New South Wales Supreme Court CITATION : Central Management Holdings Pty Ltd & Anor v Nauru Phosphate Royalties Trust [2001] NSWSC 1056 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50168/2000 HEARING DATE(S) : 12 and 13 November 2001 JUDGMENT DATE : 22 November 2001 Central Management Holdings Pty Limited (First Plaintiff) PARTIES : Aphelion Marketing Pty Limited (Second Plaintiff) Nauru Phosphate Royalties Trust (Defendant) JUDGMENT OF : Brownie AJ COUNSEL : RJ Powell (Plaintiffs) GL Turner (Defendant) SOLICITORS : Bowring Stone Lawyers (Plaintiffs) Alan Brown & Company (Defendant) CATCHWORDS : Construction of written contract - No question of principle DECISION : See paragraphs 25 and 26. SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BROWNIE AJ Date: THURSDAY 22 NOVEMBER 2001 50168/2000 - CENTRAL MANAGEMENT HOLDINGS PTY LIMITED & ANOR v NAURU PHOSPHATE ROYALTIES TRUST JUDGMENT 1 HIS HONOUR: The two plaintiff companies were beneficiaries of a trust, so as to be entitled in certain circumstances to be paid sums of money representing specified proportions of the profits of a business. In the expectation that there might be difficulties in relation to making these distributions, the plaintiffs and the defendant entered into a Contract containing a promise by the defendant that it would lend to the plaintiffs sums of money equal to the amounts that would otherwise be payable by way of distributions from the trust, if the expected difficulties arose. The issues to be resolved now are whether, on the proper construction of the relevant documents, three particular items of expense should be taken into account in calculating the relevant profit. In shorthand form, the items in question may be described thus:- (a) It is common ground that interest on a debt known as "The Senior Debt", should be taken into account. However, the plaintiffs say that, during the period 16 October 1998 to 7 January 1999 the amount of that debt should be taken to be $60 million, whilst the defendant says it should be taken to be $70 million. (b) On the defendant's case, there should be taken into account the interest incurred in relation to a debt owed to "Multiplex", and a further debt owed to "AAPC Lender". On the plaintiffs' case, these items should not be taken into account. 2 In a limited sense there are only three relevant documents: the contract sued upon, the terms of which are recorded in a letter from the defendant to the plaintiffs dated 1 October 1997; a "Settlement Deed" dated 24 December 1996; and an "Amending Deed" also dated 1 October 1997. However, as is common ground, the proper construction of these three documents necessarily involves an understanding of the context in which they came into existence, for the relevant words of promise are capable of more than one meaning; and the ultimate question to be answered, in respect of each of the three items of expense in question, is whether the item falls within an expression which appears in Annexure "C" to the Settlement Deed: profit, less "Rent payable to the Land Trust equivalent to interest paid under Multiplex/BT Agreements incurred after the Practical Completion Date". 3 In 1990 an agreement was reached between the Republic of Nauru Finance Corporation ("Ronfin") and Austfin Pty Limited ("Austfin"). In summary Austfin agreed to procure the sale to Ronfin or its designee of certain land at Railway Square Sydney ("the Site"), and to procure for Ronfin a finance facility in respect of the purchase of the site and the construction of a hotel upon it. A company was to be formed as the vehicle for the venture; and in general terms it seems that the parties to this agreement agreed that the profits from the project would be divided between them in the proportions 75% to Ronfin and 25% to Austfin. 4 It seems that by 1996 the defendant or an associated company Central Realty Corporation Pty Limited ("CRC") was, or was entitled to be the registered proprietor of the site. Ronfin, the defendant and the CRC are all controlled by the Republic of Nauru. In 1996 the defendant and Multiplex Constructions Pty Limited ("Multiplex") executed a document called Heads of Agreement. That document recorded that Multiplex was to construct a hotel on the site for about $90 million; that Multiplex was to endeavour to procure from a financier a loan facility of not less than $70 million, secured by a first mortgage over the site; and that Multiplex was to cause a further advance to be made of not less than $20 million, to be secured by a second mortgage over the site. It appears to have been envisaged that Multiplex itself would advance these funds, representing in whole or in part money already expended or then about to be expended by it, concerning the initial stages of the work relating to the construction of the hotel. 