New South Wales Supreme Court CITATION : TREACEY v FERDINANDS [2002] NSWSC 31 CURRENT JURISDICTION: EQUITY FILE NUMBER(S) : SC 2753/99 HEARING DATE(S) : 29/01/02 JUDGMENT DATE : 12 February 2002 Edward Francis Treacey - First Plaintiff Edward F Treacey & Assoc. Pty Ltd - Second Plaintiff PARTIES : Douglas Ferdinands - First Defendant Henryk Dabrowski - Second Defendant Kerry Gerard Meehan - Third Defendant Mercantile Systems Pty Ltd - Fourth Defendant JUDGMENT OF : Bryson J at 1 COUNSEL : R. McKeand - Plaintiffs D.A. Smallbone - Defendants SOLICITORS : Warren McKeon Dickson - Plaintiff English Kearns - Defendants CATCHWORDS : CONTRACT - interpretation - construction of document - whether agreement to buy shares was made by Defendants 1, 2 and 3 as principals or as agents for unnamed parties. CASES CITED : No cases cited. DECISION : I answer the separate question: Yes, the first and second and third defendants were so obliged. THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BRYSON J. TUESDAY 12 FEBRUARY 2002 2753/99 EDWARD FRANCIS TREACEY & ANOR v. DOUGLAS FERDINANDS & ORS JUDGMENT 1 HIS HONOUR: In these proceedings commenced by Statement of Claim on 17 June 1999 the plaintiffs' claims include a claim for a declaration to the effect that the first, second and third defendants Mr Ferdinands, Mr Dabrowski and Mr Meehan are liable to pay to the plaintiffs the sum of $130,000 together with interest thereon pursuant to an agreement referred to in the Statement of Claim. There are other claims, and claims for consequential relief. The agreement relates to shares and notes in Mercantile Systems Pty Ltd the fourth defendant. By an agreement made on 16 January 1997 (Exhibit 1) for the sale of shares the vendors Mr Peters and Mr Jones, who until that time owned the issued shares in Mercantile Systems, agreed to sell the shares (namely two $1 shares) to four purchasers which were (to use a neutral term) entities associated with each of Mr Treacey the first plaintiff, Mr Ferdinands, Mr Dabrowski and Mr Meehan. The purchasers were Sabenza Pty Ltd, Edward F. Treacey & Associates Pty Ltd (which is the second plaintiff) Douglas Ferdinands & Associates Superannuation Fund Investment Trust (which is a trust of which the trustees were and are Mr Ferdinands and his wife Mrs Carmel Agnes Ferdinands) and Greta Point International Pty Ltd. 2 An associated transaction was an agreement dated 29 January 1997 for the sale to Mercantile Systems of computer software referred to as the Source Code owned by Mr Peters and Mr Jones and developed by them. Mercantile Systems incurred obligations in respect of the sale which Mr Treacey, Mr Dabrowski and Mr Meehan, who were parties to that agreement, agreed to guarantee. 3 Mercantile Systems obtained a loan facility of $500,000 from Bank of Western Australia Limited; the loan facility comprised a cash advance of $450,000 and a $50,000 overdraft for the purpose of Mercantile Systems acquiring interests related to the Source Code and for working capital. By a guarantee and indemnity in a Deed dated 29 January 1997 Mr Treacey, Mr Dabrowski and Mr Meehan guaranteed the liabilities of Mercantile Systems to the bank; and so did two other persons Mr Timothy David May and Mrs Penelope Hastings May his wife. 4 By shareholders' agreement made (on a day which does not appear) in March 1997 arrangements were made regulating directorship and shareholding in Mercantile Systems. The shareholders' agreement established beneficial entitlements to issued shares in Mercantile Systems by a table in cl.4.1 which set out the proportions of beneficial interest; Sabenza held 43.86%, the trust of which Mr and Mrs Ferdinands were trustees held 21.93%, Greta Point International Pty Ltd Superannuation Fund (and not that company itself, which was a party to the agreement of 16 January 1997) held 11.4% and the second plaintiff held 22.81%. Mr and Mrs May did not hold a beneficial interest although there were provisions in the shareholders' agreement for them to apply for an allotment; so far as appears they did not apply, or did not become shareholders at any relevant time. The shareholders' agreement provided to the effect that there were to be five directors, each shareholder was to be entitled to appoint one director and the first Board was to comprise Mr Ferdinands, Mr Dabrowski, Mr Meehan, Mr May and Mr Treacey. At meetings of the Board a director who was a nominee of the shareholder was to be entitled to exercise a number of votes proportional to the shareholding of the nominating shareholder. 