Case: Dobbs v National Bank of Australasia Ltd [1935] HCA 49 ; (1935) 53 CLR 643
Outcome: cited
my view, the following issues require decision. Did Forbes Australia experience a profit shortfall in the financial year ending 31 December 1998? What is the position of Mrs Forbes in relation to the 1998 profit shortfall? Was the effect of cl 3.3 and Annexure 1 of the share sale agreement such that the production of audited figures for the financial year ending 31 December 1999 was conclusive evidence of those figures, consistent with the decision of the High Court in Dobbs v National Bank of Australasia Ltd [1935] HCA 49 ; (1935) 53 CLR 643? Was the change of control of Forbes Australia from the vendors to Forbes Asia an alteration in the factual substratum sufficient to discharge the respondents as guarantors? Did the third and fourth deeds of variation to the share sale agreement result in the discharge of the respondents as guarantors? Did the transaction resulting in the acquisition of Favco by Forbes Australia result in the discharge of the respondents as guarantors under the Forbes Guarantee? Even if the vendors' profit guarantees as articulated in cl 3.3 of the share sale agreement are valid, are the applicants estopped from relying on them because of the alleged representations of Mr Poh as pleaded in para 13 of the respondents' defence? Was the applicants' cause of action statute barred? Was the Forbes Lot 8 Lease Guarantee enforceable? What are appropriate rulings in relation to the notice of motion filed 12 September 2007? I now turn to each of these issues. 1. Did Forbes Australia experience a profit shortfall in the financial year ending 31 December 1998? So far as concerns the 1998 financial year the applicants submit in their Statement of Facts, Issues and Contentions as follows: In my view Mrs Forbes is not bound by the agreement reached by Mr Poh on behalf of the applicants and Mr Forbes in relation to the 1998 profit shortfall. Further, the substituted agreement with respect to the 1998 profit shortfall represented a material alteration to the calculation of that shortfall, the terms of the principal agreement and in particular the liability of the guarantors with respect to the amount guaranteed for the year ending 31 December 1998. It is not claimed, and there is no evidence, that this alteration in any way benefited Mrs Forbes. Accordingly, any liability of Mrs Forbes in relation to a profit shortfall for the calendar year ending 31 December 1998 pursuant to the Forbes Guarantee and cl 3.3 of the share sale agreement was discharged in light of the substituted agreement reached by Mr Poh and Mr Forbes in respect of that year, and to which she has not consented. 3. Was the effect of clause 3.3 and Annexure 1 of the share sale agreement such that the production of audited figures for the 1999 financial year was conclusive evidence of those figures, consistent with the decision of the High Court in Dobbs v National Bank of Australasia Ltd [1935] HCA 49 ; (1935) 53 CLR 643? In relation to the year ending 31 December 1999 the applicants submit that Forbes Australia recorded an audited loss before tax, calculated by reference to the Formula in Annexure 1 of the share sale agreement, of $341,284.00. This loss, recorded in Forbes Australia's audited financial report for that year prepared by Deloitte Touche Tohmatsu, together with the failure of Forbes Australia to reach the guaranteed profit of $1,350,000 (being 90% of $1,500,000 in accordance with cl 3.3.3 of the share sale agreement as varied) resulted in Forbes Australia experiencing a profit shortfall for that year of $1,691,284. The applicants submit further that the fact that the loss was recorded following an audit in accordance with Annexure 1 of the share sale agreement means that it is conclusive evidence of that loss. The applicants refer to the decision of the High Court in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 as authority for this proposition. The applicants' case in relation to the claimed 1999 shortfall was helpfully summarised by Counsel in closing submissions, as follows: Mr Jones: Your Honour, the applicant's case is very straight forward, and that is the terms of the share sale agreement, clause 3.3 says that the profit guarantee the amounts of the profit guarantee are to be referenced by the audited accounts. Now, in evidence is the only document which fits within that description. It's the audit by Deloittes, the company auditors. They are the audited accounts. If they are not audited accounts, and if they are not audited accounts to which that clause refers, then, one may ask rhetorically what conceivably could possibly fit that description of audited accounts. There's no suggestion, there's no pleading that that audit report, those accounts are in