Rural Insurance (Aust) Pty Limited v Reinsurance Australia Corporation Limited [2002] NSWSC 156

Reported Decision : 41 ACSR 30

New South Wales Supreme Court

CITATION : Rural Insurance (Aust) Pty Limited v Reinsurance Australia Corporation Limited [2002] NSWSC 156 FILE NUMBER(S) : SC 50119/01 HEARING DATE(S) : 06/03/02 JUDGMENT DATE : 13 March 2002

PARTIES : Rural Insurance (Aust) Pty Limited (Plaintiff) Reinsurance Australia Corporation Limited (Defendant) JUDGMENT OF : Einstein J

COUNSEL : Mr J E Sexton SC (Plaintiff) Mr R A Dick (Defendant) SOLICITORS : Tillyard & Callanan (Plaintiff) Phillips Fox (Defendant) CATCHWORDS : Contract - Formation of contract - Negotiations - Intention to contract Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 622 Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61 CASES CITED : Hide & Skin Trading v Oceanic Meat (1990) 20 NSWLR 310 John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd [2002] NSWSC 43 Masters v Cameron (1954) 91 CLR 353 Reardon-Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 DECISION : Proceedings to be dismissed on the bringing in of short minutes of order. Submissions invited on costs.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

EINSTEIN J

13 MARCH 2002

50119/01 RURAL INSURANCE (AUST) PTY LIMITED v REINSURANCE AUSTRALIA CORPORATION LIMITED JUDGMENT The Proceedings 1 Rural Insurance (Aust) Pty Ltd, being a shareholder in Insure That Pty Ltd ("the company") seeks a declaration that it is entitled to acquire the balance of the shareholding from the other shareholder, Reinsurance Australia Corporation Limited. The plaintiff also seeks an order for the delivery to it of a duly executed transfer for the subject shares on payment of the sum of $22,556. The Shareholders Deed 2 On or about 20 January 2000 a Shareholders Deed ["the deed" or "the shareholders deed"] was entered into between the plaintiff, the defendant, Mr Peter Hayward and the company. The deed had apparently been signed sometime earlier by the plaintiff and bears the date 27 December 1999. It was signed by the defendant on or about 20 January 2000. The deed provided for the initial funding of the company by the plaintiff and the defendant as shareholders to the extent of $100 and for the issue of 30 ordinary shares to the defendant and 70 ordinary shares to the plaintiff. 3 The deed recited that the shareholders agreed to establish a joint venture insurance underwriting agency business to be operated through the company and that the parties wished to regulate the activities of the company and their relationship with one another and the company in accordance with the terms of the document. 4 The company had been incorporated in June 1999. Until February 2000, Mr Hayward was the only shareholder, holding 10 ordinary shares and also being managing director of the plaintiff. 5 The defendant, a listed public company, was a reinsurer licensed to operate as an insurer and had commenced to provide funding to the company in September 1999. 6 On 15 October 1999 the defendant, which wished to commence its insurance business for rural and crop insurance products, appointed the company as its agent for the purpose of developing and selling such products. The appointment was by formal Agency and Outsourcing Agreement letter ["the agency agreement"], which provided that the agreement could be terminated at any time by either party provided that 90 days written notice was given. [Clause 11 (a)] 7 The defendant provided funding to the company in October and November 1999 and thereafter. 8 It was against that background that the shareholders deed was executed. The deed recognised the existing relationship between the company and the defendant and the underlying basis upon which the defendant was to become a shareholder in the company. 9 On 8 February 2000, 60 shares in the company were allotted to the plaintiff and 30 shares were allotted to the defendant. On the same day Mr Hayward transferred his shareholding to the plaintiff. 10 The shareholders deed provided: · For the payment by the defendant to the company of $300,000 on a non-refundable, non-interest bearing basis to be applied to meet the working capital requirements of the company in accordance with its current budget and business plan. · For the provision by the defendant to the company of an overdraft facility in the amount of $400,000. 11 $300,000 of the advances by the defendant to the plaintiff were by way of non-refundable deposits in September 1999 and in January 2000. The defendant also provided loan funds to the company in the amount of $400,000 which have now been repaid. 12 The agency agreement was terminated by the defendant by written notice dated 11 February 2000. The notice provided that the termination was to have effect on 9 May 2000 (being 90 days thereafter), "unless an alternative underwriter can be arranged prior to that time". I do not accept that the termination of the agency took place on 11 February 2000 by reason of Mr Hayward signing and "noting" the notice of termination. This submission was not ultimately pressed by the defendant's counsel. 