GALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY, MEAGHER and STEIN JJA 27 March 1998, 24 February 1998 True construction of clause of agreement — meaning of 'become insolvent'? — entitlement to declaratory relief — hypothetical issue — future rights — proceedings an abuse of process/vexatious/ revealing no reasonable cause of action — stay of proceedings under Pt13 r5 SCR The opponents are in partnership with the claimants to supply movie subscription services and general entertainment subscription services for pay TV pursuant to two distribution agreements. The term of the agreements is for 25 years. C113(c) of the agreements provide for termination of the agreements by giving notice of election to terminate if a party becomes insolvent. The opponents allege that the claimants became insolvent in or about November 1997 to January 1998 and sought declarations before Giles J that they are entitled to terminate the agreements on the ground that the claimants became insolvent by so notifying them. The claimants contend that on the proper construction of the agreements they must be insolvent at the time the notice electing to terminate is given. The claimants sought an order that the question of the proper construction of cl13(c) be decided separately from and before any trial in the proceedings and, alternatively, an order that the proceeding be dismissed or permanently stayed. The two principle issues before Giles J were the proper construction of cl13(c) of the distribution agreements and the entitlement of the opponents to the declaratory relief they were seeking. Giles J held that the clause was satisfied if the claimants had moved from a state of solvency to a state of insolvency at any time prior to the giving of notice of election to terminate and refused the claimants' application for a stay or summary dismissal. On appeal, the claimants argued that the trial judge erred in failing to find that: (1) on the true construction of cl13(c) 'the bankrupt party' must be insolvent at the time the notice of election of termination is given; (2) the proceedings should be dismissed or stayed under Pt13 r5 SCR; (3) the application for declaratory relief was an abuse of process and/or vexatious and/or that the opponents' summons did not disclose any reasonable cause of action. Held: The construction of the term in the distribution agreements 'become insolvent' is most usefully assisted by reference to the term, contained within the clause, 'the bankrupt party'. When read together, the interpretation that most accords with commercial common sense is that the party must be insolvent at the time of the giving of the notice of election to terminate. Having determined the true construction of cl13(c), the proceedings which remain before the Commercial Division should be stayed pursuant to Ptl3 r5 of the Supreme Court Rules. They constitute an abuse of process and are unreasonably oppressive to the claimants as they involve hypothetical future rights, produce no foreseeable consequences for the parties and disclose no reasonable cause of action. Forster v Jododex (1972)127 CLR 421 Ainsworth v Criminal Justice Commission (1991-92) 175 CLR 564, applied. Lessue v Quetel Pty Ltd Queensland Court of Appeal, unreported, 1 November 1993, JN Taylor Holdings Ltd (in Liquidation) v Alan Bond (1993) 59 SASR 432, considered. 2 UNREPORTED JUDGMENTS Dormer v Solo Investments Pty Ltd (1974) 1 NSWLR 428 DC Wagemaker v Commonwealth Development Bank (1970) 91 WN (NSW) 617, referred to. Priestley JA Application for leave to appeal - concurrent argument of the appeal. What began in this court as an application for leave to appeal from interlocutory orders made by Giles CJ Comm D became the hearing of the substantive appeal. This has always been possible, in cases thought suitable by the court, but amendments to Pt51 of the Supreme Court Rules, which the parties used, have simplified the practice. Pursuant to new r4B of Pt51 the summary of argument now required by that rule stated the case was suitable, and also why it was suitable, for oral argument of the appeal to proceed concurrently with the leave application; it added that the claimants had been informed by the opponents that they were of the same view. Accordingly, when the application for leave was called on for hearing the court, taking into account the views of the parties and also considering the matter for itself, decided that oral argument of the appeal should proceed concurrently with the leave application. The construction point. The principal matter in contest between the parties was the meaning that should be given to a sub clause (cl13(c)) which appeared in substantially the same form in two agreements. The details concerning the agreements and the facts of the case are set out in the reasons of Stein JA with which I generally agree. For myself, I say no more about the construction argument than that in my opinion the most obvious way of reading cl13(c), which is set out in para(8) of Stein JA's reasons, is by taking its opening and closing words together, namely the words "If either party hereto becomes insolvent... the other party... may, by so notifying the bankrupt party, elect to terminate" the agreement. As well as I can judge, most legal and lay readers would read this sub-clause as meaning either, in its opening part, "if either party is insolvent etc" or in its closing part, "by so notifying the party that has become and is bankrupt", or some combination of the two. Other meanings are possible, but, in my opinion, only by applying a good deal more arm twisting to the words than is required by the reading which seems to me to be the more obvious one. I agree with Stein JA that the preliminary question of construction stated by Giles J should be answered "Yes". Should the proceedings be terminated now? Galaxy submits that if the preliminary question of construction be answered "Yes", then the proceedings should be brought to an end. It would have been easy to accept this submission had the opponents left their claim in the form it took when they commenced their proceedings. They then alleged that Galaxy became insolvent "in or about November 1997 to January 1998". In view of what in my opinion is the appropriate construction of cl13(c), this original allegation of insolvency is irrelevant and the opponent's claim had to fail. However the situation is made more complicated by the alternative allegation later added by the opponents before Giles J that Galaxy "remains insolvent up to and including the making of the declarations sought". If that allegation could be proved, and if a declaration to that effect were made immediately at the conclusion of the evidence furnishing the proof, and if the opponents had prepared a notice beforehand, then in theory it could be served upon Galaxy the \GRALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC (Stei& JA) instant after the court made the declaration. If all these things could be brought together simultaneously, or substantially so, then the combination of the making of the declaration by the court and the subsequent immediate service of a notice of termination would enable the opponents to terminate the contract immediately; that is, the making of the declaration would be a practical matter of commercial importance to the opponents. Such a situation would be not dissimilar to that dealt with by Hope J in Integrated Lighting and Ceilings Pty Ltd v Philips Electrical Pty Ltd (1969) 90 WN (Pt1) (NSW) 693 and could attract the wide view of the declaratory jurisdiction explained by Hope J in that case (see especially at 701-2) and typical of the general run of subsequent authority. However, it seems unlikely to me that the opponents would be able to obtain a declaration in the alternative as sought by them, or that if they did, it would be of any practical benefit to them. Taking this line of thought further, it seems to me, as a matter of practical reality, exceedingly unlikely that the three matters of (1) evidence of insolvency, (2) declaration of insolvency by the court and (3) service of notice of termination in reliance on the court's holding of insolvency, even if the first two were decided in the opponents' favour, would ever come close enough together to enable the opponents to rely on their concurrence as founding the giving of an effective notice under cl13(c). This conclusion seems to me to bring the proceedings into the category described in Ptl3 r5(1)(a) of the Supreme Court Rules, namely of being proceedings in which, following the decision of the construction point, no reasonable cause of action is disclosed. That proceedings which have been appropriately begun may, during their course, cease to be so, seems to follow from the reason of the thing and has in any event been recognised in this court: see Hanrahan v Bluett (Court of Appeal, Hope, Mahoney and Priestley JJA, unreported, 11 June 1985, per Hope JA at 11 and Mahoney JA at 2). Hanrahan was not on all fours with the present case, in that the stay sought was on the ground of abuse of process (Pt13 r5(1)(c)) rather than that no reasonable cause of action was disclosed, but the ideas in the cited passages from the reasons of Hope and Mahoney JJA seem to me to be applicable also to a case such as the present where what may have seemed a reasonable cause of action at the commencement of the proceedings has ceased to be so because of a subsequent binding ruling. Conclusion. Iam therefore of the view that the orders proposed by Stein J should be made. Meagher JA I agree with Stein JA. Stein JA (1) This is an application for leave to appeal from an interlocutory decision of Giles CJ of the Commercial Division. The parties agreed that the court should hear the substantive appeal at the same time as the leave application. WHO ARE THE PARTIES? (2) The first to fifth opponents (Paramount Films of Australia luc; SPE Australian Ventures Pty Ltd; Universal Studios Pay Television Australia Inc; TCI Movies Australia Pty Ltd and Twentieth Century Fox Pay Television (Australia) Pty Ltd) are subsidiaries of some of the world's largest film studios and pay TV operators. They are in partnership with Australis Movies Pty Ltd (the second claimant) in the PMP partnership which supplies the movie services, Showtime 4 UNREPORTED JUDGMENTS and Encore, to Galaxy Communications Pty Ltd (the first claimant) for use in Galaxy Pay TV. The sixth to eighth opponents (Paramount General Entertainment Australia Inc; SPE General Entertainment Pty Ltd; Universal Studios TV1 Australia Inc3 are partners in 'TV1 partnership', which provides a general entertainment service to Galaxy for use in Galaxy Pay TV. THE FACTS (3) Under two distribution agreements Galaxy pays monthly fees amounting to millions of dollars. It is accepted that Galaxy is not presently in default in payment of such fees under the agreements and the opponents do not so allege. Galaxy Pay TV is one of the three principal pay television services available for subscription by the Australian public. Approximately 600,000 people in Australia subscribe to Galaxy or for a service which incorporates all or some of the Galaxy channels eg Foxtel. The three channels which relate to the services supplied by the PMP partnership and the TV1 partnership are commercially significant to Galaxy. The services are supplied under the two distribution agreements. To obtain the distribution rights provided for by the agreements, a related company of Galaxy paid A$40 million to affiliates of the four Hollywood studios. (4) Both agreements are long term - for a term of 25 years - subject to any early termination. The PMP agreement was entered into on 19 