CLARADEEN LIMITED v BANKERS TRUST AUSTRALIA LIMITED SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, MAHONEY and CLARKE JA 6 and 9 July 1990, 9 July 1990 [1990] NSWCA 43 Gleeson CJ The first issue in this appeal concerns the construction of a written agreementmade between the appellant and the respondent relating to the respondent's entitlement to remuneration for its services in introducing the appellant to certain vendors of shares and options which the appellant contemplated acquiring and assisting in the negotiations for the sale and purchase of those shares and options. The written agreement is continued in a letter dated 6 April 1987 signed by the representatives of both parties. That letter is in the following terms: "Further to our recent discussions, we are writing to outline BT's role and fee basis in relation to the acquisition by your company of a substantial interest in Mincoa. We understand the transaction will initially involve the acquisition (subject to shareholder approval) of approximately 61% of the shares and 61% of the options from major shareholders ('the transaction'). Since BT introduced the principals of Mincoa to you, BT has acted as an intermediary between the parties whereby there now exists an agreement in principle (as per the Letter of Intent) for the transaction to proceed. Our role and fees for introducing this opportunity, facilitating and advising you generally on the transaction would be as follows: (1) an hourly rate of $200 in respect of executive time expended on the project; (2) a success fee of 1% payable only in the event that your company and /or any associated person acquires the securities (ie the shares and options) the subject of the transaction by any means in the next six months and against which the hourly rate charge is rebateable. The 1% would be applied to the amount expended by your company and /or associated person on any acquisition by any means of Mincoa securities within the next six months. No brokerage would be payable in the event that the services of BT Stockbroking Pty Ltd are required; and (3) out of pocket expenses. The six month period would commence from the date of your agreeing to this fee basis. For your information, norntally the success fee is calculated as a percentage of gross consideration paid in accordance with the following standard scale: First $2.5 million 2.0% Next $2.5 million 1.5% Next $5 million 1.25% First $10 million 1.5% $10-100 million 1.0% Above $100 million 05% 2 UNREPORTED JUDGMENTS In addition, brokerage would have to be provided for. If the above fee basis is acceptable to you kindly sign the enclosed duplicate of this letter. Kind regards, Yours sincerely, Signed Frank Favretto Director Authorised Person for and on behalf of Claradeen Limited Sgd David Goodman. " Within the period of six months referred to in the letter the appellant in fact acquired a substantial interest in the company referred to as Mincoa. The appellant acquired 61.2% of the options that had been issued by that company, but, in circumstances that will be referred to in due course, the appellant acquired not 61% or 61.24% of the issued shares in the capital of the company but only 55.7%. On that ground the appellant has denied liability to pay the success fee referred to in the letter. The learned trial judge found in the appellant's favour in this issue but ultimately held that the appellant was liable to pay the success fee on the basis of an estoppel. If his Honour had accepted the defendant's primary submission that, upon the true construction of the letter of agreement and in the events that occurred, the respondent was entitled to the success fee then it would have been unnecessary to go into that question. In my view, the respondent was entitled to succeed at first instance on the basis of its primary contention. I consider, with respect, that the learned judge was in error in rejecting the contention. It WIS unnecessary for his Honour to become involved in the alternative considerations that ultimately led him to enter judgment for the respondent for the full amount claimed. The background to the letter of agreement was as follows. In March 1987 Mr Chan, the representative of the appellant, met with Mr Favretto of the respondent and said to him: "Frank, basically I am looking to acquire a company with good cash f low and I would want to have enough of a stake in the company to make sure that I had control of the company and thus its cash f low. " At the time Mr Chan was representing another company named Allied Pacific Investments Limited but for reasons that are presently irrelevant Allied Pacific Investments disappeared from the picture and Claradeen took its place. Mr Favretto knew of Mincoa, which he regarded as a company that might suit Mr Chan's requirements. There were two groups of major shareholders as well as certain minority groups on that company. One of the groups of major shareholders was referred to as the "Management Group", presumably because its members were active in the management of its affairs. The other major shareholder was a subsidiary of a prominent West Australian company named Wesfarmers Limited. After having some discussions with representatives of Mincoa and ascertaining that a sale was possible, Mr Favretto had a further meeting with Mr Chan. Mr Favretto said: "Mr Chan, I can now tell you that I have found what looks like a suitable acquisition for your company. It