Supreme Court New South Wales Medium Neutral Citation: Crest One Pty Ltd v Olynthos Australia Pty Ltd & Ors [2013] NSWSC 1766 Hearing dates: 27 November 2013 Decision date: 29 November 2013 Jurisdiction: Equity Division Before: Sackar J Decision: See paragraph [42] Catchwords: EQUITY - specific performance - effect of honestly held but mistaken belief as to proper construction of arrangements. Legislation Cited: N/a Cases Cited: DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 Quest Rose Hill Pty Ltd v Owners Corporation of Strata Plan 64025 [2012] NSWSC 1548; (2012) 16 BPR 31,387 Remax Developments Pty Ltd v Chamwell Pty Ltd [2011] NSWSC 695; (2011) 15 BPR 29,479 Velik v Steingold [2013] NSWCA 303 Texts Cited: N/a Category: Principal judgment Parties: Crest One Pty Ltd (Plaintiff) Olynthos Australia Pty Ltd (First Defendant) Olynthos Pte Ltd (Second Defendant) Ilias Christianos (Third Defendant) Representation: Counsel: D Ash (Plaintiff) N Newton (Defendants) Solicitors: Robert H Butler (Plaintiff) Iles Selley Lawyers (Defendants) File Number(s): 2012/183848 Judgment Proceedings 1By its amended summons filed on 22 February 2013, the plaintiff seeks relief in the following terms: 1. A declaration that the Plaintiff is entitled to have the Agreement made between the Plaintiff and each of the Defendants on 4 July 2011 and varied by them on 16 September 2011 specifically performed and carried into execution. 2. An order that the Defendants specifically perform and carry into execution the said Agreement, in particular: a) by the Defendants and each of them doing all things necessary to register 11,850,000 of the First Defendant's shares currently in the name of the Third Defendant, into the name of the Second Defendant; and b) by the Second Defendant executing a charge in favour of the Plaintiff over its business assets and undertakings. 3. In default of the Defendants or any of them complying with Order 2, a direction that a Registrar of the Court be empowered to execute all such instruments and do all such things in the name of and on behalf of every defaulting Defendant as may be necessary in order to specifically perform and carry into execution the said Agreement. 4. As to the 150,000 of the First Defendant's shares which can no longer be the subject of an order for specific performance, the Plaintiff seeks from all Defendants damages. 5. Interest on any damages. 6. Costs. 7. Further or other orders, including an order that the restraint on the Third Defendant ordered on 7 February 2013 be discharged or varied to the extent necessary to give effect to any other relief granted. 2The defendants oppose the relief sought. Background 3The parties, being Crest One Pty Ltd (Crest or the plaintiff), Olynthos Australia Pty Ltd (the first defendant) Olynthos Pte Ltd (the second defendant) and Ilias Christianos (Mr Christianos or the third defendant) entered into an agreement entitled a "Loan and Management Deed" on 4 July 2011 (the Agreement). 4The sole director, secretary and shareholder of the plaintiff was, at all relevant times, a Mr Allen Linz (Mr Linz), who is not a party to these proceedings. At all relevant times, the third defendant was a director and a shareholder of the first and second defendants. The first defendant has other officeholders and shareholders, including a director, Mr Rolf Lorenzen (Mr Lorenzen). 5The object of the Agreement was to provide capital to the first defendant to enable it to apply for a licence to explore and exploit the commercial potential of coal deposits in an area near Dubbo (the project). The Agreement provided, among other things, that the plaintiff was required to advance $600,000 jointly to the second and third defendants (clause 2.1) and in due course a further $2.4 million to the first defendant (clauses 2.1 and 2.8), the second defendant was required to subscribe to 12 million shares in the first defendant (clause 2.2), and the second defendant was required to grant a fixed and floating charge over its own assets and undertaking in favour of the plaintiff to (generally and among other things) secure the plaintiff's advance of $600,000 (clause 2.5). The Agreement also provided to the plaintiff two options, subject to particular terms, to purchase from the second defendant shares in the first defendant (clauses 3 and 5). 6For reasons which will later emerge, it is important to note clauses 2.6, 2.6.1 and 5.4 of the Agreement: 2.6 The Christianos Advance [i.e. the advance of $600,000] shall be repaid on the date provided for in clause 5.4 for payment of the Consideration in respect of the Second Share Option (those terms as defined in clause 5). Christianos [i.e. the third defendant] and Olynthos [i.e. the second defendant] shall pay interest thereon calculated at the rate of twelve per centum per annum (12%) on the balance outstanding from time to time from the date of payment of the Christianos Advance by Crest [i.e. the plaintiff] until the date of repayment. 