November 1994 and the TV1 agreement is dated 8 May 1995 (to have effect from 19 November 1994). By cl17(f) they are to be construed in accordance with the laws of New South Wales. (5) One of the clauses in the distribution agreements relating to early termination is cl13(c). Relevantly the clause provides for termination by giving notice of election to terminate if a party "becomes insolvent'. The opponents claimed declarations before Giles J that they are 'entitled to elect to terminate [the distribution Agreements] on the ground that [Galaxy] has become insolvent by so notifying [Galaxy]'. The opponents allege that Galaxy became insolvent 'in or about November 1997 to January 1998'. By an amendment in the alternative, it is alleged that Galaxy became insolvent in or about November 1997 to January 1998 'and remains insolvent up to and including the making of the declarations sought' .! Galaxy denies the allegation. The opponents have not purported to issue any notice of election to terminate under either cl13(c) or otherwise. They indicate a 'present intention... that they will elect to terminate...upon obtaining a declaration from this Court that they are entitled to do so'. (6) Under another agreement known as the TNC Agreement, Foxtel has the right to use the three Galaxy Pay TV channels discussed above, in its cable network. Substantial payments are made under this agreement to a related company of Galaxy. The opponents have accepted offers from Foxtel which, if the subject distribution agreements are terminated by 30 September 1998, means that Foxtel has rights to the three channels for a substantially lower fee than it presently pays to Galaxy's related company under the TNC Agreement. (7) Two principal issues came before Giles J and before this court. The first concerns the proper construction of cl13(c) of the distribution agreements and the second, the entitlement of the opponents to the declaratory relief they seek. Giles J held that the clause was satisfied if Galaxy has at any time prior to the giving of notice of election to terminate moved from a state of solvency to a state of 1. Paral3A, Amended Summons \GRALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC (Steii JA) insolvency. His Honour rejected Galaxy's submission that it must be insolvent at the time any notice of election to terminate is given. Giles J refused Galaxy's application for a stay or summary dismissal. Part of the reason for his refusal of these applications was the finding on the true construction of cl13(c). THE CONSTRUCTION ISSUE (8) Cl13(c) of the agreements provides: Bankruptcy If either party hereto becomes insolvent or the subject of any bankruptcy proceeding (unless if such proceeding is involuntary, it is dismissed within 30 days after being brought), then the other party hereto, in addition to whatever other remedies it may have under this Agreement, at law or otherwise, may, by so notifying the bankrupt party, elect to terminate this Agreement. (9) I have put to one side a minor difference between cl13(c) in each of the two agreements since the parties agree that it is of little or no relevance. To place cl13(c) in context in the agreements I set forth cl13(a) and cl13(b). (a) Monetary Defaults If either party hereto fails to pay any amount due and owing to the other party hereto under the terms of this Agreement at the time provided for hereunder, then, if such non-payment is not cured within 3 Business Days after notice of such non-payment is given by the non-breaching party, then such non-breaching party, in addition to whatever other remedies it may have under this Agreement, at law or otherwise, may, by so notifying the breaching party, elect to terminate this Agreement. (b) Non-monetary Defaults If (i) either party hereto materially breaches or defaults in the performance hereof and fails to provide written proof of its remedy of such breach or default within a period of thirty days after receipt of written notice from the non-breaching party specifying such breach or default; or (ii) Distributor violates or contravenes any laws or regulation applicable to the ownership, management or operation of an Affiliate System or if any permit required to own, manage or operate an Affiliate System is revoked or not duly renewed and such violation, contravention or revocation is not cured within 120 days after Programmer give Distributor notice of such default, then (in addition to its other rights and remedies under law or equity (including without limitation injunctive relief), but excluding the right to terminate this Agreement, except as provided below) any controversy, dispute or claim arising out of, in connection with, or in relation to such breach or default may be finally settled by arbitration conducted in accordance with the then existing rules for commercial arbitration of the American Arbitration Association, or any successor organization. Prior to the launch of the Services, the parties hereto shall agree on a list of persons who they believe would be competent arbitrators to resolve any dispute that may arise between the parties as provided in this s13(b); provided that failing such agreement, the parties hereby agree that any person or persons appointed as arbitrator pursuant to this Section should have experience in arbitrating matters relating to the distribution of motion pictures. Judgment upon any award rendered by the arbitrator(s) may be entered by the court having jurisdiction thereof. If any such award remains unpaid within 3 Business Days after the date such award is due, then such failure to timely pay such award shall permit, without limiting any other rights and remedies it may have under law or equity, the party to whom such award is due to terminate this Agreement and be relieved of any liabilities and obligations hereunder. The non-breaching