is a goldmining company called Mincoa and I think we can deliver two parcels of shares in Mincoa which will give you control in fact far more than a majority of the shares. One parcel is held by what I will call the vendor group whose representative is a director of the group called Ian Trahar and they hold about 36% of the shares. The other parcel is held by Wesfarmers and it is about 25% of the shares. Mr Chan tells me that he is confident Wesfarmers may sell if the price is right. Is that about the percent of shares that you are interested in?" URJ CLARADEEN LIMITED v BANKERS TRUST AUSTRALIA LIMITED (Gleeson CJ) 3 Pausing there, the agreed facts show that at all material times the Management Group held 36.24% in the shares of the capital of Mincoa and 41.2% of the options and a Wesfarmers subsidiary held 25% of the shares in the capital of Mincoa and 25% of the options. The total percentage shareholding of the Management Group and the Wesfarmers subsidiary was 61.24% of the shares and 61.2% of the options. It is perfectly obvious that the source of the figure of 61% in the letter of agreement on 6 April 1987 is a combination of the figures of 36% and 25% mentioned in the conversation between Mr Favretto and Mr Chan. It is of some importance to note the terms of Mr Chan's response. He said: "Well Frank my aim is to get control and put in as little money as possible and I would be comfortable buying as little as say 45% of the shares of this company. You might have heard I have made two bids for listed companies and each time someone else came in and bid more than me and I lost the company. All I want is to achieve control of the company on a friendly basis and the exact percentage shareholding I get is not significant to me." The concluding words of that statement are of considerable importance having regard to the submission that is now advanced to this Court on behalf of Mr Chan's company. Bearing in mind the events that ultimately occurred and the point which is taken by the appellant as a justification for not paying the respondent's fee it is important to note Mr Chan was anxious to get less than 61% of the shares of the company if in doing so he could secure a quantity that would gain him control. Far from it being important to Mr Chan that he should ultimately obtain a shareholding of precisely 61.24% or as close to 61.24% as was possible, what he was looking for was a controlling shareholding and subject to that qualification he would have been perfectly content to buy as few as 45% of the shares of the company The conversation continued with Mr Favretto saying: "My understanding at the moment, based on my discussions with the vendors, is that they may want to sell all their parcel about 36% and that Wesfarmers may also want to sell all of its parcel. That would give you around 61% of the shares." The reference to the vendors in that statement is evidently a reference to the Management Group. Mr Favretto's uncertainty as to the precise quantity of shares Wesfarmers might want to sell is also important. Mr Chan said: "My preference is to buy about 40-45% of Mincoa but I realise that in transactions like this it may be necessary to buy out a whole parcel of shares to satisfy the vendors. If that is necessary here I know I can place the balance of the stock that is over and above what I need to get control with friends of mine. " This statement again emphasises the point made earlier and reveals Mr Chan's attitude which was common knowledge of the parties to the agreement of 6 April 1987 at the time it was made. Two other matters should be mentioned at this stage. First, there had been an earlier letter of agreement concerning fees but that agreement had not been proceeded with. That agreement appears at p 69 of the Appeal Book and is dated 17 March 1987. It is expressed in terms which are somewhat different from the terms of the letter of 6 April 1987. The second paragraph of that letter was as follows: "We understand the transaction will initially involve the acquisition (subject to shareholder approval) of a minimum 36% of the shares and 41% of the options from interests associated with the incumbent Board ('the transaction'). You have 4 UNREPORTED JUDGMENTS indicated to us your interest it increasing the shareholding in Mincoa to over 50%, however it is not certain at this stage whether this will be possible prior to the transaction." It is common ground that the explanation of the references in that paragraph to 36% and 41% is that as at 17 March 1987 the transaction in contemplation was the acquisition of at least the shareholding of the Management Group. The fact that there may well be an acquisition of other shares is presumably the explanation of the use of the term "minimum". The second matter that should be mentioned is that the reference to a letter of intent in the document of 6 April 1987 is slightly misleading. There were in existence around 6 April 1987 various draft letters of intent but there was no formal or concluded letter of intent. Neither side cf this appeal places reliance on any specific feature of the letters although their terms are of general background interest. The circumstances in which in the events that happened, the appellant purchased only 57.5% of the shares in Mincoa are as follows. There were some rather difficult negotiations with Wesfarmers about the price to be paid for its shares in Mincoa. Ultimately a representative of