any way were fraudulently prepared or are not what they say they are... There's much complaint raised that, "Oh, we can't test it." That's true to a point, insofar as that every single document which those auditors would have seen are no longer available, and there's the evidence, particularly, that the correspondence between the instructing solicitors explain why that is, and, namely, that the company went into a period of administration for a period of time, and lost control of all of its records, and when it came out of administration it never got those all of those records back. And for some reason the accountants the administrators no longer have them, and unfortunately Deloittes no longer have everything either. Now, but it's... And it's a novel proposition put by the respondent that the plaintiff, in particular a company can't rely on its own audited accounts, which is what we're seeking to do. Now, if your Honour accepts that they are the audited accounts of the company for the period 31 December 1999, then, in our submission, that is the end of the story. They fit the description of the accounts referred to in the profit guarantee clause, and clearly on their face, they comply with the terms in the share sale agreement. My friend, in his submissions, put to your Honour that they don't, they merely there's a further step that needed to be done, and that hasn't been done, is the effect of my friend's submission. If you Honour will turn to exhibit 1A, at page 148, which is at the end of the audit report Deloittes audit report. There it is. There it is. That's the calculation in accordance with clause 3.3 of the share sale agreement. So the applicant has done all it can conceivably, in terms of establishing what the profit was or and rather the loss was, and what the profit shortfall was, in this case. And you have the subsequent to that report is the report of Ernst and Young which merely confirms the position of the Deloittes calculation. But your Honour need not, strictly speaking, rely on refer to it as the only report, because the Deloittes report is what it is, the audited reports of the company. (TS pp 391-392) The respondents' case with respect to the claimed loss in the 1999 calendar year falls into three parts namely an attack on the applicants' interpretation of cl 3.3 as a matter of law, submissions with respect to the Deloitte Touche Tohmatsu report itself, and submissions as to the admissibility of the report. In relation to the applicants' interpretation of cl 3.3, the respondents submit that the applicants' claims with respect to the final and conclusive nature of an audit report allegedly produced in compliance with cl 3.3 of the share sale agreement are unsustainable in light of ordinary principles of interpretation applicable to commercial contracts because: Further submissions of the respondents with respect to the authority of the Deloitte Touche Tohmatsu report are in summary: In Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 the bank brought an action against the appellant to recover the sum of &#8356;998 8s 7d pursuant to a guarantee signed by the appellant. So far as material the instrument of guarantee provided: ... 8. A certificate signed by the manager or acting manager for the time being of your head office or of any other office of your bank at which the banking account of the customer shall for the time being be kept stating the balance of principal and interest due to you by the customer shall be conclusive evidence of the indebtedness at such date of the customer to you. The appellant in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 submitted that the clause was invalid because it had the effect of ousting the jurisdiction of the Court and was therefore contrary to public policy. More specifically the appellant submitted that: In finding for the bank the majority of the High Court observed (at 651): This clause does not purport to impose upon the bank the necessity of obtaining the certificate it describes. It is not a qualification of the undertaking to pay contained in the first clause. It does not make a certificate a condition precedent to recovery. The promise remains a promise to pay the amount owing; it does not become a promise to pay the amount owing if certified or a promise to pay only what is certified as owing. The bank could recover without the production of a certificate if, by ordinary legal evidence, it proved the actual indebtedness of the customer. But the clause, if valid, enables the bank by producing a certificate to dispense with such proof. It means that, for the purpose of fixing the liability of a surety, the customer's indebtedness may be ascertained conclusively by a certificate. It was contended, however, for the appellant that, upon its true construction, the clause did not make the certificate conclusive of the legal existence of the debt but only of the amount. It is not easy to see how the amount can be certified unless the certifier forms some conclusion as to what items ought to be taken into account, and such a conclusion goes to the existence of the indebtedness. ...