party may 2. Judgment p12 6 UNREPORTED JUDGMENTS demand arbitration by written notice to the breaching party and to the American Arbitration Association ('Demand for Arbitration'). Any demand for Arbitration pursuant to this s13(b) will be made within one year from the date that the dispute upon which the demand is based arose. The parties intend that this agreement to arbitrate be valid, enforceable and irrevocable. Notwithstanding the foregoing, if any Affiliated System materially beaches (sic) s9 hereof, Programmer shall, without limiting any other rights and remedies it may have under law or equity, be entitled [to] immediately terminate its obligation to deliver the Services to such Affiliate System. (10) Giles J considered the meaning of 'becomes' in cl13(c). He examined dictionary definitions concluding that they were useful but by no means conclusive. I would agree. The definitions themselves contain the seeds of ambiguity and can be used by both sides of the argument. (11) His Honour accepted that the opponents' submission contained some artificiality in postulating that the event of entering into the state of insolvency was an event with contractual consequences. Because of the possible difficulty in concluding that a party is insolvent except as at a known and specific date, Giles J found that the phrase 'becoming insolvent' could refer to the state of insolvency existing at a stated material date. Notwithstanding, his Honour felt that the natural reading of 'becomes' in cl13(c) supported the construction that the phrase meant the 'coming to be in the state of insolvency as a changed state from the former state of not being insolvent'.3 He added: There are rights to elect to terminate the agreements if it can be said that the party has come to be insolvent, without the necessity of identifying when that occurred, and the clauses do not require that the state of insolvency be when notice of election to terminate is given. (12) Giles J concluded this section of his judgment thus: In my opinion, so far as cl13(c) speak of a party becoming insolvent the natural and preferable import of those words as used in the clauses is that rights to elect to terminate the agreements arise when the a party comes to be insolvent, that is, is insolvent by change from previous solvency, and nothing ties the state of insolvency giving the right to elect to terminate to insolvency when notice of election to terminate is given.4 (13) His Honour then turned to the assistance that other terms of the agreements might lend to the question of construction. Giles J considered that the part of cll3(c) negating the significance of an involuntary bankruptcy proceeding, which is dismissed within 30 days, favoured the opponents' construction. I am not sure that I agree. Rather, it seems to me to be equivocal or, at least, of limited assistance. Both sides sought support from cl13(a) and cl13(b). The opponents pointed to a material difference between 13(a) and (b) on the one hand and 13(c) on the other. The former dealt with defaults capable of remedy. The latter did not. Once a breach of cl13(c) had occurred, the right to elect to terminate arose and the default could not be cured. His Honour thought that cl13(a) and cl13(b) supported the construction of the opponents. I do not agree although I would not see the clauses as advancing the position of either party. 3. Judgment p10 4. Judgment p12 \GRALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC (Steifi JA) (14) There is no doubt that the more important aspect of the wording of cl13(c) is the reference to 'notifying the bankrupt party'. The claimants relied on the phrase as indicative that a notice of election to terminate cannot be given to a party which is not insolvent at the time the notice is given. The claimants submit that if a notice to terminate is given at a time that a party is not insolvent, which is open on the opponents' construction, the party cannot be described as 'the bankrupt party'. Giles J agreed that the phrase 'the bankrupt party' was not a happy one. However, he opined that: ... the phrase has been used to encompass these other categories suggests that it is not descriptive of the party, and I do not think it is to be taken as descriptive of the party so that the party must be in the state of insolvency, subjection to a bankruptcy proceeding, or in the case of the TV | agreement appointment of a receiver etc, at the time the notice of election to terminate is given. Rather, the phrase is used to do no more than identify the recipient of the notice of election to terminate, identifying the recipient as the party falling within the earlier words in the clauses which, at best for the defendants' position, had come to be in the state of insolvency, subjection to a bankruptcy proceeding, or in the case of the TV 1 agreement appointment of a receiver etc, without saying anything about continuance of that state when notice of election to terminate is given. To my mind that is the natural way of reading the clauses, but that it is the correct way is assisted by regard to cl13(a) and cl13(b) so far as they refer to non-breaching parties and breaching parties.5 (15) In my opinion, the reference to 'notifying the bankrupt party' is persuasive of the claimants' argument that a party has to be insolvent at the time of giving the notice. It is attempting, perhaps somewhat clumsily, to be descriptive of the party in default, ie. one subject to bankruptcy proceedings, having a receiver appointed (in the TV1 agreement) or being in the state of insolvency. To my mind, it is persuasive of the claimants' construction of 'becomes insolvent'. It is difficult to comprehend how a party who may have been insolvent on 1 January of one year but is not insolvent on | January some years later, and perhaps flushed with funds, can be aptly described as 'the bankrupt party'. The opponents' construction is disharmonious with the phrase. (16) I turn to the issue of commercial convenience for what assistance it may provide. It was argued before Giles J that the construction of the opponents brought with it consequences which could be described as capricious, unreasonable, inconvenient or unjust (Australian Broadcasting Commission v Australian Performing Right Association Ltd). It was submitted that there was no commercial purpose in permitting a party to terminate after the other party had ceased to be insolvent. To allow a party to elect to terminate at some time after the other party had reverted to a solvent state would create continuing uncertainty, which was in the interests of no party and could work injustice. The rights, it was contended, could remain oppressively alive. This was all the more so because cl17(d) provided that the rights cannot be lost by waiver. The claimants submitted that it could hardly have been intended by the parties that temporary embarrassment should have such dire results. In the claimants' submission such a construction would not accord with business common sense. 5. Judgment p15-p16 6. (1972-1973) 129 CLR 99 at 109 8 UNREPORTED JUDGMENTS (17) His Honour, however, did not see this as self-evidently correct. He felt that it could equally be said that 'the purpose is to ensure that no party is obliged to continue to deal with a party which has become insolvent... those events being thought to make it commercially expedient and fair to give a right of termination because they warrant, at the least, grave concern for the future of the insolvent... party and its performance of the agreements.'7 As to the argument about the potential unreasonableness of the opponents' construction, Giles J said that whether the rights can still be exercised if the insolvent party regains the state of solvency is controlled by other principles, such as waiver and estoppel (and perhaps reasonableness in the exercise of contractual rights). His Honour acknowledged that waiver would be relevant only to the extent that it was not excluded by cl17(d). This clause relevantly provides that: No action or course of conduct or dealing by any party to this Agreement shall be deemed a waiver... of this Agreement. (18) Giles J also made reference to the absence of any provision in the agreements for disclosure of financial information by the parties. He noted the competing submissions - both sides relying on the absence of such a provision. While not seeing it as critical, Giles J preferred the opponents' position. Again, with respect to his Honour's reasoning, I am unable to agree. Although I also conclude that it is not critical, it seems to me that the parties must have accepted that lack of access to financial information meant some uncertainty even in determining the issue of insolvency at a prior date to the notice of election to terminate. It is unlikely, by the failure to include such a provision, that the parties intended that the question of insolvency be determined by the court. His Honour's conclusion, on the commercial convenience issue, was that there were commercial reasons for the operation of the clause, as a matter of construction, which were in accordance with that urged by the opponents. (19) The issues upon which I part company with Giles J's construction of the agreements are the relevance of the reference to 'bankrupt party' in cl13(c) and the question of commercial convenience, to the true construction of 'becomes insolvent' in the clauses in question. I have already given reasons why I think that the reference in the clauses to the 'bankrupt party' favour the construction urged by the claimants. I propose to consider the question of commercial convenience and then, with such assistance as I gain, return to the primary task of construing "becomes insolvent'. (20) The parties agree that the task of construction should be approached in the way described by Gibbs J, as he then was, in the Australian Broadcasting Commission case.8 From the words used in the contract, what was the intention of the parties? The whole of the contract may be considered since the meaning in one part may assist in construing another. In relation to the subject agreements, I have already indicated that within the very clause under consideration, the reference to 'notifying the bankrupt party' is persuasive of the claimants' construction. Acceptance of the claimants' interpretation is consistent and in harmony with that reference. Whereas, as I have said, the opponents' construction is not. I find that no other clause is of more than marginal assistance in the task - cl13(a) and cl13(b) are essentially neutral and the same may be said for cl2(b)(i). 7. Judgment p18 8. (1972-1973) 129 CLR 99 at 109 \GRALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC (Steia JA) (21) Are the words of cl13(c) ambiguous? In my opinion, the answer to this is a clear cut 'yes'. Two meanings - being the ones contended for - are open. Neither construction, in my view, is inconsistent with giving the words their natural and ordinary meaning. Ordinarily understood, insolvency means being unable to pay your debts as and when they fall due. Normally one would test whether a party is insolvent by reference to a particular date certain. This makes for greater ease of ascertainment and therefore certainty, which is in the interests of the parties. Of course, as his Honour observes, this merely directs the inquiry as to what is the material date for ascertainment. While I accept that it is open to construe "becomes insolvent' as meaning 'coming to be in the state of insolvency' I do not accept that this leads to a right to elect to terminate without the necessity of identifying when that insolvency occurred. The preferable