13 On 2 March 2000 the company entered into an agency agreement with Lumley General Insurance ["Lumley"] which agreement apparently took effect from 1 April 2000. Depending upon the question of construction of the words "arranged prior to that time", it is arguable that the agency agreement was terminated on 2 March, 1 April or on 9 May 2000. The issue as to which of those dates was the correct termination date is of no particular importance to the matters here litigated. 14 Clause 26.1 (c) of the shareholders deed provided that the deed would terminate on the lawful termination of the agency agreement. 15 In the result the shareholders deed would have terminated as a matter of law either on 2 March, 1 April or 9 May 2000. 16 On 15 March 2000 the defendant announced to the Australian Stock Exchange that it would no longer write new reinsurance business and would operate in managed run-off. On 2 May 2000, APRA appointed an inspector to the defendant. 17 It is common ground, and Mr Hayward gave evidence to this effect, that in early 2000 the defendant was in financial difficulty and ceased to underwrite business by agreement with the insurance regulator. It was in this setting that on approximately 10 May 2000, Mr Hayward, a director of the plaintiff (still being the managing director of the company), met with Mr Vines who was then the Senior Executive Officer - Strategy and Planning of the defendant and who became, on 15 May 2000, its Chief Executive Officer. Amongst matters which were discussed at the meeting were issues existing between the defendant and the company in terms of the repayment of loans made to the company and vacation of the defendant's office space, which was apparently surplus to the defendant's requirements. I return to the meeting below. 18 It seems appropriate from the evidence and the addresses to accept that the defendant's termination of the agency agreement occurred by reason of the defendant's financial position as part of the complete winding down of the defendant's relevant affairs. Likewise it seems appropriate from the evidence and the addresses to accept that the substratum which had led to the involvement of the defendant in the company had disappeared once the agency agreement had been terminated and the company had entered into the new agency agreement with Lumley. Once the defendant had ceased to underwrite insurance by agreement with the insurance regulator, the whole purpose of its involvement with the plaintiff in the company had disappeared. Save for the regular winding up of relevant affairs, including the important tasks of attending to past claims and the provision of run-off cover, the defendant was simply left with an asset, namely its shareholding in the company. 19 This was the setting against which the communications between the parties, to which I now turn, took place. 20 The communications took place between 10 May 2000 and 1 June 2000 and concerned the defendant's shares in the company. The issue in these proceedings is whether these communications constituted an enforceable agreement for the sale by the defendant to the plaintiff of the shares held by the defendant in the company. 21 The number of relevant communications are few. There is virtually no issue as to their terms. As a matter of convenience I propose to number these communications. The numbers will be given in bold emphasis and italicised. Meeting on approximately 10 May 2000 [1] 22 The communications appear to have commenced with the meeting already mentioned, between Mr Hayward and Mr Vines. The meeting had been to discuss the replacement of the defendant as the underwriter to the company's business by Lumley for the reason already referred to, that the defendant was in financial difficulty and had ceased to underwrite business by agreement with the insurance regulator. The competing versions of the conversation are as follows: Version of Mr Hayward Mr Hayward : "Does [the defendant] want to sell its shares in the company or retain them? Mr Vines: "Peter, I think we would like to sell our shareholding in the company since we will no longer be underwriting the business for the company. What would be your suggested price for the shares? Mr Hayward : "I think the best thing to do is to determine a price and I will advise you" Version of Mr Vines Mr Hayward : "Is [the defendant] interested in selling its shares in [the company]? Mr Vines: "Given that we are no longer business partners, there does not seem to be much point in retaining any investment in [the company]. I would be prepared to consider an offer for our shares in [the company]". Mr Hayward: "I think the best thing to do is to determine a price and I will advise you". 23 The critical portions of the following communications were: · A letter from Mr Hayward to Mr Vines written on letterhead of the company and dated 17 May 2000: