New South Wales Supreme Court CITATION : Principal Strategic Options v Coshott [2000] NSWSC 310 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50065/99 HEARING DATE(S) : 27.3.2000 JUDGMENT DATE : 28 March 2000 PARTIES : Principal Strategic Options Pty Limited -v- Robert Gilbert Coshott JUDGMENT OF : Hunter J COUNSEL : Plaintiff: G A Palmer QC Defendant: R G Coshott (in person) SOLICITORS : Plaintiff: Watkins Tapsell Defendant: R G Coshott (in person) CATCHWORDS : Contract - construction of put option clause - specific performance - uncertainty of option agreement. DECISION : Option agreement specifically enforceable. Judgment for plaintiff in sum of $1,355,239.74. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST HUNTER J TUESDAY 28 MARCH 2000 50065/99 - PRINCIPAL STRATEGIC OPTIONS PTY LTD v ROBERT GILBERT COSHOTT REASONS FOR JUDGMENT 1 In these proceedings the essential facts are not in issue as distinct from the effect of particular acts relevant to the performance of agreements as referred to in these reasons. 2 The question to be determined is the construction of an agreement between NSW Master Franchise Pty Ltd (the company), Robert Gilbert Coshott (Coshott) and Principal Strategic Options Pty Ltd (Strategic) dated 21 August 1998 (the shareholders deed). Strategic was controlled by Andrew Blake (Blake) an option trader. 3 The shareholders deed related to proposed restaurant franchising rights granted to the company under an agreement dated 28 August 1998 (the license agreement) between Schlotzsky's Australasia Pty Ltd (Schlotzskys) and the company pursuant to which the company acquired the right from Schlotzskys "to Franchise the use of the System and the Marks in the Territory in connection with the Licensed Restaurants" (clause 3.5(a)). The "Territory" was defined under the license agreement as New South Wales and the Australian Capital Territory. It is agreed that Coshott was a director and held a beneficial interest in both Schlotzskys and the company at the time of the execution of the shareholders deed and the license agreement. The two agreements linked in time and in operation. Under the shareholders deed conditions precedent were stipulated as follows: "3.2 Conditions precedent The obligations of the Shareholders under this document shall be conditional on the following conditions having been satisfied: (a) the Company redeeming the Shares issued to the initial subscribers of the Company; (b) Coshott paying to the Company a total of $100 for and the Company allotting and registering to Coshott 100 ordinary shares in the Company; (c) the Company entering into a final and binding Area Development Licence Agreement with Schlotzsky's Australasia Pty Ltd; (d) Coshott advancing to the Company $80,000 and the Company paying $80,000 to Schlotzksy's Australasia Pty Limited as the Area Development Fee; and (e) Coshott transferring to POS 50 Shares and $40,000 of the debt due to Coshott under the loan account for a consideration of $1,250,000. Each Shareholder shall use its best endeavours to secure the fulfilment of the conditions set out in paragraphs (a) to (e) of this clause 3.2 by a date which is five Business Days after the date of this document ("Termination Date"). If the conditions or any of them are not fulfilled by the Termination Date then either the Shareholder may terminate this document by notice in writing given to the other whereupon this document shall be at an end and neither Shareholder shall have any claim against the other (except in respect of a Shareholder's failure to use best endeavours as required by this clause)." 4 It is agreed each of those five conditions precedent were satisfied save for the assignment of the $40,000 debt referred to in subpara (e). There is a dispute as to the effective dates upon which the conditions precedent in subparas (b) and (e), as to the allotment and transfer of shares, were satisfied. 