Wesfarmers said to a representative of Claradeen: "Wesfarmers regards Mincoa as a very good investment and is very happy with the performance of that company and its management, especially Ian Trahar. Wesfarmers will sell 19.5% of its shareholdings at the agreed price and hold the balance of 5.5% as an investment, if that suits Claradeen." The representative of Claradeen said that that was acceptable. This attitude is hardly surprising having regard to the attitude evinced by Mr Chan in conversation to which reference has already been made. The arrangement was made within a few days of 6 April 1987. The transaction then proceeded to completion. Apparently no one from Claradeen suggested for a moment that in the events that happened Claradeen was not legally entitled to the success fee mentioned in the letter. The question that now arises is whether on the true construction of the letter of 6 April 1987 and in the events that happened the respondent is entitled to its success fee. It is to be noted that the arrangement as to fees outlined in the letter has the following structure. Reference is made to the services which had been performed and were expected to be performed in the future by the respondent on behalf of the appellant. Those services are described as follows: "Our role and fees for introducing this opportunity, facilitating and advising you generally on the transaction, would be as follows." The letter goes on to provide that the respondent's first entitlement is to an hourly rate of $200 in respect of executive time expended on the project. Plainly, it was contemplated that the respondent would be entitled to a fee on that basis in any event. No doubt the primary contingency that the parties had in mind was that the acquisition contemplated in the letter would not proceed at all. The respondent, in addition, bargained for what was described as a success fee. That was agreed to by the appellant but it was obviously necessary for the parties to provide some formula for describing what would constitute success so as to identify with reasonable precision in the circumstances in which the success fee would be treated as earned. I say it was necessary to identify that with reasonable precision but it should also be added that, having regard to the commercial background to the letter, it was plainly appropriate that the identification should involve also a fair measure of flexibility. I repeat that at the time the letter was URJ CLARADEEN LIMITED v BANKERS TRUST AUSTRALIA LIMITED (Gleeson CJ) 5 prepared there was uncertainty being expressed by the parties as to whether or not Wesfarmers would either desire or require that Claradeen should purchase the whole of the shares and options held by the subsidiary of Wesfarmers, and Mr Chan for his part was expressing his own flexibility of attitude in relation to that subject. Against that background there was every reason for the parties to seek to maintain a reasonable degree of flexibility in relation to the subject and no apparent reason why they should intend to specify with rigid precision that the respondent would only be entitled to its success fee in the event that the appellant were to acquire 61.24% of the shares in Mincoa and 61.2% of the options. Nevertheless, the appellant's submission, which it should be added, succeeded at first instance, was that the effect of the agreement made between the parties was to specify with precision the number of shares and options which the appellant was to acquire before the respondent would be entitled to its success fee. Interestingly enough, on the appellant's submission the way in which the parties went about obtaining that rigid precision was by employing the word "approximately". The appellant's submissions concerning the letter of 6 April 1987 depend upon the acceptance of both of two propositions. The first proposition is that it is para 2 of the letter which is of controlling effect in relation to the respondent's entitlement to its success fee and in particular that the second paragraph defines the relevant transaction in a way which limits that entitlement. The second proposition is that the expression "approximately 61% of the shares" is not sufficiently flexible to accommodate an acquisition of 55.7% of the shares. I regret that I am unable to agree with either of those two propositions. As to the first, it seems to me that par | of the letter is of far more importance that the appellant's submissions are prepared to accept. That identifies the relevant transaction as "The acquisition by your company of a substantial interest in Mincoa". Furthermore, the language of the second paragraph contains within itself a recognition of the uncertainty in the minds of the parties as to the precise form which the transaction would ultimately take and an acceptance by them of an appropriate degree of flexibility in the description that would be given to the circumstances under which the respondent would be entitled to a success fee. The paragraph is expressed to be a statement of "understanding". The transaction referred to in the paragraph is said to be a transaction that will "initially involve" a certain acquisition. Further and most importantly, the number of shares and options referred to in the paragraph are preceded by the word "approximately". No commercial purpose has been advanced on behalf of the appellant as an explanation of why the parties to this letter of agreement would possibly have intended to limit or restrict the appellant'x entitlement to a success fee in the rigid and inflexible manner now contended for by the appellant. On the contrary, as the evidence relating to the conversations that preceded the letter shows, there was every reason in commonsense why they should not intend us to limit it. Furthermore, as both parties would clearly have contemplated, by hypothesis there would only be a substantial interest in Mincoa acquired by Mr Chan's company in circumstances where Mr Chan was content with the detail of the ultimate acquisition. There was no obligation on Mr Chan's company to acquire any of the shares or options in Mincoa. 