(T)he manifest object of the clause was to provide a ready means of establishing the existence and amount of the guaranteed debt and avoiding an inquiry upon legal evidence into the debits going to make up the indebtedness. The clause means what it says, that a certificate of the balance due to the bank by the customer shall be conclusive evidence of his indebtedness to (652) the bank... Parties may contract with the intention of affecting their legal relations, but yet make the acquisition or rights under the contract dependent upon the arbitrament or discretionary judgment of an ascertained or ascertainable person. The majority then considered issues relevant to arbitration and concluded: There are many familiar kinds of contracts containing provisions which make the certificate of some person, or the issue of some document, conclusive of some possible question. The most conspicuous example, perhaps, is the certificate of the engineer or architect under contracts for the execution of works or the construction of buildings. For these reasons we think the certificate of the officer of the bank is conclusive upon the parties of the amount and existence of the customer's indebtedness. However, after considering the submissions of both parties I have concluded that the applicants have not substantiated their case in relation to alleged profit shortfall for the 1999 calendar year based on the Deloitte Touche Tohmatsu report. Although there is force in the submission of the applicants to the effect that, if the audited financial statements for 1999 prepared by the auditors of Forbes Australia did not contain information as to "audited profits before tax" of that company as described in cl 3.3 and Annexure 1 of the share sale agreement, one indeed might ask what else in the circumstances of this case could conceivably fit that description, I am not persuaded that the reasoning in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 applies in these circumstances for the following reasons. Construction of clause 3.3 The legal principles emerging from Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 have been largely confined to circumstances where a banker's certificate has been issued as to the amount of indebtedness of a debtor to the bank (for example Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 , Je Maintiendrai Pty Ltd v Australia and New Zealand Banking Group Ltd (1985) 128 SASR 70, Campbell v National Australia Bank Ltd [1994] SASC 4526 , Equus Financial Services Limited v Sabri [1994] FCA 1331 , George Biritz v National Australia Bank Limited [1995] VSC 91 , Shomat v Rubenstein (1995) 124 FLR 284 , Thurwood v First for Finance Pty Ltd [1997] FCA 559 , Australia &amp; New Zealand Banking v Pan Foods Company Importers &amp; Distributors Pty Ltd [1998] VSC 346 , Jenkins v National Australia Bank Ltd [1999] VSCA 33 , State Bank v Lo [2000] NSWSC 1191 , State Bank of NSW v Kit Cheng Chia [2000] NSWSC 552 , Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 , Julong Pty Ltd v Fenn [2002] QCA 529 , Apple Computer [2003] NSWSC 126 , Commonwealth Bank of Australia v Bouwman [2003] WASC 205 , Timms v Commonwealth Bank of Australia [2004] NSWSC 76 , Permanent Trustee Company Limited v Gulf Import and Export Company [2008] VSC 162). Since and possible because of Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 , bankers' certificates have become well-known in practice. That is not to say that the principle articulated in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 has not been extended beyond the banker/customer/surety relationship, however circumstances in which the Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 principle is applicable are primarily confined to those involving the issue of a certificate as to the existence of a fact pursuant to legislation, or certain types of agreement, for example: In this case it is clear that: Any clause which purports to specify how a particular issue will be determined so as to preclude the parties from subsequently ventilating that issue in court must be expressed in the clearest of terms ( Stylis v United Medical Protection Ltd [2007] NSWCA 109). Neither cl 3.3 (nor Annexure 1) clearly express such a limitation. While these provisions do purport to prescribe a method of calculation of profits, they do not purport to have the effect of finality as was the situation in many of the cases to which I have referred. In the absence of such language the Court will be loath to impute