5 It will be seen that Mr Treacey the first plaintiff was not a shareholder and was not a party to the shareholders' agreement. Mr Ferdinands, who is the first defendant, was a party to the shareholders' agreement in that he was one of the two trustees of Douglas Ferdinands & Associates Superannuation Funds Investment Trust, although he was not referred to by name in the shareholders' agreement as a party. Greta Point International Pty Ltd Superannuation Fund was also a party; there was provision for the trustees of that superannuation fund to execute the shareholders' agreement, although the evidence does not identify who those trustees were. So on 16 June 1997 Mr Treacey was a director of Mercantile Systems, but he did not have a beneficial interest or another interest in the shareholding, while Edward F. Treacey & Associates Pty Ltd the second plaintiff did have a beneficial interest in the shareholding. Mr Treacey did not own unsecured notes in the company, and Edward F. Treacey & Associates did. 6 The agreement which is alleged to give rise to the obligations sued on is an agreement in writing found in two letters, a letter dated 16 June 1997 at pp84-86 of Mr Treacey's affidavit of 23 December 1999, and a letter dated 17 June 1997 at p.87 of that Affidavit. The issue determined by this judgment turns upon the meaning and the effect of the agreement in those letters, and does not involve any question of general principle. After pleadings and a complex interlocutory course the Court (Windeyer J) on 28 November 2001 made an order for decision of a question separately from all other questions and before further trial of the proceedings. That question is now before me and it is in these terms: Whether, upon the true construction of the agreement comprised in or evidenced by the letters dated 16 June, 1997 and 17 June 1997, being the letters referred to in the particulars of para 5 of the Statement of Claim, in the relevant circumstances, in which the agreement was made, the first, second and third defendants were obliged to pay $150,000 to the plaintiff or either or them for the transfer of the second plaintiff's shares and unsecured note holdings in the fourth defendant, to such person or persons as the first to third defendants may have directed. 7 The order for the separate question went on to provide for entry of judgment if the question is answered in the affirmative and for the effect of any decision on pursuit of other claims; and on the outcome if the question is answered in the negative. 8 A payment of $20,000, particulars of which are not presently important, explains why the separate question relates to an obligation to pay $150,000 but the plaintiffs' claim is a claim for $130,000. There are no questions or issues relating to matters of detail of the performance or manner of performance of the transfer of the shares and notes; the transfers can be taken to have taken place in a manner which does not give rise to contention, and the substance of the separate question is whether the promise to pay $150,000 was made by Mr Ferdinands, Mr Dabrowski and Mr Meehan as principals, or whether in making contractual promises in the agreement in the letters they did so as agents for other persons and not so as to bind themselves. 9 The letter of 16 June 1997 is on printed letterhead of a firm called Douglas Ferdinands & Associates, Banking and Finance Advisory Services. According to the letterhead that entity was incorporated in New South Wales. There has been no contention and no basis for a contention that that entity was a party to the agreement. The letter of 17 June 1997 is on the letterhead of Mercantile Systems Pty Ltd. Again there was no contention that the letter was written on behalf of Mercantile Systems or that it became contractually bound thereby, and on the terms of all the arrangements in the letters such a contention would have no basis but would be absurd. The connection between the letterheads and the contents of the letters is fortuitous. 10 There are some particular terms of the letter of 16 June 1997 to which I should give emphasis, while at the same time directing myself that the whole terms of both letters are under consideration and that no part can be disregarded. The letter of 16 June 1997 is addressed to Mr Treacey, and his address is given in care of Mercantile Systems. It is not addressed to the second plaintiff Edward F. Treacey & Associates Pty Ltd. Its opening sentences are: This is to advise you that Kerry, Ryk and I seek your resignation as Managing Director of the Mercantile Systems Pty Ltd and its wholly owned subsidiaries. We do so for the following reasons …" 11 The whole terms of the letter show the person referred to as "I" in this sentence is Mr Douglas Ferdinands. At a number of later points the letter uses expressions in the plural appropriate for a letter written on behalf of all three of Mr Ferdinands, Mr Dabrowski and Mr Meehan, although at one later point it reverts to speaking in the singular, again in the context the person speaking being Mr Ferdinands. The singular recurs on the second page of the letter in a passage which commences "Accordingly I have been authorised by Messrs Kerry Meehan and Ryk Dabrowski to offer you the sum of one hundred and fifty thousand dollars ($150,000) in consideration for you relinquishing your shares and unsecured note holdings in the company …". At the end where signatures appear the letter is signed by Mr Ferdinands, Mr Meehan and Mr Dabrowski, in each case above a typed indication of a space for a signature with their respective names – Douglas Ferdinands, Kerry Meehan and Ryk Dabrowski, and in each case with the word Director under the signature and typed name. 12 The opening sentence seeking Mr Treacey's resignation as Managing Director is followed by a number of matters put forward as reasons; these matters relate to the financial affairs of the company and include a statement initiated with the observation "As investors we paid Edward F. Treacey & Associates Pty Ltd the sum of $52,000 for undertaking the due diligence in relation to the acquisition." The following complaints related to matters which were adverse financial considerations which it was said had been uncovered since acquisition of the company. After going through these reasons for seeking Mr Treacey's resignation the letter went on to set out an array of duties to be undertaken by directors and by Mr Venner who was to act as the company's Secretary, and to assert that there would be no meaningful role which Mr Treacey could play in the future operations of the company. 13 Then the matters expressed in the letter take a distinct turn and the subject stated became an offer or proposal for an agreement. I set out the opening words of this passage earlier: the passage is: Accordingly I have been authorised by Messrs Kerry Meehan and Ryk Dabrowski to offer you the sum of $150,000 (One hundred and fifty thousand dollars) in consideration for you relinquishing your Shares and Unsecured Note holdings in the Company, recognising that these amounts currently total $130,000 in the Company's books. The excess of $20,000 over and above the value of $130,000 is offered in consideration for you accepting such payment over the next 15 months at the rate of $10,000 per month commencing 15 July '97 with final payment to be made on 15 June 1998. This arrangement can be structured in the form of a Redeemable Unsecured Note obligation of the Company. We will be pleased to instruct our Solicitors to prepare the necessary documentation for your consideration. This offer is irrevocable and remains open for acceptance until 5 pm on Tuesday 17 June '97. Acceptance of this offer may be communicated to me at my offices by facsimile at 9223 0290. Should you accept this offer we then require transfer of the Shares and the Unsecured Notes to us immediately following acceptance of this offer. 14 This passage clearly separates the agreement proposed from the means of implementation. The last sentence of the passage quoted shows what was meant by relinquishing shares and notes. The letter then goes on at p3 to call for delivery of company records and property and concludes "We regret having to bring our association to an end but believe this to be in best interest of the company", with a formal termination "Yours sincerely" and with the signatures to which I have referred. 15 The letter of 17 June 1997 is again addressed to Mr Treacey and opens with the following words: We refer to our letter dated 16 June '97 and now propose the following changes to the terms and conditions stated therein based on our discussion of this morning …" 16 In the following paragraph (1) it was proposed that there be a payment of $24,022.78 constituted by $10,000 consultancy fees due and payable to the second plaintiff in respect of an existing verbal consulting agreement entered into with Mercantile Systems and a further sum of $10,000 by way of notice of termination of that agreement, and interest $4,022.78 on unsecured notes from 29 January 1997 to 23 June 1997; these payments to be made payable to the second plaintiff on 23 June 1997 by company cheque. The reference plainly was to obligations of Mercantile Systems Pty Ltd to the second plaintiff which were to be paid by Mercantile Systems Pty Ltd. The substance of this proposal was that Mercantile Systems Pty Ltd would meet certain of its obligations. Paragraph (1) of the letter of 17 June proposes an arrangement collateral with and only nominally integrated with the offer and the obligations of Mr Treacey which acceptance would require. 17 The second paragraph was an undertaking to negotiate with the Bank of Western Australia for a release of guarantees. The third was: "3. Pending release of such guarantee Messrs Dabrowski, Ferdinands and Meehan agree to indemnify your company from any action that the bank may take in respect of its securities." The remaining condition (numbered 5, there being no 4) extended the time for the final payment on payment of the $150,000. The letter concluded "All other terms and conditions of our letter dated 16 June '97 otherwise remain unchanged" and was signed similarly as the letter of 16 June 1997. Underneath the signatures Mr Treacey signed his name under the word "Accepted" and his signature was witnessed. 