2.6.1 In the event of the exercise by Crest of the Second Option as referred to in clause 5 the full amount of the Christianos Advance then outstanding together with any interest which may have accrued shall be deemed forgiven as from the date of receipt by OA [i.e. the first defendant] of the notice exercising the Option. ... 5. Second Option to acquire Olynthos Shares ... 5.4 The Consideration shall be paid by Crest to Olynthos within sixty (60) days of the date of Crest's exercise of the Second Option. 7Also on 4 July 2011, the plaintiff advanced $600,000, in accordance with the terms of the Agreement. On or before 4 July 2011, in accordance with the terms of the Agreement, 12 million shares in the capital of the first defendant were issued, but, contrary to the Agreement, to the third rather than second defendant. 8Seemingly as a result of the plaintiff's subsequent discovery of the allocation of the 12 million shares of the first defendant to the third rather than second defendant, the parties to the Agreement entered into a further agreement, entitled "Deed of Variation to Loan and Management Deed" (the Variation Deed) on 16 September 2011. The purpose of the Variation Deed was to address the contradiction between the requirement in the Agreement that 12 million shares in the capital of the first defendant be issued to the second defendant, and the fact that such shares were issued instead to the third defendant, by providing (among other things) that the shares would remain held by the third defendant, for the purpose of giving effect to the Agreement, and as though the shares had issued in the name and for the benefit of the second defendant. I will now refer to the Agreement, as varied by the Variation Deed, as the Agreement. 9On 7 November 2011, the plaintiff sent a letter dated 7 November 2011 to the defendants, expressing disappointment about the lack of progress in the proposed mining project, the delay in obtaining an exploration licence from the relevant government agency, alleged breaches of the Agreement, and requesting the resolution of these issues. 10On 15 February 2012, apparently following oral discussions the previous day about the plaintiff's concerns about the project, Mr Linz sent an email to Mr Christianos at 10:18am (or 10:19am), in the following terms: Hi Eli Good to see you yesterday. I confirm our agreement as follows: 1. That our intention is that OA repay the loan and that our agreement then be at an end; 2. That OA immediately release to Crest $100,000 from the holding account monies which presently stands at approx $180,000 and we classify it as an early repayment of the loan in accordance with our agreement; 3. That the balance of $500,000 be paid by OA by 30 March 2012; 4. That Crest will have the option to convert its $500,000 loan into 5% of OA (non dilutable) at any time between now and the time the loan is repaid on 30 March 2012; 5. That if Crest does exercise the option as per 4 above, OA will grant Crest a further option to purchase another 10% of OA (taking Crest's total interest to 15% non dilutable) for $2.5 million. This option will be exercisable 90 days from the grant of the EL. 6. That if Crest does exercise its options as per 4 or 5 above, Crest will be granted a board seat. 7. We will agree on the terms of a Deed ASAP to be put into place at the time of the exercise of the option referred to in 4 above or, if the option is not exercised, at the time of repayment of the full $500,000 as per 3, which incorporates appropriate provisions and also provides for mutual releases (including BST [sic]) and the formal setting aside of our agreement; 8. Until the amount is repaid in full, or the option in 4 is exercised, and in either case an agreed Deed is signed, our current agreement will remain in place. Please call me at your convenience. Regards, Allen 11At 11:52am that day, Mr Christianos replied as follows: Dear Allen I agree and confirm with your e-mail. Regards Eli Elias Christianos Olynthos group 12At 12:05pm, Mr Linz responded: Thanks Eli. What are the bank details of the operating account so that we can authorise transfer of the 80k into that account? Also who is the contact at the bank that the letter should be addressed to? ... Regards Allen 13Later that day, Mr Linz sent a letter on behalf of the plaintiff to the first defendant, addressed to Mr Christianos, in the following terms: Dear Christian, As agreed, please transfer from the holding account the amount of $100,000 to Rebel Property Group Pty Ltd [BSB and Account Number details], and the balance of $82,878.58 to Olynthos Australia Pty Ltd [BSB and Account Number details]. Please instruct the Commonwealth Bank of the transfers and remove me on all signatory obligations. Also once transfers are completed please close Olynthos Australia Pty Ltd account [BSB and Account Number]. 14Later in February 2012, the plaintiff received $100,000 from the first defendant's account. 