such an effect: Permanent Trustee Company Ltd v Gulf Import and Export Company &amp; Emirates Trading Agency LLC [2008] VSC 162 at [38] . The preparation of an audit opinion in accordance with Australian Accounting Standards, while usually undertaken by experts, is clearly not a banker's certificate as contemplated in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 and the overwhelming majority of cases where the Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 principles have been applied. Nor, in my view, is it akin to a banker's certificate, whereby a person nominated by the relevant bank certifies the existence of a fact appearing in bank records, namely the recorded amount of indebtedness of a customer to the bank. Further, in the sense that an audit report is produced, albeit in an expert fashion, but based upon information provided by the company itself, in my view it is not akin to a certificate given by an engineer, an architect or a builder, who certifies the existence of a state of affairs in relation to construction of a building which he or she has personal knowledge and control. Clause 3.3 can be contrasted with cll 3.4.2, 3.4.3 and 3.4.4 of the share sale agreement which do purport to prescribe certifications by third parties in a manner akin to cases where Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 has been applied. These clauses refer to the retention and subsequent payment of the "Retention Sum" by the vendors' solicitors as follows: ... 3.4.2 secondly, to the Company, such sum of money which represent the difference in the Net Tangible Asset ("NTA") of the Company represented by the Vendors under the Said Accountants (as hereinafter defined ) as at 30.6.97 namely A$1,611,432.00 and the actual NTA of the Company as certified by a firm of accountants appointed by the Purchaser in verifying the NTA of the Company as represented by the Vendors to the Purchaser; 3.4.3 thirdly, to the Company such sum of money which represent the loss and damages suffered by the Company as a result of FFT's breach of FFT's warranties, representations and covenant under the FEH/FFT Agreement upon the Vendors' Solicitor's receipt of FEH's auditor's certification of such amount of loss and damages suffered by the Company; 3.4.4 fourthly, to the Company, such sum of money which represent the loss and damages suffered by FI as a result of FBT's breach of FBT's warranties, representations and covenants under the FIA/FIPL Agreement, upon the Vendors' Solicitor's receipt of FEH's auditor's certification of such amount of loss and damages suffered by the Company. Clauses 3.4.2, 3.4.3 and 3.4.4 provide for conclusive certification by nominated persons of certain facts. Such language does not appear in cl 3.3. Significantly, cl 17 of the share sale agreement provides that " any dispute in connection with the agreement should be finally settled by arbitration by an independent person appointed by the President for the time being of the Australian Society of Certified Practising Accountants (Queensland) at the request of either party". This clause did not exclude disputes in respect of cl 3.3. The existence of cl 17 and the fact that it applies to all disputes militates against an interpretation that audited financial statements were to be a final and conclusive determination of the profits of Forbes Australia within the meaning of cl 3.3. Possible failure of Deloitte Touche Tohmatsu report to comply with Annexure 1 Even assuming that the effect of cl 3.3 and Annexure 1 is that an audit opinion is akin to a "Dobbs" certificate as submitted by the applicants, I do not accept that the position as to the audited profits before tax is so finally and conclusively determined by the tender of the Deloitte Touche Tohmatsu audit report that the respondents are not permitted to challenge the findings of the report on the basis that it does not comply with Annexure 1, which provided the machinery of calculation adverted to in cl 3.3. The High Court in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643 accepted that a clause of this nature should not be interpreted as covering all grounds which go to the validity of the amount certified, for example illegality (at 651). Similarly, the Courts have found that a certificate can be challenged on such grounds as fraud and obvious error ( Permanent Trustee Company Limited v Gulf Import and Export Company [2008] VSC 162) , although if the certificate is properly tendered the onus falls upon the defendant to demonstrate by acceptable evidence that the certificate is incorrect ( Commonwealth Bank of Australia v Oberdan [2000] SASC 428 at [14] , Concrete Constructions Group Pty Ltd v Coddlestone Pty Ltd [1995] ACTSC 332). In these proceedings, in summary: In relation to the alleged profit shortfall for the year