5 A dispute arose, the detail of which is not established by the evidence, but the dispute was settled and the terms of settlement were recorded in the Settlement Deed dated 24 December 1996, which was later amended by a Deed dated 1 October 1997. When it is not necessary to be more precise I will refer to these two Deeds, read together as the Settlement Deeds. It might be said that there were two groups of parties to the Settlement Deeds: on the one hand Ronfin, CRC and the defendant (collectively "the Nauruan interests"), and on the other hand Austfin and a Mr Minks, who was a direction of Austfin. By the time of the execution of the Settlement Deed the plans for the project had been developed considerably. It was proposed that there be three trusts created, called respectively the Holding Trust, the Land Trust and the Business Trust. The Nauruan interests agreed that Austfin would be issued with units in the relevant trust, so as to entitle Austfin to receive 25% of "the Nauru profit". That expression was defined in copious detail, but all that is presently relevant relates to the profit earned from the operation of the hotel. There is no issue between the parties about the meaning or operation of the provisions about calculating the profit, other than the issue already identified: whether the three items of expense mentioned come within the words quoted at [2] above. 6 After the execution of the Settlement Deed of 24 December 1996, negotiations proceeded between a large number of interested parties, culminating in the agreement now sued upon, and the Deed of Amendment of 1 October 1997, amongst other documents. The agreement sued upon consists of the defendant's letter to the plaintiffs of 1 October 1997, a copy of which was countersigned by the two plaintiffs and returned to the defendant, although not until 28 May 1998. 7 By then, the project proposed as at 24 December 1996 had been further refined. There were now to be only two trusts, rather than three: the Hotel Trust and the Business Trust; and there were other modifications. One may obtain an overall view of the project as it had been proposed as at 24 December 1996 by looking at Annexure "E" to the Settlement Deed, and as it was as at 1 October 1997 by looking at Annexure "E1" to the Amending Deed. 8 One term of the arrangement was that Austfin was to receive, by way of distribution made by Ronsi Business Pty Ltd ("Ronsi Business") as trustee of the Business Trust a distribution representing 25% of the Nauru profit, as defined. 9 The evidence shows that a number of parties were troubled about the capacity of the Nauruan interests and associated entities to pay the sums expected to be payable in respect of the construction of the hotel and the furnishing and equipping of the hotel at and about the time of the commencement of the hotel business; and it seems that this concern led to the making of some complicated arrangements. 10 Three financiers, collectively called "the Financiers" or "the Senior Lenders" advanced $70 million to Ronsi Business: Bankers Trust Australia Ltd, State Bank of New South Wales Limited and Bank of Western Australia Limited. Ronsi Business, the Senior Lenders and two other companies associated with Bankers Trust Australia Limited entered into an agreement dated 5 September 1997 called the Railway Square Syndicated Construction Facility Agreement. Clause 17.7(l) of that agreement provided that, subject to Clause 17.10, Ronsi Business was not to make any distributions to the holders of units in the trust, without the written consent of "the Agent", that is, BT Management Services Pty Limited. However, Clause 17.10 provided: The Company [that is, Ronsi Business] may make a distribution of the type prohibited by clause 17.7(l) at any time after the Practical Completion Date if, at that time the Agent…has given the Company a written notice that it is satisfied that: (a) ….. (d) Not less than $2,500,000….is held in an account nominated by the Agent; (e) the Aggregate Amount Owing does not exceed $60 million; (f) all fees due and payable to the Hotel Operator under the Hotel Management Agreement have been paid [and] (g) all interest and other charges due and payable to the Financiers, the Hotel Operator and the Arranger have been paid. 11 The "Hotel Management Agreement" was another agreement, also dated 5 September 1997, made between Ronsi Business as Owner, and AAPC Properties Pty Limited ("AAPC Properties") as Hotel Operator, and AAPC Limited as a Guarantor. It provided in considerable detail that AAPC Properties would manage the hotel for Ronsi Business. 