeframe, failing which it will be taken to have accepted the NPAT Statement. 6. Given the amendment of the Second Performance Conditions in May 2015, the NPAT Statements provided by PPK Mining Equipment on 10 November 2016 and, again, on 29 November 2016 did not comply with the requirements of the Share Purchase Agreement as the statements assessed satisfaction of the condition on the basis of NPAT rather than revenue. PPK Mining Equipment failed to provide an NPAT Statement which complied with clause 9.1, as varied. It was thereby in breach of contract. It does not matter that, by this judgment, the terms of the Share Purchase Agreement have been enunciated. The contract, as varied, imposed an obligation on PPK Mining Equipment at the time, which it did not discharge. 7. Where the defendants did not then accept that the Share Purchase Agreement called for the calculation of revenue, as opposed to NPAT, it is difficult to see how the plaintiffs could have appointed an Independent Accountant to determine the matter. It is scarcely to be assumed that the parties intended that the Independent Accountant would determine a factual or legal dispute as to the terms of the Share Purchase Agreement, and whether it had been varied. An accountant's training lies in completely different areas than the questions of construction and legal principle: Strategic Publishing Group Pty Ltd v John Fairfax Publications Pty Ltd [2003] NSWSC 1134 at [16] per Einstein J. The fact that, by the jurisdiction clause, the parties expressly contemplated litigation in this Court is a key contextual indicator that they did not contemplate that all disputes would come before the Independent Accountant: Strategic Publishing at [21]. The dispute as to whether the Share Purchase Agreement had been varied did not fall within clause 9.4. 8. Like any contract, an agreement to resolve a dispute by expert determination may be frustrated, discharged by breach or by reason of waiver, estoppel, election, abandonment or repudiation. Here, the defendants' breach of Clause 9.1 had the consequence that the dispute resolution process could not be completed in accordance with the contract. Nor can the defendants benefit from their breach by contending that Business revenue has not been determined and thus the plaintiffs are not entitled to relief at all: Ipoh v TPS Property No 2 Pty Ltd [2004] NSWSC 289 at [61] (per McDougall J). 9. The effect of an expert determination clause is not to oust the jurisdiction of the Court but to limit, in some circumstances, the matters which the Court can consider: Straits Exploration at [15]. Here the expert determination process did not, and could not, commence where the defendants, in breach of contract, did not provide the starting point for that process, being an NPAT Statement that complied with the Share Purchase Agreement. Nor can that process now be complied with, where the strict time limits in clause 9.1 have expired, and indeed were not complied with at the time. But nor should the plaintiffs be thereby precluded from any entitlement to further shares if, in fact, the Second Performance Conditions were satisfied. In these circumstances, the Court has jurisdiction to determine the matter. 10. Nor do I accept the defendants' submission that, in determining whether revenue exceeded $1 million, the Court is confined to resolve the issues identified by the NPAT Statement and Dispute Notices that were served. The Court is not standing in shoes of the Independent Accountant. The Court is determining whether the plaintiffs satisfied the Second Performance Conditions on the basis of the evidence before the Court, where the expert determination process could not, and now cannot, be undertaken due to the defendants' breach of contract. 11. I also do not accept the defendants' submission that, even if the Share Purchase Agreement is varied, Business revenue has not been determined in accordance with clause 9 such that the time for PPK Group to issue the Second Performance Shares has not yet arrived, being three Business Days after the date on which the Business revenue is finally determined: clause 7.2. The date of breach was 31 October 2016, being ten Business Days after the second anniversary of the Completion Date. No NPAT Statement meeting the description of the Share Purchase Agreement as varied was supplied, either on time or at all. Revenue 1. The plaintiffs contend that the NPAT Statement did not include all revenue and did not properly account for the "hydraulic business" nor revenue from the "Wollongong branch", which I understand to be a reference to PPK Mining Equipment's Port Kembla workshop. The defendants were said to have thereby breached the Share Purchase Agreement, causing loss and damage. But for these breaches, Flynfam would have received 3,441,039 shares in PPK Group on 16 October 2016. 2. The revised NPAT Statement sent on 29 November 2016 put revenue at $762,056. The experts agreed that this figure should be adjusted for revenue earned in October 2015 and October 2016 but outside the precise dates of the NPAT period, being 17 October 2015 and 16 October 2016. As adjusted, revenue was $743,689. To this, Ms Delbridge made further adjustments resulting in revenue of $1,525,856. By and large, Mr Jackson did not agree with these adjustments. 3. Before turning to points of contest between the accounting experts, it is necessary to return to the Share Purchase Agreement. Clause 1.1 included the following relevant definitions, which should now be construed as follows: (emphasis added, changes from original marked) Business revenue NPAT means … the revenue net profit after tax of the Business for the 12 month period ending on the day immediately before the second anniversary of the Completion Date calculated in accordance with the Accounting Standards after making the Agreed Adjustments. Business means the business of manufacturing and selling mining equipment and parts primarily for use in the underground coal mining sector carried on by Exlec immediately before Completion. 1. In determining whether the Second Performance Conditions were satisfied, the focus is on the revenue of the Business, being Exlec's business carried on immediately before Completion, to which Agreed Adjustments are made, and then calculated in accordance with the Accounting Standards. Schedule 3, entitled "Agreed Adjustments" provides for various expenses to be excluded or included when calculating NPAT as follows: For the purpose of calculating the Business NPAT, the following adjustments shall be made: (a) any head office or management fees, charges or expenses not directly attributable to the Business charged by PPK, the Buyer or any other Related Body Corporate of PPK (other than the Exlec Group) to the Business will be excluded; (b) any expense paid by the Buyer, PPK or any other Related Body Corporate of PPK (other than the Exlec Group) that relate to the conduct of the Business will be included; and (c) any re-location or other expenses incurred in connection with the integration or relocation of the Business into the Buyer's business or premises after Completion will be excluded. 