18 Throughout these letters there are a number of strange shifts of expression; the first letter opens with language appropriate for Mr Ferdinands to be writing on behalf of himself, Mr Dabrowski and Mr Meehan, but at other places the language is appropriate for all three to be writing as offerors in a letter from them all. There are also some anomalies of idea which gave rise to some submissions and observations by counsel. The most prominent of these is that although the letter of 16 June is addressed to Mr Treacey, and does not contain any expression which might show that it was directed to or contained an offer directed to Edward F Treacey & Associates, what it was proposed that Mr Treacey should do, in a passage I have set out, is relinquish "your Shares and Unsecured Note holdings in [Mercantile Systems]" whereas it was not Mr Treacey but Edward F Treacey & Associates which had a beneficial interest in shares and had unsecured note holdings in Mercantile Systems. 19 Another anomaly is that in the letter of 17 June 1999 paras (2) and (3) relate to negotiating with the bank (and the reference must be the Bank of Western Australia) to release "your company" which must be Edward F. Treacey & Associates from the joint and several guarantees, and to Messrs Dabrowski, Ferdinands and Meehan agreeing to indemnify "your company," again Edward F Treacey & Associates, from any action that the bank may take in respect of the bank securities. The anomaly is that Mr Treacey himself and not his company was the party to the guarantee provided to the bank, his company was not in a position to obtain and had no need of a release by the Bank of any guarantee, and his company would not be assisted by an agreement of Messrs Dabrowski, Ferdinands and Meehan to indemnify that company from any action by the bank. These proposals cannot have been intended to be futile and ineffective and on any reasonable reading with the purpose of the arrangements in mind the release and the indemnity must have been intended to be available to the entity which could have advantage from them. 20 These matters show that the letters, while obviously intended to create binding obligations, are not carefully composed or well considered, and that an address to their meaning must be undertaken with an understanding that complete symmetry of expression and integration of idea will not be available, and with the object of perceiving in a fair way the substance of what the parties intended. 21 It is an anomaly that, according to grammar and the literal meaning of the words used, the offer of $150,000 was made to Mr Treacey himself but was made in consideration of his relinquishing shares and unsecured note holdings which he did not himself own, but were owned by the company which was associated with him and of which he was nominee on the Board. The anomaly is a small one, in context, and there is no difficulty in perceiving the proposal as being in substance a proposal that Mr Treacey was promised $150,000 in consideration of his bringing about relinquishment of the shares and unsecured notes, and transfer of them to the offerors immediately following acceptance of the offer. 22 In my view the way in which the letters are composed makes it altogether unlikely that shifts in the manner in which the authors of the letter are referred to convey any significant matter relating to the meaning and effect of the letters. 23 The opening passages of the letter of 16 June were appropriately to be made and according to their terms were made by Mr Ferdinands, Mr Dabrowski and Mr Meehan in their capacity as directors of Mercantile Systems. This of itself is sufficient to explain the subscription "Director" beneath their signatures. In no way however does the use of the subscription, in this context, suggest that they were acting or purportedly acting for or on behalf of Mercantile Systems or of any other person: they were acting in exercise of office as directors, and not in the course of any agency. 