construction is, in my opinion, that argued for by the claimants. To construe cl13(c) as requiring the state of insolvency to exist at the time of the giving of the notice of election to terminate lends certainty to the determination of that state. It is a preferable construction to that of the opponents', which involves the spectre of delay between the state of insolvency being attained and the giving of a notice electing to terminate on that basis. The delay may be considerable and in the hands of the opponents. It may pay no relevance to the fact that the party (said to be in breach) may not in fact be insolvent when the notice is given. (22) The preferred construction is also, in my assessment, assisted by examining the consequences of accepting the opponents' submission. One can easily conjure up a myriad of circumstances which could be seen as unreasonable, inconvenient or unjust. These are long-term agreements involving vast sums of money. For a party to be able to hold a right to elect to terminate over the head of the other party, like the sword of Damocles, following a momentary state of insolvency, is oppressive and unjust. It is not answered by common law remedies relating to estoppel by conduct and waiver. As to the latter, cl17(d) may have effectively eliminated it. The parties are unlikely to have intended that the law relating to estoppel should govern the timing of the giving of a notice to elect to terminate. They certainly would not have had in mind litigation testing the reasonableness of the exercise of contractual rights. (23) When one examines the issue of commercial convenience, it is apparent that it favours the position of the claimants. The opponents' construction leads to commercial inconvenience and, as I have said, potentially unjust, unreasonable and oppressive results. It is not overstating it to conclude that it makes commercial nonsense. On the other hand, the claimants' construction avoids the commercial inconvenience and potential injustice and gives certainty to the clause. In other words, it accords more with commercial good sense and, in my opinion, the likely intention of the parties. While an argument can be mounted that the purpose of the right is commercial expediency in the event that one party does not wish to continue to deal with an insolvent party, I do not think that such a view reflects the intention of the parties when entering into the agreements. To the contrary, I see no difficulty in accepting that a right to elect to terminate may come and go during the life of the agreements. A party may have a number of commercial reasons for continuing its contractual relationship with the party which has become insolvent, especially if that state is but temporary. (24) For these reasons I think that Giles J erred in his construction of cl13(a) and the separate question that he determined by the answer 'no' should be answered 'yes'. That is, that 'the bankrupt party' must be insolvent at the time the notice of election to terminate the agreements is given. 10 UNREPORTED JUDGMENTS SUMMARY DISMISSAL OR STAY (25) The finding on the true construction of cl13(c) puts a new complexion on the application by the claimants for a dismissal or stay of the proceedings than was relevant before Giles J. Having found that cl13(c) require that the 'bankrupt party' must be insolvent at the time the election of termination is given, the question is whether there are no reasonable grounds disclosed for making the declarations sought or that the proceedings are vexatious and oppressive and/or an abuse of process. (26) The claimants argue that the proceedings should be stayed because they involve allegations of future insolvency. That is, of insolvency at some date in the future when the opponents may elect to give a notice of termination. Accordingly, the opponents may elect not to give a notice of termination even if they obtain a declaration that, as at the date of publication of the court's judgment, Galaxy is insolvent. The opponents could then hold the declaration over Galaxy's head as a bargaining tool. It is maintained that the issue the court is being asked to investigate in the proceedings is therefore hypothetical. Subjecting Galaxy to a lengthy proceeding, including discovery and inspection, aimed at proving that it is insolvent would amount to an abuse of process, especially since there can be no date certain as to when the insolvency is to be determined. Galaxy submits that it is in an untenable position in meeting an allegation of insolvency as at an unknown and moveable future date. (27) It is an important feature of declaratory relief that it be a flexible and discretionary remedy, Forster v Jododex Pty Ltd.? In Ainsworth v Criminal Justice Commission,!° after referring to Forster, Mason CJ, Dawson, Toohey and Gaudron JJ said that the power to grant declaratory relief 'is confined by the considerations which mark out the boundaries of judicial power'. Such relief must be directed to the determination of legal controversies and not to answering hypothetical or abstract questions. Relief will not be granted if the question 'is purely hypothetical' or is claimed in circumstances which have not occurred and might never occur, (Gibbs J in University of New South Wales v Moorhouse).!! Iam conscious, in approaching this matter, that the considerations mentioned by the High Court in Ainsworth are guidelines rather than binding rules. (28) Turning to the declarations sought and viewed in the light of the true construction of cl13(c), is the matter theoretical or hypothetical and does it concern future rights? The reluctance of the courts to deal with hypothetical questions is well illustrated by a short but eloquent quotation from the speech of Harman LJ in Windsor Refrigeration Co Ltd v Branch Nominees Ltd!2: It is highly undesirable that the court should be constrained to tie itself in so many knots, and in the end merely say: "Well, if this was thus, then that was so". 