1. The Agreed Adjustments do not include any adjustment for revenue, this being the starting point of any calculation of profit. Where the Agreed Adjustments did not require any adjustment to be made, it follows that revenue is to be calculated in accordance with the Accounting Standards. Accounting standards 1. An initial question is what Accounting Standards apply to the calculation of revenue. Clause 1.1 defines Accounting Standards as: (emphasis added) Accounting Standards means: (a) the applicable accounting standards under the Corporations Act and mandatory professional reporting requirements; (b) to the extent that the standards and requirements referred to in paragraph (a) do not apply or do not clearly govern any particular aspect of the preparation of the financial statements, generally accepted accounting principles, policies and practices in Australia for an entity similar to the relevant Group Company. Group Company means Exlec or Exlec Holdings: Clause 1.1 (definition of "Exlec Group"). 1. Turning to sub-paragraph (a) of the definition of Accounting Standards, as PPK Group is listed on the ASX, it is a reporting entity and required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act 2001 (Cth) by complying with accounting standards issued by the AASB. The relevant accounting standard is AASB 118, Revenue. (AASB 118 has since been replaced by AASB 15, Revenue from Contracts with Customers, but the experts agreed that AASB 118 is the applicable standard as it was in force during the NPAT Period). 2. Exlec and Exlec Holdings are small proprietary companies and not required to prepare financial reports under the Corporations Act nor apply accounting standards: sections 45A(2) and 292(2), Corporations Act. As divisions of the PPK Group, Exlec and Exlec Holdings' accounts became part of PPK Group's consolidated financial statements. 3. The plaintiffs submitted that sub-clause (a) did not apply as there are no mandatory requirements or standards prescribed by the Corporations Act for Exlec and Exlec Holdings. Rather, generally accepted accounting principles should apply, as described by Ms Delbridge. The defendants submitted that Accounting Standard AASB 118 applied where, at the time of calculating revenue, Exlec and Exlec Holdings would be integrated divisions within a publicly listed company. This was said to accord with the scheme of the Share Purchase Agreement, where Exlec's business was to be integrated into the defendants' business in the first year after the Completion; the Second Performance Conditions were based on the financial performance of Exlec's business as integrated. 4. This is essentially a question of construction of the Share Purchase Agreement. The principles are uncontentious. The meaning of the contract is determined objectively, by reference to what a reasonable person would have understood the contract to mean having regard not only to the text of the document but to the surrounding circumstances known to the parties and the purpose and object of the transaction: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35 at [22] (per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ). The context includes the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46] (per French CJ, Nettle and Gordon JJ) citing Electricity Generation Corporation; Codelfa. 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. 5. The definition of "Business NPAT" focuses attention on the financial performance of the Business, being the business carried out by Exlec. I consider that the Accounting Standards mean the standards applicable to Exlec rather than to PPK Group, as it is Exlec's financial performance which is being measured. Consistently with this, sub-paragraph (b) of the definition of Accounting Standards directs attention to generally accepted accounting principles applicable "for an entity similar to" Exlec or Exlec Holdings. 6. Similar language is used elsewhere in the Share Purchase Agreement which supports this construction. The plaintiffs gave Sellers' Warranties in the Share Purchase Agreement: Clause 11 and Schedule 1. In particular, clause 4.1 of Schedule 1 stated: (emphasis added) 4. The Accounts 4.1 Basis of preparation The Accounts: (a) have been prepared as at [10 October 2014] in accordance with generally accepted accounting principles, policies and practices in Australia for an entity similar to Exlec and show a true and fair view of the financial position and the assets and liabilities of Exlec … 1. As there are no applicable accounting standards under the Corporations Act which apply to Exlec, I consider that revenue must be calculated in accordance with generally accepted accounting principles. What then are "generally accepted accounting principles" and do these principles depart from how the defendants calculated revenue in the revised NPAT statement or what, if any, adjustment should be made? Generally accepted accounting principles 1. Generally accepted accounting principles (GAAP) has been described as an undefined term in Australia: Brand v Digi-Tech (Australia) Ltd [2002] NSWSC 416 at [1212] (per Einstein J). In the United States, GAAP is "a technical accounting term that encompasses the conventions, rules and procedures necessary to define accepted accounting practice at a particular time. It includes not only broad guidelines of general application, but also detailed practices and procedures. Those conventions, rules and procedures provide a standard by which to measure financial presentation": Brand at [1212]. A similar definition now appears in the Encyclopaedic Australian Legal Dictionary. 2. Some evidence of the general accepted accounts principles used by Exlec may be seen from its own accounts. Exlec's financial statements for the year ended 30 June 2012, signed by Mr Flynn, were prepared in accordance with the accounting policies outlined in Note 1 to the financial statements. Note 1, "Statement of Significant Accounting Policies" included: Revenue and Other Income Revenue is measured at the fair value of the consideration received or receivable … Revenue from the sale of goods is recognised at the point of delivery as this corresponds to the transfer of significant risks and rewards of ownership of the goods and cessation of all involvement in those goods. Revenue recognition relating to the provision of services is determined with reference to the stage of completion of the transaction at the end of the reporting period and where outcome of the contract can be estimated reliably. Stage of completion is determined with reference to the services performed to date as a percentage of total anticipated services to be performed. Where the outcome cannot be estimated reliably, revenue is recognised only to the extent that related expenditure is recoverable. 