5 The importance of that dispute lies in the validity of the purported exercise on 29 April 1999 by Strategic of a put option conferred by clause 13.11 of the shareholders deed. The terms of that clause are as follows: "13.11 Aggregate Fee Purchase (a) If, on the Option Date: (i) the Company has not become entitled to receive an amount of $2,500,000 in Aggregate Fees; or (ii) a franchise agreement has not been executed between the Company and Schlotzsky's Australasia Pty Ltd for the franchise of a Schlotzsky's training restaurant in the Sydney metropolitan area, Coshott hereby grants PSO an option to sell to Coshott the PSO Shares and the balance, if any, of the debt of $40,000 referred to in clause 3.2(e), for a purchase price calculated as follows: (A) in the event of sub-clause (i) above, P= $1,250,000 - AF 2 where: P = purchase price for PSO Shares; and AF = Aggregate Fees, and (B) in the event of sub-clause (ii) above, the Fair Market Value of the PSO Shares on the Option Date. (b) Where: (i) clause 13.11(a)(ii) applies, the option may be exercised by PSO at any time after the Option Date and prior to the date one month after the Option Date; (ii) clause 13.11(a)(i) applies, the option may be exercised by PSO at any time between the later of the Option Date and the date on which Coshott gives to PSO written particulars of the Aggregate Fees received by the company prior to the Option Date ("Exercise Date")and the date one month after the Exercise Date; in either case by PSO giving to Coshott a notice of exercise of option duly executed by PSO. (c) For the purposes of this clause 13.11 the Company shall provide to PSO details of the Aggregate Fees on or before the Option Date." 6 The "Option date" therein referred to is defined in the shareholders deed as meaning "the date 8 months after the Operative Date". The latter date was defined to mean "the later of the date of commencement of the... Licence Agreement and the date the conditions set out in clause 3.2 are satisfied", they being the conditions quoted above. 7 The commencement of the license agreement was stipulated in that agreement as being 28 August 1998. Strategic's notice of exercise of its put option was given pursuant to clause 13.11(a)(i). That notice could only be given if it fell within one month after the expiry of 8 months after the later of the dates referred to in the definition of operative date, namely 28 August 1998. 8 It is the contention of Coshott that the conditions precedent in clause 3.2 were not satisfied, in the case of 3.2(b), at the earliest, until 31 August 1998 and, at the latest, 30 September 1998: in the case of sub-paragraph (e), at the earliest, 30 September 1998 and, as to the assignment of the $40,000 debt, Coshott asserts that that condition has never been satisfied. 9 Coshott also challenges the exercise of the put option by Strategic on the basis that clause 13.11 is void for uncertainty. That challenge arises out of the fact that both triggering events for the exercise of the put option stipulated by paragraph 13.11 (a)(i) and (ii) had occurred on Strategic's case. That is, on the option date the company had not become entitled to receive fees in the amount of $2,500,000. Indeed, no fees had been received at that time and no franchise agreement had been executed between the company and Schlotzskys for the franchise of a training restaurant in the Sydney area, or for that matter anywhere else. Coshott's challenge rests on the provision in clause 13.11 (A) and (B) of different formulae for calculating the purchase price payable under the put option exercised pursuant to sub-paragraph (i) and (ii). 10 I think that issue is readily disposed of. There is no express or implied provision in the shareholders deed precluding an election by Strategic as the basis of calculation of the put option price where both triggering events under clause 13.11(a) have occurred. In my view there is no element of uncertainty in that operation of clause 13.11. The reference in clause 13.11(a)(ii) to an agreement for the establishment of a training restaurant is explained in clause 6.2 of the licensing agreement which provides as follows: "6.2 Training Restaurant (a) Licensor will establish and commence operating a training restaurant in the Sydney metropolitan area within 3 months from the Effective Date. (b) The training restaurant will be established by Licensor pursuant to an agreement, the detailed terms of which are to be negotiated in good faith and agreed between Licensor and Licensee but on the basis that: (i) Licensor will be a Franchisee within the meaning of this agreement. (ii) Licensor will pay to Licensee the Service Fee and the Franchise Fee on commercial terms as if it were a Franchisee under this agreement. (iii)The obligations and expense referred to in clause 9.1 of this agreement in relation to selection of a site for the Licensor's training restaurant will be borne by Licensor as Franchisee. (iv) The Licensor's training restaurant will be available to Licensee and Franchisees for training in accordance with the System and the Manual. (v) Licensor will, at its own expense, conduct the necessary training programs and other training-related matters at Licensor's training restaurant at its own expense and in accordance with its obligations under the Master License Agreement and this agreement in relation to provision of training. (vi) Any terms which are not agreed within two months of the Effective Date may be referred by either party for determination by an expert nominated by the President of the Australian Institute of Chartered Accountants (NSW Branch)." 