24 The letter turned away from the subject with which it opened, and its authors turned away from the action in their capacity as directors with which they opened the letter. When they came to making an offer, using their own names to make an offer, the ordinary meaning of the language used, and its plain meaning are that they themselves as principals made the offer. There is some loose language about the history and ownership of the interest, but there is no looseness about who is offering to make promises and to pay money. There is nothing in the context in which they spoke when making the offer, or of what they said about making the offer which suggests that they acted in any other character than as principals. The consideration that they themselves were not personally the owners of beneficial interests in the shareholding has in my opinion no force to suggest that in making what, read literally, was an offer to pay money in consideration of Mr Treacey relinquishing shares and unsecured note holdings, they were acting on behalf of those beneficial holders of shares which were associated with them, or were acting on behalf of anyone else other than the persons whom they mentioned, that is, themselves. No reasonable reader could understand, from the looseness of the language used in referring to the shares and unsecured notes as those of Mr Treacey, that there was intended to be a projection back, through a similar loose usage, to persons who were associated with the offerors and who already had beneficial interest in shares; there is simply no expression in either letter which could convey that understanding. 25 The passage commencing "As investors we paid Edward. F. Treacey & Associates Pty Ltd the sum of $52,000 for undertaking the due diligence in relation to the acquisition" has in my opinion no force to establish or even to suggest that when in a later and distinct passage in the letter the authors of the letter came to make an offer they did so in the exercise of some agency. No special usage or connotation of the word "investors" has been established, and it is unremarkable, in a passage such as the opening passage of the letter of 16 June seeking Mr Treacey's resignation and reciting reasons, to find the word used literally of the writers of the letter but with the intention of referring to entities closely associated with them which made the payment. This usage of "investors" might be thought to be loose language, but in a recital of grievances it is not strikingly loose, and it has no force to establish that either that part of the letter, or the whole of the letter was written in the exercise of an agency for those entities, none of which is identified or clearly referred to at any point in the letter. There is no textual support, either here or anywhere in either letter, for a finding adverse to any of those entities that it was the person making the offer or the person on whose behalf the offer was made. There is no textual support in either letter for treating any of the shareholder entities as having made an engagement to pay for relinquishment of the shares, and it is plain that an attempt to set up the letters in support of a case against them could not succeed. 26 There is very little assistance in the construction of the letters of 16 and 17 June from the shareholders' agreement, which is only related to them in the most general way, and does not establish any standard terminology or governing context within which the letters are to be understood. There is no clear reference to the shareholders' agreement in the two letters. 27 It was contended that the terms of the letters raised ambiguity as to whether the offer was made by Mr Ferdinands, Mr Dabrowski and Mr Meehan as principals or was made by them on behalf of other persons, and that the resolution of that ambiguity depends on extrinsic evidence. In my finding there is no such ambiguity, and further there is no supposed extrinsic evidence which would point to any person other than those three as the persons intended to be bound; and the references to them as directors and as investors do not do so. If there is any doubt (and I see none) as to what means of relinquishment were contemplated, that doubt would be resolved by the sentence "Should you accept this offer then we require transfer of the shares and the unsecured notes to us immediately following acceptance of this offer." These words are quite inconsistent with the concept that the offer was made in exercise of an agency for the shareholder entities and that the transferees were to be persons other than the offerors. 28 In my view the subscription "Director" to the signatures is not of governing or controlling importance in the construction of expressions elsewhere in the letters. For some parts of the letters their capacity as directors was clearly important; but this cannot obscure the plain meaning of other parts of the letters as an offer for contractual formation in their personal capacity. 29 Order: (1) I answer the separate question: Yes, the first second and third defendants were so obliged. (2) Give judgment for the second plaintiff against the first second and third defendants for $130,000 with costs. (3) Reserve further consideration of interest. ******** Last Modified: 03/05/2002 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.