Hurdsman & Ors v Ekactrm Solutions Pty Ltd

Reasons for Decision of The Honourable Justice Kelly

 

10 August 2018

 

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS

ARBITRATION – THE SUBMISSION AND REFERENCE – SUBMISSION AS A DEFENCE AND AS A GROUND FOR STAY OF PROCEEDINGS – STAY OF PROCEEDINGS

The defendant in proceedings commenced by the plaintiffs alleging a breach of contract pursuant to a share sale agreement, filed an interlocutory application seeking a permanent stay of proceedings on the ground that the parties were subject to a binding agreement to arbitrate.

Held – per Kelly J (refusing the application for a permanent stay):

(1)   Clause 28.3 of the share sale agreement entered into by the parties does not constitute a binding arbitration agreement.

(2)  Application for a permanent stay of proceedings dismissed.

International Arbitration Act 1974 (Cth) s. 7; Commercial Arbitration Act 2011 (SA) s. 5, referred to.
Westpac Banking Corporation v Tanzone Pty Ltd (2000) 9 BPR 17, 521; Dockside Holdings Pty Ltd v Rakio Pty Ltd (2001) 79 SASR 374, considered.

HURDSMAN & ORS v EKACTRM SOLUTIONS PTY LTD
[2018] SASC 112

KELLY J:

Introduction

1. The applicant in these proceedings, Ekactrm Solutions Pty Ltd (“the defendant”) is the defendant in an action commenced by Edward Allan Hurdsman and Sylvia White as Trustees for the Hurdsman Family Trust and Asterios Badios as Trustee for the Badios Family Trust (“the plaintiffs”) seeking damages for breach of a Share Sale Agreement (“SSA”) entered into between the parties on 26 June 2013.  The plaintiffs in the proceedings were the sellers of shares valued at approximately $5.8 million and the defendant was the buyer.
2. The applicant by interlocutory application filed on 25 July 2018 seeks an order that the proceedings commenced by the plaintiffs be permanently stayed on the basis that the parties are bound by an agreement to arbitrate in accordance with the rules of the Singapore International Arbitration Centre (“SIAC”) applying South Australian law, pursuant to clause 28.3 of the SSA.
3. Both parties filed affidavits relevant to the interlocutory application.
4. Before I discuss the issue which arises it is necessary to set out some of the relevant factual background.
5. Prior to entering into the SSA, the plaintiffs and another party, a company incorporated pursuant to the laws of India called Eka Software Solutions Private Limited (India), entered into a memorandum of understanding (“MOU”) on 5 April 2013.  A relevant extract from that MOU was tendered by the defendant as an exhibit to the affidavit of Mr Atkin. Another company located in Singapore is the parent company of the defendant, Eka Software Solutions Private Limited (Singapore).  The defendant is a company incorporated in Australia with registered offices in both Adelaide and Sydney.
6. For convenience, the relevant clause in the MOU is set out below:

   23.     Governing Law and Dispute Resolution

   a.     This MOU shall be governed and interpreted in accordance with the laws of South Australia.

   b.     In the event a dispute, controversy or claim between the Sellers and/or the Group on the one hand and EKA on the other, arises in connection with or relating to any of the matters set out in this MOU, including the breach, termination or invalidity thereof (“Dispute”), the parties to the dispute shall each appoint 1 (one) nominee/representative who shall use all reasonable endeavours to discuss in good faith to resolve the Dispute.  If a party gives the other party(ies) notice that a Dispute has arisen (“Dispute Notice”) and the parties are unable to settle the Dispute within 30 days of service of such Dispute Notice, then the Dispute shall be referred to arbitration in accordance with sub-clause (c) below.

   c.     Subject to sub-clause b above, any Dispute shall be referred to and finally resolved by arbitration in accordance with the rules of the SIAC applying South Australian law, and shall be in the English language using an arbitrator selected by both EKA and the Sellers, and failing such agreement, a sole arbitrator appointed by the Chairman of the SIAC.

   d.     Notwithstanding the existence of a dispute or difference each Party shall continue to perform their obligations under the Agreement.

   e.     Subject to arbitration, all Parties agree to submit to the jurisdiction of the courts of South Australia, Australia.