15However, in a letter dated 8 May 2012 sent to the plaintiff, the first defendant, through Mr Lorenzen, advised (among other things): ... As we indicated to you yesterday, the Company's position is that any arrangement that you say you have reached with Mr Elias Christianos since the execution of the Loan and Management Deed of 4 July 2011 is a matter for you and Mr Christianos. The Company does not consider itself bound by the actions or inaction of Mr Christianos in this regard... ... 16In a letter dated 12 May 2012, addressed to the directors of the first defendant, Mr Linz on behalf of the plaintiff, responded by expressing surprise at the content of Mr Lorenzen's letter of 8 May 2012, and demanded: ... that the terms of the Deed dated 4 July 2011 between Crest, Olynthos Australia Pty Ltd, Olynthos Pte Ltd and Eli Christianos ... be observed and complied with immediately. 17In a further letter dated 25 May 2012, addressed to the directors of the first and second defendants, Mr Linz, on behalf of the plaintiff, said: As you will recall, Crest had written to the company and each of you on 12 May 2012 asking the company to perform its obligations under the Crest Deed. Neither the company nor any of you replied. Instead, on 18 May 2012, the company by one of its directors asserted that the Crest Deed was no longer operative and that the Crest loan had been extinguished. This attempt to repudiate the Deed is not accepted by Crest. The parties' rights and obligations remain on foot. 18On 12 June 2012, the plaintiff commenced these proceedings. 19On 9 November 2012, the third defendant transferred 150,000 (of 12 million) of his shares in the first defendant, to a third party, namely Kim Cheng of Hong Kong. 20The matter was listed for hearing before Stevenson J on 7 February 2013. However, it did not proceed, and consent orders were made including the following: 1. Declare that the Loan and Management Agreement executed by the parties on 4 July 2011 as varied by the Deed of Variation to Loan and Management Deed executed by the parties on 16 September 2011 has not been terminated. 2. Without admission of liability, and upon the plaintiff through is counsel giving the usual undertaking as to damages, the third defendant is retrained from transferring, encumbering or otherwise dealing with the 11,850,000 shares that he holds in the first defendant. 21In March and April 2013, numerous letters were exchanged between the solicitors acting for the plaintiff and the solicitors acting for the defendants. In summary, the defendants' solicitors repeatedly requested that, in light of the consent orders confirming the continuation of the Agreement and Variation Deed, the sum of $100,000 paid to the plaintiff in February 2012 be repaid to the first defendant. The plaintiff's solicitors denied that the plaintiff was required to return the $100,000, on the basis that, notwithstanding the consent orders made on 7 February 2013, the arrangement made on 15 February 2012 still had effect. Ultimately, by a letter dated 11 April 2013, the defendants' solicitors wrote to the plaintiff's solicitors, advising that the plaintiff's persistent refusal to repay the sum of $100,000 was in breach of the Agreement and amounted to a repudiation which the defendants accepted, and purported to terminate the Agreement. Discussion and conclusion 22The plaintiff relied on three fairly brief affidavits of Mr Linz, and the defendants relied only on a brief affidavit of a Mr Anthony Damianos (a project manager and executive officer). There was no cross-examination. Mr Christianos, who on any view played a pivotal role both in the negotiation of the 4 July and 16 September 2011 agreements, and the 15 February 2012 arrangement, provided no evidence at all. Strictly speaking, his absence is of no moment because the question of his authority to bind the defendants by his actions on 15 February 2012 did not loom in the conduct of the proceedings. In addition, no testimony from Mr Christianos relevant to any contractual issue was relied on by any party. 23Counsel for the plaintiff contended that, despite the consent orders made by Stevenson J on 7 February 2013 confirming the subsistence of the 4 July and 16 September 2011 agreements, the plaintiff was not obliged to return the sum of $100,000. The arrangement reached on 15 February 2012 between the plaintiff, and the third defendant, allegedly acting on behalf of the defendants, is critical to the plaintiff's case. 24In particular, the plaintiff submits that the arrangement reached on 15 February 2012 was binding on the defendants, that the immediate repayment of $100,000 to the plaintiff pursuant to paragraph 2 of the 15 February 2012 arrangement was simply a repayment of money in accordance with clause 2.6 of the Agreement (albeit at an earlier date), and that the arrangement reached on 15 February 2012 should not be characterised as a variation to the Agreement. 25Counsel for the defendants submitted that, whatever Mr Linz and Mr Christianos thought they were doing, the repayment of $100,000 to the plaintiff could not have been made pursuant to, and was indeed contrary to, the terms of the Agreement. 