1. As I read it, this accounting policy aligns with AASB 118. 2. Ms Delbridge turned to "transfer pricing" principles applied to the treatment of internal revenue when preparing management accounts. Management accounting measures, analyses and reports financial and non-financial information in order to assist managers to fulfill the goals of an organisation: Alnoor Bhimani, et al, Management Accounting and Cost Accounting (7th ed, 2018, Pearson) at 561. Where an organisation comprises individual sub-units, "transfer prices" may be used to evaluate performance of the sub-units. The "transfer price" is the price one sub-unit of the organisation charges for a product or service supplied to another sub-unit. The operating profits can then be used to evaluate the performance of each sub-unit. Three generally accepted methods for determining transfer price are market-based, cost-based and negotiated transfer prices. If cost-based transfer prices are used, further forms of transfer pricing may be considered including full cost, full cost plus a markup or variable cost plus a fixed fee. 3. Ms Delbridge considered that, where Exlec was engaged by another division of PPK to provide a good or service during the NPAT period, Exlec ought be allocated revenue in the form of a transfer price for the purpose of determining revenue. Further, Ms Delbridge considered that the appropriate transfer price was "market-based". Ms Delbridge referred to Jae K Shim, et al, CFO Fundamentals (2012, Wiley) at 326, where the authors considered that market price was the best transfer price to use in order to maximise the profits of the company as a whole and was suitable where a competitive market price existed and the divisions of the company were independent from each other. Similarly, the authors of Don R Hansen, et al, Cost Management Accounting and Control (6th ed, 2007, South West College ISE) observed at page 373, "If there is an outside market for the … good to be transferred … and that outside market is perfectly competitive, the correct transfer price is the market price", albeit perfectly competitive markets rarely exist. When imperfections exist in the market, negotiated transfer prices may be a practical alternative. 4. The selection of market-based transfer pricing here is perhaps curious where there is no evidence as to whether the external market for Exlec's goods and services was "perfectly competitive", nor that PPK's divisions were independent from each other. Indeed, the collaborative efforts of the divisions to remedy the Coaltram defect suggests that the latter condition was not present. The surrounding circumstances known to the parties when the Share Purchase Agreement was executed included the depressed state of the coal mining industry. Mr Flynn was personally cognisant of the difficult financial times, whilst PPK sought to take advantage of the opportunities this presented by acquiring assets at the bottom of the mining cycle in the expectation that values would appreciate as the cycle "rebounded and strengthened". In that environment, the market for Exlec's goods and services was likely highly competitive in the sense that those providing goods and services were competing for scarce customers, with achievable prices being heavily discounted from usual pricing in order to secure limited opportunities. 5. There is also no evidence of the market price of Exlec's goods and services, either usually or in the depressed state of the coal mining industry at the time. Ms Delbridge was not provided with information to support the external revenue for Exlec's products, nor was this information available in PPK's accounting software. Ms Delbridge used cost plus a margin as a proxy for market price, which seems to be essentially the same as what PPK did when preparing the NPAT statements: see [153]-[155]. 6. Nor is it clear why "transfer pricing" forms part of generally accepted accounting principles for an entity similar to Exlec. Transfer pricing may well form part of generally accepted accounting principles for an entity similar to PPK Group, comprising numerous divisions contributing goods and services to each other. Transfer pricing is surely irrelevant to a small proprietary company. There is no mention of transfer pricing in Exlec's Statement of Significant Accounting Policies, nor would one expect there to be for a small proprietary company. 7. In summary, whilst I agree that the definition of Accounting Standards focusses on the standards applicable to Exlec – to which no standards apply – there is no relevant difference between accounting standard AASB 118 – applied by PPK Group – and generally accepted accounting principles applicable to Exlec. In particular, I do not consider that "transfer pricing" is a generally accepted accounting principle pertaining to Exlec as a small proprietary company as opposed to a multidivisional corporate entity such as PPK Group. Further, I do not accept that "market price" transfer pricing is an Accounting Standard within the meaning of the Share Purchase Agreement, nor is there sufficient evidence to support the selection of this particular method of transfer pricing as suitable. Internal jobs 1. Turning then to the points of contest between the accounting experts, the accounting issue of largest significance was revenue for jobs partially performed in the NPAT period, where the job required labour and parts from more than one division of PPK. PPK's policy was to allocate revenue between the divisions as follows: 1. revenue for the sale of parts was recognised on sale to an external customer; 2. revenue for work was recognised during the period on a percentage completed basis; and 3. revenue so recognised was allocated between divisions in proportion to each division's contribution to the total contribution of all divisions. 1. Ms Wilson explained PPK's process where one division of the business contributed to a job. Every individual transaction in the job, whether it be revenue or costs, was entered into work in progress (WIP) and held in the general ledger in a balance sheet account. At the end of each month, the operations and finance staff in each PPK division undertook a WIP review, apportioning the potential profit for the job against the work completed to that point. This enabled a calculation of the revenue and costs that should be recognised to date for that job on a percentage completion basis. An accrual was then processed to account for the revenue and costs for the job to date. Ms Wilson understood this policy to be in accordance with AASB 118, using the matching principle to recognise revenues and related expenses in the same period. The experts did not suggest otherwise. 2. When preparing the NPAT Statements for Mr Beddow, Ms Wilson identified all internal jobs for which labour had been performed by Exlec staff or an Exlec part had been used. Once these jobs were identified, the revenue, expenses and profit recognised during the NPAT period was recorded, together with the costs of the labour and parts attributable to Exlec. Ms Wilson then calculated the share of revenue, based on the total of Exlec parts, materials or labour, which totalled $115,336. Having totalled Exlec's costs, Ms Wilson made an allowance for Exlec's share of profit on the job by calculating the percentage of total Exlec costs against the total costs of the job, multiplied by the overall profit on the job. 3. Ms Wilson reviewed her work again to capture any jobs previously missed or labour identified in archived transactions. Ms Wilson also classified the jobs into those which produced revenue and those which did not (being internal unrecoverable costs, non-customer related jobs and the manufacture of parts for warehouse stock). The total for Exlec parts, materials and labour was $182,291, of which $88,683 related to revenue producing jobs. In order to arrive at revenue, Ms Wilson added 14%, being Exlec's share of profits, making a total of $103,227. 4. Ms Delbridge considered that, rather than $103,227, PPK should have recognised revenue for internal jobs at $115,936. Rather than apply the 14% margin used by Ms Wilson, Ms Delbridge used a higher margin of 16.4%, by dividing the gross margin of $14,544 in Ms Wilson's spreadsheet by total costs of $88,683. In addition, Ms Delbridge appears to have classified stock build ($8,576) as revenue, to which she applied the same margin of 16.4%. 5. It was not clear to me why Ms Delbridge considered a higher gross margin was more appropriate, and even less clear why inventory should be treated as revenue to which the same gross margin should be added as if the inventory had been sold. Mr Jackson was unsurprisingly firm on this subject, explaining that under generally accepted accounting principles and accounting standards, stock is not revenue but an accumulation of costs that sits on the balance sheet, "It's stock that has been manufactured, it hasn't been sold to anyone, and it's sitting there ready for sale." I note that Exlec's balance sheet attached to the Share Purchase Agreement included stock as a current asset in the balance sheet, as did Exlec's financial statements for 2012. 6. As explained by Ms Wilson, her calculation of revenue attributable to internal jobs accords with AASB 118 and, indeed, with the accounting policies which Exlec applied before acquisition: see [164]. PPK recognised revenue earned by Exlec for internal sales on a cost plus a share of profit basis. Although Ms Delbridge did not regard this as the preferred approach, she agreed that it was nonetheless a generally accepted approach. In the absence of any particular reason why Ms Delbridge's gross margin was a better measure of the fair value of consideration receivable, I see no reason to depart from Ms Wilson's calculations. Recognising revenue on inventory is at odds with accounting standards and generally accepted accounting principles, including those applied by Exlec before acquisition, where revenue for the sale of goods was recognised at the point of delivery and inventory was recorded on the balance sheet. No adjustment to the calculation of revenue should be made on this account. 7. The largest adjustment proposed by Ms Delbridge can now be considered. The main part of the FLP-1 solution was the componentry produced by the MONEx Division. Of the 41 enclosures made, only fourteen had the MONEx componentry installed. Of these, six were sold during the NPAT period for $85,020 (including the MONEx componentry), being $14,170 each. 8. Exlec's employees assisted with the fit out of the enclosures. Exlec's labour and materials was $6,253.82 per FLP-1 solution. However, the six FLP-1 solutions were sold at a loss, where the average price was less than the labour and materials expended by all PPK divisions to each FLP-1 solution. Most of the remaining 35 enclosures (with or without MONEx componentry) were never used as part of a FLP-1 solution. A few were sold after the end of the NPAT period while 16 were used as stock build and 21 enclosures were written off. 9. Ms Delbridge opined that revenue for all 41 enclosures ought to be recognised at full market value. In the absence of evidence of market value, Ms Delbridge added a profit margin of 16.4% to the cost of $6,253.82, resulting in an additional $298,439 in revenue. Mr Jackson opined that revenue ought to be allowed for the six FLP-1 solutions which were sold, at a cost of $6,253.82 per enclosure, giving a total of $37,523. However, no profit margin should be added where the FLP-1 solution was never intended to generate revenue for PPK and did not in fact generate a profit. In cross examination, Mr Jackson also agreed with Ms Delbridge's addition of a further $6,171 for four other work items relating to the FLP-1 solution. 10. I struggle to see why any revenue should be recognised in respect of Exlec's contribution to the FLP-1 solution. Although it was possible to bill for six FLP-1 solutions, the FLP-1 solution was never intended to generate revenue but was a necessary response to the unplanned movement problem which had resulted in prohibition notices being issued for the Coaltram vehicles in the field. In this regard, I do not consider there is any relevant difference between AASB 118 and generally accepted accounting principles. The accounting standard notes, "Revenue is recognised when it is probably that future economic benefits will flow to the entity and these benefits can be measured reliably." AASB 118 defines revenue as: Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity … 1. No future economic benefit was expected to flow to Exlec beyond sharing the burden, together with other divisions of PPK, of remedying a serious product defect. Nor can creating a 'fix' for a major product defect be described as Exlec's ordinary activities, nor would it have been expected to result in an increase in the company's value but rather to staunch the losses which might otherwise be incurred by other divisions of PPK Group. 2. I consider that Ms Delbridge's approach defies basic accounting concepts, by recognising revenue on unsold stock and then at full market value where the items which were sold were sold at a loss. As such, I do not accept that any adjustment to revenue should be made, either the adjustment proposed by Ms Delbridge nor that proposed by Mr Jackson, where the flameproof enclosures were not manufactured for the purpose of generating revenue, were by and large not used, and those which were sold were sold at a loss. Deposits 1. In December 2015, Exlec issued a quote to Premron CHS System for the provision of flameproof enclosures. The terms of the quote required payment of a 40% deposit on placement of the order. In January 2016, Premron placed an order for items with a total price of $636,382.40. Exlec issued an invoice for the deposit, being $254,552.96, which was paid. Work commenced. 2. In accordance with PPK's usual accounting policies, revenue for the job was not recognised when the invoice was issued or the deposit paid. Revenue was recognised over the life of the job on an accrual basis. However, in March 2016, Premron informed Exlec that the work was to be placed "on hold". Some further work was performed after March 2016 but, by May 2016, work had ceased. As at 31 May 2016, PPK's job transaction report recorded charges for all work totalled $163,264. In May 2016, revenue of approximately $156,000 was recognised based on the completion of the job to that point. 3. No further work was performed and no further revenue was recognised for Exlec prior to 16 October 2016. The NPAT Statement nonetheless recognises revenue of $179,807.84, which seems on the high side given Ms Wilson's evidence, but there it is. Ms Wilson said the job was reactivated in March 2018. 4. The plaintiffs submitted that "money in the bank should be counted as revenue". When requesting that the job be put on hold, Premron did not ask for a refund of the deposit. The job was "cancelled". The "cute distinctions" drawn by Mr Jackson between cash and revenue were said to be inappropriate. Rather, revenue should be recognised on the issue of the invoice. 5. This submission overlooks the fundamental demarcation in accounting between the cash method and the accruals method. The job was not "cancelled" but put "on hold", apparently in the expectation that the job would later proceed, either in the same form or in a different form. Premron's emails did not address what was to happen to the unearned part of the deposit but appeared to proceed on the basis that the money would be held by Exlec pending resumption of the job and then applied to further work. 6. Ms Delbridge accepted that the deposit was not revenue unless Exlec was entitled to retain it. I consider that the revenue which has been recognised accords with accounting standards or generally accepted accounting practice, although I doubt there is any difference on this subject. Under AASB 118, the receipt of payments is irrelevant to the recognition of revenue for the supply of both services and goods. The use of the percentage completed basis complies with AASB 118. It would have complied with the policies used by Exlec in its 2012 financial statements. No adjustment need be made for this item. Business 1. The NPAT Statement did not include $161,794 revenue from four jobs undertaken by Exlec during the NPAT period, overhauling hydraulic mining equipment, where this revenue "reflects the establishment of a new 'hydraulics' business whilst under PPK ownership": see [97]. Ms Delbridge's included this revenue on the basis that Exlec had a "hydraulic business" before it was acquired by PPK. 2. Again, it is necessary to return to the Share Purchase Agreement, applying the principles set out at [150]. The revenue to be calculated by the NPAT Statement was the revenue "of the Business", defined as: (emphasis added) Business means the business of manufacturing and selling mining equipment and parts primarily for use in the underground coal mining sector carried on by Exlec immediately before Completion. 1. The business is expressly described as "manufacturing and selling mining equipment and parts". Whilst Exlec may have engaged in other activities at the time of purchase, such as service or repair, it was clearly Exlec's manufacture and sale of mining equipment and parts which caught PPK's eye. PPK's internal communications refer to Exlec's "range of current and future products that are highly complimentary to us". The "Goal [was] to secure the plans and COCs", where PPK identified value in Exlec's intellectual property, drawings and accompanying certifications. Mr Schweizer was tasked with ensuring that the sale resulted in PPK acquiring the right to manufacture Exlec's products. Mr Levison's sought approval from the board noting "the technology we are getting is immense". PPK was also keen to acquire Mr Flynn and his skilled staff, but the prize was as described in the Share Purchase Agreement, being "the business of manufacturing and selling mining equipment and parts". In drafting the Share Purchase Agreement, PPK has described the business as PPK perceived it at the time following due diligence. Mr Flynn did not propose any amendment to the definition. 2. The plaintiffs submitted that "Business" was not limited to manufacture and sale of mining equipment and parts but included the processes permitting those sales, including repairs and overhaul. This is not obvious. I consider that the manufacture and sale of mining equipment and parts is a distinct activity to repair and overhaul. The plaintiffs submitted that regulation of the mining industry required the products manufactured and sold by Exlec to be maintained and overhauled. Assuming that to be the case, it does not necessarily follow that the business which sold the mining equipment will maintain and overhaul it. Mr Schweizer explained that separate certifications were needed to manufacture approved products and to perform service and overhaul services on those products. Further, where the words used in the definition of "Business" are clear, I do not accept the plaintiffs' submissions that these words mean something else. 3. The business was further identified by a temporal element, being the business being "carried on by Exlec immediately before Completion". The words "immediately before" are straightforward and envisage the business being carried on by Exlec in the days, or perhaps, weeks before Completion. Exlec was then operating a minimal levels due to cashflow constraints. That is the business which PPK reviewed in its due diligence process commencing on 19 September 2014. The deal was executed less than a month later. I do not accept the plaintiffs' submission that the period "immediately before Completion" extended to include the biggest job undertaken by Exlec, being at least one year. Again, that is not what the contract says and hardly reflects the common sense notion of "immediately before". 