9. (1972) 127 CLR 421 at 437 10. (1991-92) 175 CLR 564 at 582 11. (1975) 133 CLR 1 at 10 12. [1961] Ch 375 at 396 \RALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC (Steifh JA) (29) Lord Diplock in Rediffusion (Hong Kong) Ltd v Attorney General!3 stated that the courts 'will not pronounce upon legal situations which may arise but generally upon those which have arisen' (my emphasis).!4 (30) The opponents rely upon two local authorities, Lessue v Quetel Pty Ltd!5 and JN Taylor Holdings Ltd (in Liquidation) v Alan Bond.!6 In the latter case, also known as the American Home Assurance case, the Full Court of South Australia said that the jurisdiction to grant declaratory relief was discretionary rather than having defined jurisdictional limits. While stating that there was no jurisdictional limit, King CJ acknowledged that the power was confined by the boundaries of judicial power (Ainsworth), would not be exercised where there was no real legal context (Johnco Nominees Pty Ltd v Albury-Wodonga (NSW) Corporation)!7 and the question raised must not be purely hypothetical. Prior J stated: That discretionary power is not to be fettered by laying down rules as to the manner of its exercise, but it is confined by the considerations which mark out the boundaries of judicial power. Hence, declaratory relief must be directed to the determination of legal controversies and not to answering abstract or hypothetical questions. The person seeking relief must have "a real interest" and relief will not be granted if the question is purely hypothetical, if relief is claimed in relation to circumstances that have not occurred and might never happen or if the court's declaration will produce no foreseeable consequences for the parties.18 The opponents rely on the refusal of the High Court to grant special leave to appeal. Although this fact was mentioned by the Queensland Court of Appeal in Lessue, I do not see that it has any relevance. (31) In Lessue, the court allowed the appeal (by majority) with the President and Cullinan J concluding that a real controversy was involved and foreseeable consequences would be produced for the parties (p8). Their Honours described as an important feature of the American Home Assurance case that the 'insurers' obligation to indemnify would not be determined before, but concurrently with the establishment of the contingency upon which its obligation depended, namely the liability of the insured to the plaintiffs'. Their Honours referred to Dormer v Solo Investments Pty Ltd!9 stating that Holland J's statements were less directly apposite 'if emphasis is placed on the appellant's fundamental contention that the material provisions of the lease are void and unenforceable, which is the subject of an existing dispute'.2° Accordingly, there was a real controversy and resolution of the dispute would produce foreseeable consequences. In my view, neither of these cases materially assists the opponents. They are examples of the exercise of the discretion to grant declaratory relief in circumstances which are distinguishable from the present. (32) In discussing theoretical or hypothetical issues Zamir and Woolf state as follows: 13. [1970] AC 1136 14. See also re Judiciary and Navigation Acts (1921) 29 CLR 257, re Tooth & Co Ltd (1978) 19 ALR 19 at 209 and Russian Commercial and Industrial Bank v British Bank for Foreign Trade Ltd [1921] 2 AC 438 at 448 15. Queensland Court of Appeal, unreported, 1 November 1993 16. (1993) 59 SASR 432 17. (1977) 1 NSWLR 43 at 61 18. JN Taylor Holdings Ltd (in Liquidation) v Alan Bond (at 443) 19. (1974) 1 NSWLR 428 20. Lessue at p7 12 UNREPORTED JUDGMENTS ... [it] should be observed that the fact that the plaintiff has an immediate practical interest in the declaration is not sufficient to render real an issue otherwise hypothetical. Nor is it sufficient that, additionally, the defendant has a real interest in opposing it. A substantial interest of both parties in disputing the issue is, indeed, important; but this is not in itself sufficient. If the issue in dispute is not based on concrete facts the issue can still be treated as hypothetical. The absence of a dispute based on concrete facts is critical. This is the missing element which makes a case hypothetical. This element, however, can take different forms and can be lacking to differing degrees. Hypothetical cases have accordingly been divided into four classes for the purposes of discussing the effect of the absence of this element. These are: (a) where there is no dispute in existence; (b) where the dispute is divorced from the facts; (c) where the dispute is based on hypothetical facts; and (d) where the dispute has ceased to be of procedural significance.2! The discussion in Zamir and Woolf may provide some guidance although one must be careful to acknowledge the differential development of the remedy of declaratory relief between common law jurisdictions. (33) In DC Wagemaker v Commonwealth Development Bank2? Helsham J refused to make a declaration of entitlement to rescind a contract which was still on foot and in the process of being performed. His Honour relied on a decision of the English Court of Appeal in Howard v Pickford Tool Co Ltd.23 (34) In Dormer?4 Holland J stated: I should observe that, if I had been in the plaintiffs favour, I would have had doubts whether the jurisdiction of the court to make a declaration of right ought to have been exercised in the present case. I am not the least inclined to find limits on the beneficial jurisdiction of this Court to make declarations of right, but it is one thing to declare present contractual rights of the parties, another to declare then contingently on the plaintiff