26In my view, the defendants' construction of the Agreement is preferable. Although clause 2.6 of the Agreement does, at least by its language, appear to contemplate that the plaintiff's initial advance of $600,000 would be "repaid", such repayment could only occur "on the date provided for in clause 5.4", which was "within sixty (60) days of the date of Crest's exercise of the Second Option". Crest had not exercised, and never did exercise, any such option. Accordingly, the repayment of $100,000 provided for under the 15 February 2012 arrangement could not have been done in accordance with, or pursuant to, the terms of the Agreement. 27Additionally, the combined effect of clauses 2.6, 2.6.1 and 5.4 is that, even in the event that Crest relevantly exercises the second option (under clause 5), thereby triggering the relevant "repayment" obligation (under clause 2.6), the Agreement nonetheless (and somewhat curiously) provides that "the full amount of the [relevant advance] ... shall be deemed forgiven" (under clause 2.6.1). The Agreement therefore never contemplated an actual transfer or repayment of the plaintiff's advance of $600,000. 28Accordingly, despite the language used by Mr Linz and Mr Christianos in their correspondence on 15 February 2012, the arrangement arrived at (if any), should, at best, properly be characterised as a variation to the Agreement. 29For a reason I will identify shortly, I do not need to decide whether the correspondence between Mr Christianos and Mr Linz resulted in an arrangement binding on all the defendants. I simply note that there is a real question as to Mr Christianos' authority to bind the first and second defendants. Although Mr Christianos was a director and shareholder of both companies at the relevant time, and although he signed off in his email of 15 February 2012 with the words "Olynthos Group", there were other officeholders in each company at the relevant time, and there were not, at least before me, any board minutes, of either the first or second defendants, authorising or contemplating such an arrangement with the plaintiff. 30In my view, it is unnecessary to decide whether, on 15 February 2012, Mr Christianos and Mr Linz successfully varied the Agreement. That is because the consent orders of 7 February 2013 in my view had the effect of reinstating the "Loan and Management Deed" and the "Deed of Variation to Loan and Management Agreement" in their respective terms, without any reference to the arrangement allegedly arrived at on 15 February 2012. 31It follows that the plaintiff's refusal to return the sum of $100,000 following the 7 February 2013 consent orders, was contrary to its contractual obligations, properly understood. However, the plaintiff, clearly in reliance on legal advice, maintained a mistaken but I am prepared to accept genuinely held belief that it was not liable to repay the $100,000. The issue is then whether this amounts to repudiatory conduct entitling the defendants to terminate the Agreement. 32The Court of Appeal recently considered the consequences of a party acting on a mistaken interpretation of a contract (Velik v Steingold [2013] NSWCA 303 at [87] per Sackville AJA with whom McColl and Gleeson JJA agreed) and quoted the following passage from DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 (at 432-433 per Stephen, Mason and Jacobs JJ, with Aickin J agreeing): No doubt there are cases in which a party, by insisting on an incorrect interpretation of a contract, evinces an intention that he will not perform the contract according to its terms. But there are other cases in which a party, though asserting a wrong view of a contract because he believes it to be correct, is willing to perform the contract according to its tenor. He may be willing to recognize his heresy once the true doctrine is enunciated or he may be willing to accept an authoritative exposition of the correct interpretation. In either event an intention to repudiate the contract could not be attributed to him. As Pearson LJ observed in Sweet & Maxwell Ltd v Universal News Services Ltd [1964] 2 QB 699, at p 734: In the last resort, if the parties cannot agree, the true construction will have to be determined by the court. A party should not too readily be found to have refused to perform the agreement by contentious observations in the course of discussions or arguments ... ... ... on the evidence this Court would not be justified in finding that the [vendor] acted otherwise than in accordance with a bona fide belief as to the correctness of the interpretation which it sought to place upon the contract. Consequently it is a case of a bona fide dispute as to the true construction of a contract expressed in terms which are by no means clear (see Asprey JA in Satellite Estate Pty Ltd v Jaquet (1968) 71 SR (NSW) 126, 149). In these circumstances the Court is not justified in drawing an inference that the [vendor] intended not to perform the contract according to its terms or that it repudiated the contract. 