4. There is no doubt that Exlec was carrying out a business of manufacturing and selling mining equipment and parts immediately before Completion. Amongst PPK's records is a brochure which describes Exlec as engaged in the design, manufacture and overhaul of electrical equipment used in the coal mining industry, with its main focus on hazard area electrical equipment. Details of Exlec's products were provided in the brochure, being flameproof enclosures, electrical equipment, accessories and programmable controllers. Whilst the brochure is undated, it was issued by Exlec Trading and bears an address which indicates it must have been produced after May 2013. Ms Wilson said that there were over 2,000 Exlec products entered into PPK's database when PPK acquired the Exlec business. Amongst these parts was one part with hydraulic components, being the HFS-45 Foot Controller. The Business included the manufacture and sale of this component. Any revenue from the sale of this part is already included in the NPAT Statement. Hydraulics overhaul 1. The work the subject of the four "hydraulic" jobs is described in quotes prepared by Mr Theodoridis in November and December 2015 to Spartan to repair hydraulic machinery back to original condition. The quotes refer to reconditioning, replacing, overhauling, repairing and servicing various components and testing the repaired item. Self-evidently, this was not part of the Business as defined in the Share Purchase Agreement, being "manufacturing and selling mining equipment and parts". The repair and overhaul of mining equipment was not the Business on which the parties agreed that revenue would be calculated for the purpose of determining whether the Second Performance Conditions were satisfied. 2. In any event, Exlec did not carry on the business of hydraulics repair and overhaul immediately before Completion. Indeed, Exlec was not undertaking repair or service work at all due to its precarious financial position: see [41]. 3. Mr Flynn referred to the design, construction and installation of the electrical system for continuous miners and a hydraulic power-pack for UGM Engineers in 2009. Whilst the word "hydraulic" appears in the description, Mr Partridge was responsible for the job and said Exlec's work was "purely electrical" and all hydraulic work was sub-contracted to hydraulic engineers. Mr Partridge said Exlec did not have the capacity to undertake hydraulics work and did not market such work. 4. In about 2011, Mr Flynn said that Exlec "started making a push towards increasing the product design and development" of mobile bolters, drill heads, roof bolters, rib bolters and hydraulic components. Mr Flynn considered that Exlec was missing out on revenue involved with the manufacture and supply of hydraulics with customers sourcing this equipment themselves for Exlec's projects. 5. Exlec did a job for Caledon Coal on a continuous haulage system (Prairie Flexiveyor), which had hydraulic components. Mr Flynn said this project represented an opportunity for Exlec to move into the manufacture and supply of hydraulic componentry. Before the Caledon Coal project, Mr Flynn agreed that Exlec supplied and manufactured one hydraulic component, being the foot pedal, and had once manufactured an oil tank. Otherwise, all Exlec work was on electrical systems. 6. Mr Luttenberger was then the General Manager of Engineering for Caledon Coal and recalled that Exlec was contracted to design, manufacture and supply electrical flameproof enclosures, electrical hardware and components and associated cabling and fitout for a continuous miner and a continuous haulage system. However, the design of hydraulic schematics for both machines, circuitry, the supply of associated hydraulic hardware and supporting components was contracted out by Caledon Coal to Bosch Rexroth Australia. Mr Luttenberger prepared the purchase order for approval by the managing director and chief financial officer of Caledon Coal. Mr Luttenberger said that Caledon Coal "absolutely" had a policy that a specialist hydraulic company, Bosch Rexroth, was exclusively authorised to design and supply hydraulics for the Flexiveyor. 7. Mr Luttenberger was shown a number of Exlec invoices which referred to hydraulic elements and explained that the items were for an electronic switch to measure the temperature of hydraulic oil, for the design and drafting of the cable and hydraulic routing equipment locations ("just like a house plan") and the supply of hydraulic oil in drums. Exlec also billed for testing the machine, but this was testing of the whole machine (including the electrical control circuitry) which was carried out under the supervision of Ashley Debnam and possibly staff from Bosch Rexroth. Mr Debnam was Caledon Coal's project manager who was located on site at the Exlec workshop and assisted Exlec with its work on the Flexiveyor. To extent that the job on Caledon Coal's Flexiveyor involved hydraulic components, a specialist hydraulic company, Bosch Rexroth, was involved under a contract with Caledon Coal to undertake that work. Exlec's involvement in that part of the job was incidental. Exlec employees assisted in assembly. 8. Mr Luttenberger volunteered that "Exlec at that time were a very competent electrical overhaul shop, workshop. They manufactured enclosures, they designed systems." However, he rejected the suggestion that Exlec undertook hydraulic work, which would require a "hydraulic shop performing repairs, performing design work, and overhauling hydraulic components." 9. From early 2013 to July 2014, Exlec hired Jim Jennings as "Hydraulics Sales Engineer" to design and develop hydraulic components. By the time Mr Jennings left Exlec, no hydraulic components had been sold. 10. On 25 June 2014, Mr Theodoridis began work at Exlec Trading as Hydraulics Applications Engineer. His duties included hydraulic design and hydraulic sales. Mr Theodoridis said his role at Exlec was to design hydraulic equipment. On 15 July 2014, Exlec Trading applied for a provisional patent for a roof or rib bolting device which "may be powered by hydraulic, pneumatic, electric or a combination of these." 