11 It is agreed that no such restaurant was ever established, presumably because of the failure to reach agreement upon terms under cl 6.2. The fact that Coshott had a foot in both camps may explain that difficulty. 12 Coshott's case on the construction of clause 3.2 of the shareholders deed invites an examination of the steps taken by the company in respect of the allotment, registration and transfer of shares as contemplated by cl 3.2(b) and (e). The facts upon which Coshott relies are conveniently included in a statement of agreed facts, Exhibit D, which is in the following terms: " AGREED STATEMENT OF FACTS 1. On Friday 21 August 1998, NSW Master Franchise Pty Ltd ("NSWMF"), Mr. Coshott and the Plaintiff ("PSO") entered into the Shareholders Deed, Exh. A p.15.1ff. 2. On Friday 28 August 1998, a meeting took place at the offices of Corrs Chambers Westgarth. Present at the meeting were Mr. Coshott, Mr. Blake, and legal representatives of Mr. Coshott and PSO. 3. At about 7-30pm on 28 August 1998 the following occurred. The order described below does not necessarily indicate the order of events. The documents were executed and exchanged contemporaneously. 3.1 Executed copies of the Area Development Licence Agreement between Schlotzsky's Australasia and NSWMF were exchanged between those parties. 3.2 A resolution by Mr. Coshott as sole director of NSWMF was passed, minute Exh. A. p.18 3.3 A transfer of 50 shares in NSWMF from Mr. Coshott to PSO was signed by Mr. Coshott as transferor and on behalf of PSO by Mr.Blake and dated 28 August 1998: Exh. A. p.64 3.4 A cheque for $1.25m being the consideration for the transfer of 50 shares to PSO and the assignment of the $40,000 debt was delivered to Mr. Coshott. 3.5 A Consent to Act as Director of NSWMF was signed by Mr. Coshott and dated 28 August 1998. 3.6 A Consent to act as Secretary of NSWMF was signed by Mr.Coshott and dated 8 August 1998. 3.7 An application for 2 ordinary shares in NSWMF was signed by Mr. Coshott and dated 28 August 1998. 3.8 An application for 98 ordinary shares in NSWMF was signed by Mr. Coshott and dated 28 August 1998. 3.9 A Consent to Act as Director of NSWMF was signed by Mr. Blake and dated 28 August 1998. 3.10 A notification to ASIC of allotment in respect of the 98 shares in NSWMF to be allotted to Mr. Coshott was signed by Mr. Coshott, and dated 28 August 1998. 3.11 An Offer in respect of Trade Debt was tabled: Exh. A p.27 3.12 A Deed of Assignment in respect of the Trade Debt was tabled: Exh.A p.30ff. 3.13 Mr. Blake read out the words of acceptance the offer in respect of Trade Debt from the document Exhibit A p.42. Mr. Nolan, solicitor of Blake Dawson Waldron for PSO swore the statutory declaration at Exhibit A p.44. 4. On Monday 31 August 1998, Mr. Severino of Messrs Corrs sent to ASIC the notification of allotment of 98 shares in NSWMF which had been signed on 28 August 1998. 5. Between 17 and 30 September 1998 the stamped share transfer of the 50 shares was sent to Corrs Chambers Westgarth: Exh. A p.63-64. 6. On 30 September 1998, Mr. Severino made the following entries in the register of members of NSWMF: 6.1 Entered an allotment of 2 ordinary shares to Mr. Coshott, the date of allotment being shown as 24 July 1998. 6.2 Entered an allotment of 98 ordinary shares to Mr. Coshott, the date of allotment being shown as 28 August 1998. 6.3 Entered an transfer of 50 shares to PSO, the transfer date being shown as 28 August 1998. 7. On 1 October 1998 Mr. Severino created a computer generated updated register of members of NSWMF which included the details of PSO set out above. 8. On or about 9 October 1998, a share certificate in respect of the 50 shares transferred to PSO was sent to PSO. The share certificate is expressed to be given under the common seal of NSWMF on 28 August 1998, and is signed by Mr. Coshott as sole director/secretary: Exh. A p 77. 9. On 12 April 1999, Mr. Coshott sent a fax to PSO notifying that total revenue to date from granting subfranchises in NSW is nil: Exh A. p.455. 10. On 29 April 1999 gave notice of exercise of option under Clause 13.11(a)(i). 11. On 29 April 1999, PSO's Solicitors gave notice to Mr.Coshott, nominating Wednesday 12 May 1999 at their offices as the time and place for settlement of the option exercised by PSO: Exh A p.462. 