12 Another agreement, called the Railway Square Loan Agreement, dated 5 September 1997, made between Ronsi Business as Operator, AAPC (RS) Finance Pty Limited ("AAPC Lender") as Lender and AAPC Limited as a Guarantor, provided for the Lender to advance money to Ronsi Business, to enable Ronsi Business to furnish and equip the hotel at and about the time of the commencement of the operation of the hotel business. 13 In the meantime there had been another two Deeds executed, between Ronsi Business and Multiplex Railway Square Pty Limited ("Multiplex Railway Square"), dated 1 August 1997. The evidence does not really explain the commercial purpose to this aspect of the overall transaction. The first of the these Deeds is titled "Arranger's Deed". Ronsi Business was called the Principal and Multiplex Railway Square the Arranger. Ronsi Business agreed to pay to Multiplex Railway Square an Arranger's Fee of approximately $27 million, in consideration of the Arranger procuring Multiplex to enter into a contract with Ronsi Business for the construction of the hotel, the fee to be payable one month after the Practical Completion Date fixed in the building contract. The second Deed provided that, in consideration of Multiplex Railway Square permitting Ronsi Business to defer the payment of the Arranger's Fee payable under the former Deed, Ronsi Business agreed to procure the delivery of a letter of credit, in the sum of $10 million; and the Deed provided, in brief, that this sum might be paid by the Arranger to the Senior Lenders in reduction of the debt owed by Ronsi Business to them. If Ronsi Business was to default, Multiplex Railway Square was permitted to sell the site. 14 A further Deed, also dated 5 September 1997, is titled Railway Square Deed of Priority and Subordination. It established the priorities of the various creditors of Ronsi Business. Relevantly for the present purposes, the Senior Lenders took priority over AAPC Lender, which took priority over Multiplex Railway Square. It also provided that if Ronsi Business paid to the Arranger the whole or any part of the Arranger's Fee, the Arranger would hold the first $10 million so paid on trust for BT Securities Limited, which in turn was to hold the money, generally speaking, for payment to the Financiers six months after the Practical Completion Date unless various conditions had been satisfied in the meantime. 15 Finally, there was a document entitled "Put Option Railway Square Hotel Project", also dated 5 September 1997, the parties to which included AAPC Lender, Ronsi Business and Multiplex. Ronsi Business agreed to pay AAPC Lender a Put Option Fee of $1.05 million, and Multiplex agreed to procure Multiplex Railway Square to provide the necessary money for this to Ronsi Business. In consideration of that Fee, AAPC Lender granted to Ronsi Business a Put Option, to require AAPC to purchase the site for $70 million, in certain circumstances - generally speaking, if there was default. 16 This was the background in which the contract sued upon was made. Those associated with Austfin were concerned that the provisions of Clause 17 of the Railway Square Syndicated Construction Facility Agreement would operate to prevent any distribution of profit being made to Austfin by Ronsi Business. In substance, the two plaintiffs came to be substituted for Austfin in the overall scheme, and on 1 October 1997 the defendant wrote to the plaintiffs in these terms (the plaintiffs being the two entities referred to): I refer to the Railway Square Hotel Project and, in particular, to Clause 17.10 of the syndicated Construction Facility Agreement which sets the circumstances in which Ronsi Business Pty Limited may make distributions. I confirm that the Nauru Phosphate Royalties Trust undertakes that either it, or its nominee, will provide to the relevant entities holding Profit Units in the Ronsi Holding Trust quarterly, limited recourse, interest free loans for amounts equal to the estimated amount of quarterly interim distributions to these entities calculated as per the Settlement Deed Clause 7.6(b), subject to the entities granting a charge over future distributions and interim distributions from which the loan will be repayable. I also confirm that the only agreements relating to the design, construction, financing and operation of the Railway Square Hotel Project to which the Nauru Phosphate Royalties Trust, Ronsi Business Pty Limited, Ronsi Holdings Pty Limited and Tonavini Investments Pty Limited to which they are parties are those defined as Transaction Documents