11. During Mr Theodoridis' time at Exlec, he was organising a part number structure for the hydraulic fittings at Exlec. He appears to have been undertaking a stocktake of the existing equipment and items at Exlec's premises which could be used in developing such products, "I began looking into … collating all the parts, looking at what we had. However … during this period is when the changes happened from Exlec to PPK." Exlec had a hydraulic system on the machines but it was not functional, nor was there a need for Mr Theodoridis to use it to operate or test hydraulic systems whilst he was at Exlec. 12. Mr Theodoridis' employment was short lived. On 28 August 2014, his employment was terminated. According to a letter of termination from Mr Flynn, "As a result of current economic conditions, the position of Hydraulic Applications Engineer is no longer needed." 13. Exlec also had a second hand shuttle car and feeder breaker acquired in January 2014 from a customer in return for an outstanding debt: see [44]. Mr Flynn said he intended to refurbish this equipment and put it back in working order so that it could be leased or sold. Mr Flynn said the shuttle car and feeder breaker was stripped, cleaned and assessed ready for re-assembly. The work had been done by himself with the help of Mr Jennings and Mr Theodoridis. This work required experience with hydraulic equipment. Mr Partridge was worked at Exlec when this work was done and said that staff employed to work on the Caledon Coal job were deployed the strip the machine. He did not agree that it involved hydraulic expertise. 14. The suggestion that Exlec's business included hydraulics work before Completion critically depends on the evidence of Mr Flynn, to which I attach no weight in the absence of corroboration from a reliable source. This contention also depends on the expert evidence of Mr Dunlop, which was not of great assistance given its general nature and where it was not clear what evidence he had relied on in reaching his conclusions or how he weighed the competing evidence. Beyond this, the plaintiffs' evidence was largely quotes or invoices which included the word "hydraulic", but absent evidence that these quotes were accepted or that Exlec undertook hydraulics work, as opposed to used a hydraulic component obtained from a third party. 15. The word 'business' imports the notion of system, repetition and continuity where the question whether someone is carrying on a particular business depends on a close examination of the facts: Hungier v Grace & Bent (1972) 127 CLR 210 at 216 (per Barwick CJ). The expression 'carry on business', in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts and not simply the effecting of one solitary transaction: Smith v Capewell (1979) 142 CLR 509 at 517 (per Gibbs J). In Hope v Bathurst City Council (1980) 144 CLR 1, Mason J observed that "carrying on" implied the repetition of acts and activities which possess something of a permanent character: at 8. As such, "carrying on the business of grazing" denoted grazing activities undertaken as a commercial enterprise in the nature of a going concern, being activities engaged in for the purpose of profit on a continuous and repetitive basis. 16. Mr Flynn does appear to have contemplated expanding Exlec's business into the hydraulics and hired Mr Theodoridis to that end, albeit briefly. Exlec was then engaged in preliminary steps in developing an hydraulics business or products but these steps appear to have ceased due to the difficult financial circumstances at the time, including making Mr Theodoridis redundant. Mr Flynn said that, as at October 2014, Exlec was doing research and development work on a number of hydraulic products. The manufacture and sale of such items would have fallen within the definition of Business, but these products had not reached that stage of development. Mr Flynn also had an idea to refurbish the disused shuttle car for hire to third parties. But these ideas did not comprise a "business" which was "carried on" immediately before Completion. Whilst Mr Flynn said Exlec had the capability to overhaul hydraulic equipment – and I should not be taken as accepted this – the capability to do so does not mean that Exlec was carrying on such a business. The revenue generated in the four 'hydraulics' invoices was clearly referable to a new business established by Mr McNamara at Exlec's workshop after Completion. No amendment to the NPAT Statement is required. Certificates of Recognition 1. The plaintiffs contend that, when the Certificate of Recognition was obtained for the Port Kembla workshop in 2015, PPK was to some extent assisted by technical documentation already held by Exlec when it was acquired in October 2014. The Certificate of Recognition for the Port Kembla workshop was issued in the name of Exlec. On this basis, the plaintiffs claim the revenue received by PPK Mining Equipment from electrical overhaul work conducted at Port Kembla as revenue of Exlec's business. 2. Apparently unconstrained by the language of the Share Purchase Agreement, the plaintiffs submitted that the relevant criteria was whether the revenue earning activities conducted at the Port Kembla workshop were commercial activities in which Exlec carried on business immediately prior to the purchase. The plaintiffs submitted, "If any division of PPK did the kind of work in which Exlec previously carried on business, that revenue counts." Further, "Even if Mr Hall had been sent down to Melbourne to set up a new division of PPK and worked completely independently of any other former Exlec employees, to the extent that the (hypothetical) Melbourne office was doing the same type of work that Exlec had done immediately prior to the merger was enough to mean that that revenue was caught by the contractual description of revenue." 3. Applying this logic, as Exlec was in the business of manufacturing and selling mining equipment and parts prior to Completion, then Exlec was entitled to all revenue earned by all divisions of the PPK Group for manufacturing and selling mining equipment and parts in the NPAT period. That would certainly make achieving the earnout effortless but would have the absurd consequence that the earnout clauses depended not on Exlec's post-completion efforts but the efforts of others. The courts will construe commercial contracts so as to avoid making commercial nonsense: Electricity Generation Corporation at [35] (per French CJ, Hayne, Crennan and Kiefel JJ). The revenue included in the NPAT Statement is the revenue "of the Business" where "Business means the business of manufacturing and selling mining equipment and parts … carried on by Exlec immediately before Completion. It does not include the business carried on by PPK Mining Equipment in Port Kembla after Completion. Nor does it include the business of assisting others to obtain accreditation for a workshop. 