33Although in this case the defendants did inform the plaintiff that it was under an obligation to return the sum of $100,000, I am not persuaded that there is a sufficient evidentiary basis for a finding that the plaintiff acted otherwise than in accordance with a bona fide belief as to the correctness of its understanding of its contractual arrangements with the defendants. In consenting to the orders made by the court on 7 February 2013, the plaintiff evinced a clear intention to perform its obligations under the 4 July and 16 September 2011 agreements, and subsequently insisted on the performance of those agreements, notwithstanding its refusal to return the sum of $100,000. The plaintiff's assertion that (in the event the court considers that the proper construction of the Agreement requires the plaintiff to repay the $100,000), it remains ready, willing and able to perform the Agreement, is, I accept, a clear indication on the part of the plaintiff that it is "willing to recognize [its] heresy once the true doctrine is enunciated" and to abide by the court's determination. In these circumstances, I would not characterise the plaintiff's conduct as repudiatory. 34Since I have found that the plaintiff's conduct was not repudiatory, the defendants' purported termination was ineffective, and presents no bar to an order for specific performance (see as examples Quest Rose Hill Pty Ltd v Owners Corporation of Strata Plan 64025 [2012] NSWSC 1548; (2012) 16 BPR 31,387 and Remax Developments Pty Ltd v Chamwell Pty Ltd [2011] NSWSC 695; (2011) 15 BPR 29,479). I am satisfied the plaintiff is ready, willing and able to comply with its contractual obligation, properly understood, which in my view involves an obligation to make repayment of the $100,000. 35I am therefore prepared to make a declaration that the plaintiff is entitled to have the Agreement made between the plaintiff and each of the defendants on 4 July 2011 and varied by them on 16 September 2011 specifically performed and carried into execution, provided that the plaintiff repays the $100,000. 36Turning to the plaintiff's damages claim (arising from the transfer of 150,000 shares in the first defendant from the third defendant to a third party), the defendants submit, first, that the plaintiff is not entitled to damages because the Agreement was terminated, and secondly, that even if the Agreement remains on foot, the plaintiff has not suffered any damage because the second defendant still holds 10,000,000 shares in the first defendant, and the maximum number of shares that the plaintiff could acquire pursuant to the first and second options (assuming they were exercised) is 9,505,000 shares. The plaintiff does not appear to dispute this, but submits that the damage it has suffered is that by diminishing the second defendant's shareholding in the first defendant, the value of the second defendant's assets is diminished, and therefore the value of the plaintiff's fixed and floating charge on the second defendant's assets is diminished. The plaintiff submits that the difficulty in valuing that loss is no bar to recovery. In my view, the appropriate course to take is to stand the matter over for some little time, and to grant the parties liberty to apply to have the matter re-listed if and when that becomes necessary in the meantime. 37In the circumstances, I am prepared to make an order for specific performance of the 4 July and 16 September 2011 agreements, provided the plaintiff makes repayment of the sum of $100,000. 38It would also follow that a charge must be brought into existence as contemplated by the Agreement. In relation to the precise form of the charge, the parties should negotiate and attempt to draft terms acceptable to them, and in accordance with the terms of the Agreement. Given the obvious potential for disagreement, I am prepared to grant liberty to the parties to apply to have the matter re-listed in the event that they are unable to reach consensus on the terms of the charge. 39I have doubts as to whether it would be appropriate to make an order in accordance with paragraph 2(a) of the plaintiff's amended summons filed on 22 February 2013, but I am prepared to hear the parties on that matter. 40I consider it appropriate to make an order in accordance with paragraph 3, and an order in the terms referred to in paragraph 7, of the plaintiff's amended summons filed on 22 February 2013. 41As for the damages claim in respect of the 150,000 shares, it seems to me that the appropriate course to take is to stand the matter over, perhaps initially for a period of six months, for directions in the Commercial List, to provide the plaintiff with time to decide whether it wishes to pursue this claim. 42I invite the parties to approach my Associate to have the matter re-listed to address me on the question of costs, and (if necessary) to discuss the final form of the orders to be made to give effect to these reasons. ********** 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. Decision last updated: 29 November 2013