ending 31 December 1998 an agreement was reached by Mr Poh on behalf of the applicants and Mr Forbes as to the agreed profit shortfall. The absence of source financial documentation was, as I have already found, irrelevant in relation to the validity and enforcement of that agreement. In relation to the alleged profit shortfall for the year ending 31 December 1999, while I consider that the absence of source financial documentation was a key issue for reasons I have already explained, I do not consider that the applicants' claim with respect to alleged profit shortfall for that year was in any fashion an abuse of process. The applicants pleaded, inter alia , that the Deloitte Touche Tohmatsu report satisfied the requirements of cl 3.3 and Annexure 1 of the share sale agreement akin to a certificate as discussed in Dobbs [1935] HCA 49 ; (1935) 53 CLR 643. In my view this was a legitimate claim, notwithstanding that this aspect of the applicants' claim was unsuccessful. Admissibility of documents and section 135 and section 136 of the Evidence Act The respondents have also sought exclusion of the material in: In relation to these documents: For the reasons I gave earlier in this judgment, the Deloitte Touche Tohmatsu report is inadmissible. It follows that the Ernst &amp; Young report dated 4 October 2001 and the letter from Freehills on behalf of the applicants to Mr Grant dated 6 April 2001 are also inadmissible pursuant to s 135 of the Evidence Act . In the interests of completeness however I note that even had I not considered the Deloitte Touche Tohmatsu report inadmissible in accordance with s 135 I would have made such an order in respect of the Ernst &amp; Young report dated 4 October 2001 on the basis that: While there is evidence that the original instructions from Mr Poh to Ernst &amp; Young to prepare to the report were given in 2000 (and possibly prior to contemplation of litigation), evidence also demonstrates that 19 months passed before the report was delivered to the applicants during which time letters had been exchanged between the legal representatives of the parties. Further, in the covering letter dated 4 October 2001 from Ernst &amp; Young to Mr Poh delivering the report, the author notes "... the procedures were performed solely to assist you in determining the quantum and importance of certain financial issues to be raised with the previous Managing Director, Mr Mark Forbes". I consider an inference can be drawn from the surrounding circumstances that the Ernst &amp; Young report was "a document prepared for or obtained for the purpose of conducting, or for or in contemplation of or in connection with, a proceeding" and accordingly excluded from the definition of "business record" by s 69(3)(a) of the Evidence Act . I do not consider that an order pursuant to either s 135 or s 136 of the Evidence Act should be made in relation to para 34 and para 35 of, and pp 13-54 of annexure "PK2" to, the affidavit of Poh Kiat affirmed herein on 15 March 2006. I take this view because: Mr Poh's evidence directly answered evidence of Mr Forbes in his affidavit sworn 16 December 2005 and Mr Brauer in his affidavit sworn 25 January 2006. A letter from Marsh &amp; Partners to the directors of Forbes Group Australia dated 16 February 2000 and a letter from Marsh &amp; Partners to Mr Forbes dated 14 March 2000, both of which are exhibited to Mr Poh's affidavit (and found within pp 13-54 of Annexure "PK2" to which the respondents object) are also exhibited to Mr Forbes' affidavit sworn 16 December 2005 as Annexure "MF-4". Accordingly, it is clear that the respondents were relying on some of the same material they now seek to impugn. The material is relevant to both the applicants' claims concerning the 1998 profit shortfall and the respondents' defence. I do not consider that an order pursuant to either s 135 or s 136 of the Evidence Act should be made in relation to Mr Blackwood's expert report. In my view no grounds have been substantiated by the respondents' to support such an order. The application is successful in part. I consider that the applicants are entitled to recover the agreed 1998 profit shortfall under the share sale agreement and the Forbes Guarantee as damages from Mr Forbes, being the sum of $127,284. The applicants have also sought interest "pursuant to a share sale agreement" or pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth). The parties have not directed my attention to any interest rate specified in the share sale agreement the subject of these proceedings. However s 51A of the Federal Court of Australia Act provides: (1) In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either: (a) order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or (b) without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.