4. Nor is it a case of 'tracing' how the assets acquired by PPK under the Share Purchase Agreement, including "Manufacturing Licences", were later deployed. I do not accept the plaintiffs' submission that the defendants are required to "properly account for revenue attributable to the Exlec Group intellectual property" in the NPAT period. That submission is a long way from the terms of the Share Purchase Agreement. That PPK was able to accelerate the accreditation of the Port Kembla workshop by using Exlec's existing accreditation does not have the consequence of retrospectively enlarging the Business carried on by Exlec immediately before Completion. 5. By this logic, the plaintiffs claim revenue for 17 jobs undertaken at the Port Kembla workshop during the NPAT period. Each job included some overhaul of flameproof electrical equipment (as well as other work) which could not have been performed without the Certificate of Recognition ANZEx SF 15.1054 obtained for the Port Kembla workshop. All the jobs were certified by Mr McLean and Mr Ornelas as the "Responsible Persons" under the licence. All the jobs were for existing customers of PPK Mining Equipment, for which Exlec had never previously performed work. Labour was provided by PPK Mining Equipment's staff at Port Kembla, not Exlec's employees. Some Exlec parts were used in the jobs, the revenue from which is already included in the NPAT Statement. 6. As the defendants submitted, it is a distortion of the plain meaning of the words to say that revenue earned by another division of PPK is revenue "of" the Business merely because it could not have been earned by the other division without Certificate of Recognition ANZEx SF 15.1054 (not to be confused with Exlec's Certificate of Recognition ANZEx SF 14.1050) or it is the "kind" of work which Exlec previously carried on. The revenue from the 17 Port Kembla jobs was not revenue of the Exlec business, let alone revenue of that Business as at October 2014. It is not necessary to make any adjustment to revenue on account of the Port Kembla jobs, nor for that matter to analyse Mr Flynn's quantification of the portion of these jobs which "related to" Certificate of Recognition ANZEx SF 15.1054 or his estimate of the market value of these items, nor Ms Delbridge's calculations. 7. After Completion, modification was made to Exlec's Certificates of Recognition to allow it to undertake overhaul and repair of equipment for the PPK MONEx division. Applying the same logic, the plaintiffs contended that revenue should include overhaul and repair carried out by Exlec using these Certificates of Recognition. Mr Flynn claims that eleven repair jobs could not have been undertaken by the MONEx Division without Exlec's varied licence. This was disputed by Andrew Pearce, the Electronics Production Supervisor in the MONEx Division. All jobs were for PPK Mining Equipment's Coaltram customers (not Exlec customers), involved work on MONEx equipment and were carried out at the MONEx workshop by MONEx division employees using MONEx parts. The plaintiffs contend that 100% of the revenue should be allocated to Exlec. 8. Again, whether or not Exlec's business immediately before Completion included overhaul and repair work, that was not "Business" within the meaning of the Share Purchase Agreement, which was confined to the business of manufacturing and selling mining equipment and parts. Even if Business extended to overhaul and repair work, Exlec's business did not include this particular work where Exlec was not permitted to perform such repair work at Completion (Certificate of Recognition ANZEx SF 14.1050 was not varied until 2015) and Exlec was not then overhauling or repairing the MONEx system. Indeed, PPK was initially interested in buying Exlec so that it would do this work. 9. Finally, the NPAT Statement includes revenue in respect of ten jobs done in the Tomago workshop. The plaintiffs contend that, as the work could not have been performed without Exlec's Certificate of Recognition, all of the revenue should be counted. Labour and materials supplied by other PPK division on these jobs should be ignored. Whilst it is true that Exlec's Certificates of Recognition formed part of the assets acquired by PPK, it does not have the consequence that work undertaken using these assets comprises revenue. Calculation of revenue in the NPAT Statement is not a 'tracing' exercise, capturing all revenue derived from Exlec's assets. Applying the definitions in clause 1.1, revenue is calculated in accordance with the Accounting Standards. As such, the revenue of Exlec's business was derived from the sale of manufactured goods or the contribution of its employees to jobs completed, either for Exlec or other divisions of the PPK Group. That revenue was recorded and calculated in accordance with AASB 118. No adjustment is required to reflect the fact that Exlec did the work, or assisted others to do the work, under Certificates of Recognition transferred from Exlec to PPK under the Share Purchase Agreement. ORDERS 1. It follows that, although the defendants were in breach of the Share Purchase Agreement as varied by failing to provide an NPAT Statement calculating the revenue of Exlec's business, either on the due date of 31 October 2016 or at all, there is no loss. The revised NPAT Statement calculated revenue, albeit proceeded to calculate NPAT. The revenue then calculated was less than $1 million. That calculation stands. The plaintiffs did not satisfy the Second Performance Conditions and were not entitled to the Second Performance Shares. 2. Although the plaintiffs have succeeded in obtaining declaratory relief in respect of the variation of the Share Purchase Agreement, the evidence on this issue was confined and uncontentious. It was a legal question on which the principles were clear. Success on this part of the case has also been for nought where the earnout benchmark was not achieved in any event. Further, this should have been reasonably apparent to the plaintiffs from the outset, where revenue was included in the revised NPAT Statement. The detail and rigour sitting behind that calculation would also have been apparent from the extensive spreadsheets supporting the calculation and supplied at the time. I consider that 80% of the costs of the proceedings should be paid by the plaintiffs. 3. For these reasons I make the following orders: 1. Declare that the Share Purchase Agreement was varied on 6 May 2015 such that the requirement under sub paragraph (a) of Part B of Schedule 2 that Business NPAT was greater than $250,000 was replaced with a requirement that the Business revenue was greater than $1,000,000. 2. Otherwise dismiss the Amended Summons. 3. Order the plaintiffs to pay 80% of the defendants' costs of the proceedings. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 December 2022