12. On 29 April 1999 Mr Coshott faxed a letter to PSO's solicitors stating that " under Clause 13.11(ii) fair market value is the specified price for your client's shares in NSWMF": Exh. A. p.465. 13. On 11 May 1999 Mr. Coshott faxed a letter to PSO's solicitors retransmitting the fax of 29 April 1999, and enquiring whether PSO was prepared to have the market value of the shares arbitrated: Exh. A p.467. 14. On 11 May 1999 PSO faxed a response to Mr. Coshott's letter, stating that PSO relied upon exercise of its option under Clause 13.11(a)(I). Exh. A p.468 15. There was no attendance by Mr. Coshott at the stipulated time for settlement." 13 In addition to those agreed facts, the parties are agreed that as at 29 April 1999 there had been no reduction of the debt of $80,000 owed by the company to Coshott as referred to in clause 3.2(d) of the shareholders deed. 14 The meeting of 28 August 1998, referred to in the statement of agreed facts, included a directors meeting of the company of which, at the commencement of this meeting, Coshott was the sole director. Although the minutes of that meeting overlap the statement of agreed facts, I think it is convenient to set out the details of those minutes that follow: " NSW MASTER FRANCHISE PTY LIMITED ( ACN 055 963 150) RESOLUTION OF A SOLE DIRECTOR MADE UNDER UNDER SECTION 248b OF THE CORPORATIONS LAW DIRECTOR: Robert Coshott ______________________________________________________________________ ALLOTMENT OF SHARES: An application for shares received from Robert Coshott applying for 98 ordinary shares on which a purchase price of $1.00 per share has been paid in the capital of the Company ("Application for Shares") was tabled. RESOLVED that shares be allotted to Robert Coshott in accordance with the Application for Shares and that the appropriate entries in the Register of Members of the Company be made. FURTHER RESOLVED that the Australian and Investments Securities Commission be notified of the allotment of shares in the capital of the Company pursuant to the Corporations Law. SHARE TRANSFERS A share transfer form for the transfer of 50 ordinary shares in the capital of the Company from Robert Coshott to Principal Strategic Options Pty Limited ( "Share Transfer") was tabled. RESOLVED that subject to stamping, the Share Transfer be approved for registration in the Register of Members of the Company. SHARE CERTIFICATES RESOLVED that Share Certificate No.2 be issued to Robert Coshott under the common seal of the Company certifying that he is the holder of 98 ordinary shares in the capital of the company. FURTHER RESOLVED that Share Certificate No. 3 be issued to Principal Strategic Options Pty Ltd under the common seal of the Company certifying that it is the holder of 50 ordinary shares in the capital of the Company. FURTHER RESOLVED that Share Certificate No.2 in the name of Robert Coshott be cancelled and that Share Certificate No.4 be issued to Robert Coshott under the common seal of the Company certifying that he is the holder of 48 ordinary shares in the capital of the Company. EXECUTION OF The following documents were tabled: DOCUMENTS (a) Shareholders' Deed between the Company, Robert Coshott and Principal Strategic Options Pty Ltd ( "Shareholders' Deed"); (b) an Area Development Licence Agreement between the Company and Schlotzsky's Australasia Pty Ltd ("Licence Agreement"). RESOLVED that entry into of the Shareholders' Deed dated 21 August 1998 be ratified and that entry into of the Licence Agreement by the Company be approved. FURTHER RESOLVED that the common seal of the Company be affixed to the Shareholders' Deed in accordance with the provisions of the Constitution of the Company. APPOINTMENT OF It was noted that a Consent to Act as a Director of DIRECTOR the Company was expected to be received from Andrew Blake. RESOLVED to appoint Andrew Blake as a director of the Company effective from the date on which his Consent is received by the Company. DATED: 28th August 1998" 15 The consent of Blake to act as director, as referred to in the last resolution, recorded in those minutes, is a reference to a written consent dated 28 August 1998. I think its significance lies in the power of appointment of a director given to Strategic under clause 4.2 in the shareholders deed which is in the following terms: "4.2 Right to appoint Directors Each Shareholder: (a) may from time to time appoint a person to be a Director so that at any one time the maximum number of Directors appointed by that Shareholder is that number specified opposite its name