6 UNREPORTED JUDGMENTS The very thing that occurred in the events that happened is something that the experienced commercial people who were parties to this letter of agreement would have understood to be a possibility. As things turned out, for a perfectly valid and understandable commercial reason, Wesfarmers and Mr Chan entered into an arrangement under which Mr Chan's company took slightly less than the whole of Wesfarmers' shareholding in Mincoa. It is hardly likely that on 6 April 1987 the possibility of something like that happening would have been completely overlooked by the parties. No explanation was advanced as to why as at 6 April 1987, if the parties had envisaged such a thing happening, they would have intended to take away the right of the respondent to the success fee, otherwise conferred upon it. As to the second of the propositions which I have mentioned, it suffices to say that the word "approximate" is a word that takes its meaning and effect from its context. In a case such as the present that context includes the commercial background of the transaction referred to in the letter. The learned trial judge correctly received into evidence information in relation to that background. The letter itself says "Further to our recent discussions". The evidence in question was not in dispute and I have stated in summary form its effect earlier. In the light of that commercial background, I am of the view that the acquisition of 55.7% of the shares in Mincoa was well within the range of flexibility created by the use of the expression "approximately 61% of the shares". For those reasons I am of the view that the respondent is entitled to succeed on the basis of the case which was in the forefront of its arguments before the learned trial judge. I would propose that the appeal should be dismissed with costs. Mahoney JA I agree with what has been said by the Chief Justice. As we are differing from the learned trial judge I would add some comments of my own. The document is, as the Chief Justice has indicated, a commercial document not drawn in strictly legal terms. In the construction of it it is therefore relevant to consider what was the commercial objective which it intended to secure in this regard. There are, I think, two things to be borne in mind that: first, what was going to be done by Claradeen was as at the date of the document 6 April 1987 not finally settled; at least it was not irrevocably settled. What Claradeen was to do might well change as the transaction developed. And, second, it is accepted Claradeen could at any stage and without reason have withdrawn from the transaction without legal consequences other than the incurring of an obligation to pay the hourly fee which had been agreed upon. What Claradeen wished to have was control of the Mincoa company. What would satisfy Mr Chan in this regard as giving control, that is what percentage of the company's shares and options was essential and exclusively for his judgment. I use "him" as the equivalent for this purpose of "Claradeen". His view obviously changed from time to time. The letter of 17 March refers to 36% of the shares and 41% of the options. The letter of 6 April 1987 adopted the figure of 61% to which the Chief Justice has referred and, in addition, it was contemplated by the letter of 6 April 1987 itself that the percentage which Mr Chan might see as appropriate, or alternatively might require, might vary from that 61%. In this context, therefore, the main function or at least a function of the agreement was to secure to the plaintiff the right to claim the 1% success fee on whatever was URJ CLARADEEN LIMITED v BANKERS TRUST AUSTRALIA LIMITED (Clarke JA) 7 the value of the securities which, as the matter developed, would be accepted by Mr Chan and Claradeen as being the substantial interest referred to and as conferring control. In addition, because legally Claradeen could, in the sense to which I have referred, withdraw at any stage it was not in a real sense necessary that it should specify that the 1% should be payable only if a particular and irrevocably stated percentage of the securities was acquired. It was for Claradeen to determine finally what it should accept as being the relevant percentage. It is in this context and against this background that the matter is to proceed and the document was to be considered. These matters referred to lead to the result to which the Chief Justice has referred. Clarke JA I agree with the judgment of the learned Chief Justice. The appeal is dismissed with costs. Counsel for the Appellant: P Taylor and P Stockley Solicitors for the Appellant: Phillips Fox Counsel for the Respondent: DA Staff and Ms R McColl Solicitors for the Respondent: Allen and Allen and Hemsley