and Project Documents in the Syndicated Construction Facility Agreement as of todays date. 17 As mentioned above, the plaintiffs did sign and return a copy of this letter, after further negotiations, on 28 May 1998. The Syndicated Construction Facility Agreement was in fact dated 5 September 1997 rather than 1 October 1997, but nothing turns upon that circumstance. The "Transaction Documents" and "Project Documents" referred to in the letter include the various documents mentioned above, as well as other documents. The "Practical Completion Date" was 16 October 1998, and the Arranger's Fee was payable one month after that date. The letter of credit mentioned at [13] was to be provided a few days before the Practical Completion Date. 18 The two competing cases may be summarised thus. On the plaintiffs' case, if the terms of the various contracts constituting the overall arrangement had been complied with, the debt owed to the Senior Lender would have been only $60 million during the relevant period, and no money would have been owed to either Multiplex or AAPC Lender, so that one should assess the sum payable under the Settlement Deeds and the contract evidenced by the letter of 1 October 1997 on the basis that the terms of the various contracts had been complied with. 19 On the defendant's case, one should read the documents more literally: if, as was the case, interest was paid on the three debts in question, that interest should be taken into account, because the interest was actually paid, and the interest that was paid answers the description "paid under the Multiplex/BT Agreements". 20 The expression "the Multiplex/BT Agreements" was not defined. The expression "Multiplex Agreements" was defined in the Settlement Deed, and the definition amended in the Amending Deed, so as to read:- "Multiplex Agreements means the agreements entered into in pursuance of the Heads of Agreement between Ronsi Business Pty Limited as Business Trustee, the Builder, the Financiers and others for the design, financing and construction of the Development, including without limitation the Transaction Documents." 21 In this definition Multiplex was the "the Builder" and "Development" meant "the construction, maintenance and operation of the Hotel". The expression "BT Agreement" was not defined, but clearly enough it meant or included the Syndicated Construction Facility Agreement and the Deed of Priority and Subordination. 22 Essentially, however, the debate is as to the proper approach to be taken, and the factual matters relied upon by the plaintiffs, recorded in the written submissions and in the transcript, not disputed by the defendant, can be assumed. The defendant says that none of the documents relied on by the plaintiffs imposed any obligation on the defendant to make any payment. This is so, but on the plaintiffs' case it is irrelevant: by its contract, recorded in its letter of 1 October 1997, the defendant promised to lend to the plaintiffs sums "equal to the estimated amount of quarterly interim distributions…calculated as per the Settlement Deed". That is, whilst none of the relevant documents obliged the defendant to pay any of the debts in question (the debts carrying the interest now under consideration), they did oblige other companies, with which the defendant was associated, to do this, and the defendant promised to advance money to the plaintiffs on this basis. 23 The purpose of the contract (now sued on) was to avoid a possible problem that had been perceived, arising from the possibility that Clause 17 of the Syndicated Construction Facility Agreement might operate to prevent the making of distributions to the plaintiffs. The solution adopted was that the parties entered into this contract. Both the language used and a consideration of the purpose of the parties in entering into this contract lead me to the view that the plaintiffs' construction should be preferred. 24 The plaintiffs adduced a volume of evidence, said to lead to the view that the defendant had made admissions that the contract should be construed in the way that the plaintiffs contend for. In the circumstances, I need not consider this evidence. 25 The plaintiffs generally succeed, but it seems to me that on a proper view of the matter, the relevant period should commence on 16 November 1998, being one month after the Practical Completion Date, rather than on the Practical Completion Date itself. 26 As requested, I publish these reasons for judgment, and will adjourn the case for a short time. ********* Last Modified: 11/23/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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