below; and (b) is taken to have appointed as a Director, and to have given notice under clause 4.3 in relation to, the person specified opposite its name below and the persons named as Directors below are to be the only Directors at the Operative Date. Shareholder Number of Directors Appointee Coshott 1 Robert Coshott PSO 1 Andrew Blake" 16 Clearly as at 28 August 1998 the company, Coshott and Strategic treated Strategic as being a shareholder of the company pursuant to the performance of conditions stipulated in clause 3.2(b) and (e) of the shareholders deed. The train of events on 28 August 1998 was not a coincidence. The shareholders deed casts obligations upon the parties as to the satisfaction of the conditions precedent of clause 3.2 in the following terms: "Each shareholder shall use its best endeavours to secure the fulfilment of the conditions set out in paragraphs (a) to (e) of this clause 3.2 by a date which is five Business Days after the date of this document ("Termination Date"). If the conditions or any of them are not fulfilled by the Termination Date then either Shareholder may terminate this document by notice in writing given to the other whereupon this document shall be at an end and neither Shareholder shall have any claim against the other (except in respect of a Shareholder's failure to use best endeavours as required by this clause)." 17 The date of execution of the shareholders deed was Friday 21 August 1998. The execution of the transfers of shares in the company, the payment for consideration of those transfers and other related acts as recorded in the agreed statement and in the minutes of the directors meeting of the company occurred within five business days of the execution of the shareholders deed. 18 It is common ground that no party acted thereafter on the basis that notice of termination of the shareholders deed could be given pursuant to clause 3.2. 19 In respect of the assignment of the $44,000 contemplated by clause 3.2 (e), the evidence of Blake, as to which there is no dispute, was as follows: "4 At that meeting on 28 August 1998, I recall there being a discussion between Rupert Nolan and Chris Ahern from Corrs about no stamp duty being payable on the assignment of $40,000 if there was an oral acceptance of the written offer assignment. I recall reading out the words appearing on page 42 of the Agreed Bundle at that meeting. I then saw Rupert Nolan swear a statutory declaration on page 44, and it was witnessed by Chris Ahern of Corrs. The statutory declaration on page 44 is undated, but it was signed on 28 August 1998." 20 The documents there referred to by Blake's evidence evidenced the terms of an oral acceptance of an offer of assignment of the debt by Coshott. No legal assignment of it took place, although it is clear that equitable assignment was effected of which the company had notice and which was accepted by the parties as fulfilment of the conditions precedent in clause 3.2(e) of the shareholders deed relating to the assignment of that debt. 21 There is a related argument concerning that debt which I think may be disposed of at this point. Coshott contends that Strategic was not ready, willing and able to perform an obligation under the put option under the nominated settlement date for the exercise of that put option, namely 12 May 1999, a settlement appointment which he failed to attend. It is his contention that no written assignment of the debt was offered by Strategic and, in my view, there is no substance in that contention. 22 The assignment which the parties have treated as effective under clause 3.2, being an equitable assignment, was equally capable of being reassigned to Coshott without recourse to an assignment in writing by Strategic. If I am entitled to look at the events of 28 August 1998 as part of the exercise of construing, in particular, clause 3.2 of the shareholders deed, then I would be left in no doubt that the construction placed upon the operation of that clause by Strategic in these proceedings was clearly the correct construction. 23 In my view the proper construction to be placed upon clause 3.2(b) and (e) is that the relevant date of fulfilment of the conditions precedent is the effective date of the subject transactions : that is 24 July 1998 for the allotment of two shares in the company to Coshott; 28 August 1998 for the allotment of the balance of 98 shares; 28 August 1998 for the transfer of 50 shares to Strategic, as evidenced by the execution of the share transfers, the resolution of the company which resolved that certificate No.3 be issued to Strategic, the issue of share certificate No.3 dated 28 August 1998 and the appointment of Blake as director of the company as the nominee of Strategic as shareholder on that date. Those dates of allotment and transfers are the effective dates of those allotments and transfers as registered. 