electing to take some course that he has not yet taken is not bound to take and may not take. In the present case the plaintiff has said that, If I were to find that he was entitled to rescind, then he would rescind, but he would not in any way have been bound to do so if I had made the declaration that is sought. It seems to me that, although the claim in the summons is for an order that the plaintiff is entitled to rescind, in substance, the relief that is sought is a declaration that, if the plaintiff elects to give a notice of rescission, that notice of rescission will be effective to terminate the contract. I think the court ought to hesitate to make declarations as to the potential effect on the contractual position of the parties of events upon which a party has not yet acted and which would not alter the existing contractual rights unless he did so act. .. [A]s Else-Mitchell J observed in Ku-Ring-Gai Municipal Council v Suburban Centres Pty Ltd it is not generally the function of the courts to entertain applications designed primarily or solely as a means of obtaining advice as to the legal potentials of a situation that has arisen between the parties. Also the time of the Court is not to be taken up deciding hypothetical question: see also DC 21. The Declaratory Judgment (Zamir and Woolf) 2nd Edition 1993 22. (1970) 91 WN (NSW) 617 at 622 23. [1951] 1 KB 417 per Lord Evershed MR 24. at 434 - 435 \GRALAXY COMMUNICATIONS PTY LTD v PARAMOUNT FILMS OF AUSTRALIA INC (Stdia JA) Wagemaker & Sons Pty Ltd v Commonwealth Development Bank of Australia and Sutherland Shire Council v Leyendekkers. (35) In some respects, what is involved in this case bears similarity to Dormer. As Holland J said, it is one thing to declare the present contractual rights of the parties, but it is another to declare them contingently on the plaintiff electing to take some course that he has not taken, is not bound to take and may not take. As with Dormer (at 434) the relief here sought is, in substance, that if the opponents elect to give a notice of termination, that notice will be valid and effective to terminate the agreements on the basis of the court's finding on insolvency. I do think that the court should hesitate in lending itself to such potential effects on the contractual position of the parties given the circumstances of the case to which I have already referred. (36) I accept the concern that the opponents have that, not being privy to Galaxy's financial affairs, they may elect to give a notice of termination which is later found to be invalid and amount to a repudiation of the agreements. However, that is a risk which the opponents have to weigh in electing to give a notice of termination. I do not accept the argument of the opponents that there may be a delay between them finding that Galaxy is insolvent and the giving of the notice by which time Galaxy may have regained solvency. In these days of instant international communication made easy by modern technology, there need be no real delay. (37) In my opinion, having determined the true construction of cl13(c), the proceedings before the Commercial Division which remain are an abuse of process and unreasonably oppressive to the claimants. They involve hypothetical future rights which may produce no foreseeable consequences for the parties. They potentially effect the contractual positions of the parties in circumstances where one party has not yet acted and indeed, may not. In my opinion the proceeding should be stayed pursuant to Ptl3 r5 of the Supreme Court Rules. ORDERS (38) I would propose the following orders: 1. That leave to appeal be granted. 2. That the appeal be upheld. 3. That the orders made by Giles J be set aside. 4. That the preliminary question of construction before Giles J: "Whether on their true construction, cl13(c) of the general provisions of the distribution agreements (referred to in parall and paral2 of the Plaintiffs' contentions)require that, for a party to be entitled to give notice of election to terminate the respective distribution agreements pursuant to such claused to the 'bankrupt party' because the 'bankrupt party' has become insolvent, the 'bankrupt party' must be insolvent at the time the notice of election of termination is given." Be answered 'yes'. 5. That the proceedings be stayed pursuant to Pt13 r5 of the Supreme Court Rules. 6. That the opponents pay the claimants' costs of the application for leave to appeal and the appeal. 7. That the opponents pay the claimants' costs of the decision on the separate question and application for dismissal or stay before Giles J. (1) That leave to appeal be granted. 14 UNREPORTED JUDGMENTS (2) That the appeal be upheld and the orders made by Giles J be set aside. (3) That the preliminary question of construction before Giles J: "Whether on their true construction, cl13(c) of the general provisions of the distribution agreements (referred to in parall and paral2 of the Plaintiff's contentions) require that, for a party to be entitled to give notice of election to terminate the respective distribution agreements pursuant to such clauses to 'the bankrupt party' because 'the bankrupt party' has become insolvent, the 'bankrupt party' must be insolvent at the time the notice of election of termination is given" be answered 'yes'. (4) That, the proceedings be stayed pursuant to Pt13 r5 of the Supreme Court Rules. (5) That the opponents pay the claimants' costs of the application for leave to appeal and the appeal. (6) That the opponents pay the claimants' costs of the decision on the separate question and application for dismissal or stay before Giles J. Counsel for the appellant: N C Hutley SC, Mr F Kunc Solicitors for the appellant: Blake Dawson Waldron Counsel for the respondent A J L Bannon SC, A Leopold Solicitors for the respondent Harper Watson