24 I think this construction of clause 3.2 is confirmed by the terms of Coshott's warranty given in clause 3.9(d) of the shareholders deed as follows: "(d) the Company has not traded or carried on business, has not entered into any transaction or contract other than the Area Development Licence Agreement and has no liabilities (actual or contingent) other than any liabilities under that agreement or in respect of the advance of $80,000 referred to in clause 3.2(d)." 25 That warranty speaks of the present and clearly contemplated the effective date for the purpose of the clause as being the date of the execution of the subject transfer of shares. 26 However, in my view one is entitled to look at the events of 28 August 1998 to remove any ambiguity in the construction of clause 3.2 of the shareholders deed and, in particular, to determine the objective intention of the parties as to fulfilment of the conditions precedent stipulated in that clause. 27 Nothing, in my view, could be clearer than that the parties treated those conditions precedent in clause 3.2(b) and (e) as referring to the effective dates of the allotment, registration and transfers and that the effective date was 28 August 1998, being within five business days as contemplated by that clause. There is some analogy in that exercise of construction to the one undertaken by the Court in Australian Broadcasting Corporation v XIVTH Commonwealth Games Limited (1988)18 NSWLR 540 in the passage of the then Chief Justice which is as follows: "The case involves the objective determination of the intention of the parties from a consideration of a series of communications exchanged by them in the context of their dealings over a period of time. In those circumstances it is both appropriate and necessary to have regard to the commercial circumstances surrounding the exchange of communications and, in particular to the subject matter of those communications: Allen v Carbone (1975) 132 CLR 528 at 531-532. Furthermore, as was noted earlier, it is proper to have regard to communications between the parties subsequent to the date of the alleged contract to the extent to which those communications throw light upon the meaning of the language which is being considered for the purpose of determining whether it expresses an intention one way or the other upon the critical matter. At the least, such subsequent communications will often form part of the context in which the particular exchanges in question are to be evaluated." 28 In my view, Strategic gave notice of the exercise of the put option conferred by clause 13.11 of the shareholders deed within the time stipulated in that deed and is entitled to specific performance of the subject transaction. 29 It was submitted by Coshott that Strategic was not entitled to that relief and that damages had not been shown to be an adequate remedy. I do not agree. It is common ground that the company has not traded and I think it follows that its shares and its debt owing to Coshott are of little or no value. Strategic, in my view, is entitled to the relief sought. 30 It is not in dispute that in the event that it should be found that Coshott is obliged to pay the price under clause 13.11 of the shareholders deed, namely $1,250,000, that interest should apply from 12 May 1999 at Schedule J rates. So calculated, interest on $1,250,000 to 28 March 2000 is $105,239.74. Nor is it disputed that costs should follow the event. Coshott has submitted that in view of the abandonment of certain issues as to damages by Strategic, that some particular orders should be made in relation to those issues. I do not agree. I think the usual order for costs should be made and I so order. 31 It is agreed that judgment should be in the sum of $1,355,239.74. I further order specific performance of the option agreement contained in clause 13.11 of the Shareholders Deed of 21 August 1998 between NSW Master Franchise Pty Ltd, Robert Gilbert Coshott and Principal Strategic Options Pty Ltd by the execution and delivery of a share transfer and assignment of debt in the forms initialled by me and placed with the papers. I give judgment accordingly and order the defendant to pay the plaintiff's costs of the proceedings. oOo Last Modified: 09/25/2000 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.