7. Two and a half months later on 26 June 2013 the parties signed a SSA.  The relevant clauses are set out below:

   28.     Dispute Resolution

   28.1   Delivering a Dispute Notice

   If any dispute arises between any 2 or more of the parties relating to or arising out of this agreement, including its construction, effect, the rights and obligations of the parties, the performance, breach, rescission or termination of this agreement, the entitlement of any party to damages or compensation (whether for breach of contract, tort or any other cause of action) or the amount of that entitlement (Dispute), the party claiming that a Dispute has arisen must deliver to the other parties a notice containing particulars of the Dispute (Dispute Notice).

   28.2   Parties must negotiate

   During the period of 10 Business Days after delivery of the Dispute Notice, or any longer period agreed in writing by the parties to the Dispute (Initial Period), each of the parties must use its reasonable endeavours and act in good faith to resolve the Dispute by discussion and negotiation.

   28.3  Referral to third party

   If the parties have been unable to resolve the Dispute within the Initial Period, then the parties must submit the Dispute to a mediator for determination in accordance with the Rules of the Singapore International Arbitration Centre (Rules), applying South Australian law, which Rules are taken to be incorporated into this agreement.

   28.4  Other proceedings

   A party may not commence court proceedings in respect of a Dispute unless it has complied with this clause 28 and until the procedures in this clause 28 have been followed in full, except where:

   28.4.1       the party seeks injunctive relief in relation to a Dispute from an appropriate court where failure to obtain such relief would cause irreparable damage to the party concerned; or

   28.4.2       following those procedures would mean that a limitation period for a cause of action relevant to the issues in dispute will expire.

   29.    Governing law and jurisdiction

   29.1  Governing law

   This agreement is governed by the law applying in South Australia.

   29.2  Jurisdiction

   Each party irrevocably:

   29.2.1       submits to the non-exclusive jurisdiction of the courts of South Australia, Commonwealth courts having jurisdiction in that state and the courts competent to determine appeals from those courts, with respect to any proceedings that may be brought at any time relating to this agreement; and

   29.2.2       waives any objection it may have now or in the future to the venue of any proceedings, and any claim it may have now or in the future that any proceedings have been brought in an inconvenient forum, if that venue falls within clause 29.2.1.

8. On or about 8 February 2018 the plaintiffs served on the defendant a dispute notice relating to whether an additional amount called an “earn-out amount” was payable pursuant to the SSA by the defendant to the plaintiffs.
9. After correspondence between the parties as to a proposed venue concerning any arbitration between the parties and faced with the defendant’s suggestion that an arbitration take place in Singapore, the plaintiffs issued proceedings in the Supreme Court.  I accept the submission by the plaintiffs, not disputed by the defendant, that the correspondence about the proposed arbitration is in a category of post-contractual communications which, while it may be relevant on any application for rectification, is not relevant in assisting me to resolve the current dispute.

   Defendant’s Interlocutory Application for a stay of proceedings

10. The defendant contends that clause 28.3 of the SSA constitutes a binding arbitration agreement between the parties and accordingly that this Court is obliged to stay the proceedings.
11. I leave aside for the moment the subsidiary dispute between the parties as to whether, if there is a binding arbitration agreement, it is one subject to the International Arbitration Act 1974 (Cth)or the Commercial Arbitration Act 2011 (SA). Both parties accept that if I find there is a binding arbitration agreement, then whether the Commonwealth or the State Act applies, it is this Court’s duty to stay the proceedings.
12. The defendant’s alternative contention, in the event that the Court finds that there is no binding arbitration agreement, is that the SSA should be rectified to replace the word “mediator”, which appears in clause 28.3, with the word “arbitrator”.  In this respect on the day of argument both parties foreshadowed and conceded, that rectification may be the appropriate application.  I invited counsel for the defendant to consider the position.  In particular, whether she wished to seek an adjournment of this application to file an application in the appropriate form seeking rectification of the contract.  The plaintiffs neither opposed nor consented to that application.  Having made it clear that the plaintiffs would seek their costs thrown away should any adjournment occur, counsel for the defendant was instructed to press on with this application.
13. Accordingly, it is now for this Court to determine on the basis of the material before it whether there is a binding arbitration agreement contained within the SSA.
14. The defendant contends that it is not necessary to make any application for rectification as it is plainly obvious on the face of the agreement that the insertion of the word “mediator” was a typographical error and should have read “arbitrator”.  In advancing this contention the defendant relies on authorities such as Westpac Banking Corp v Tanzone Pty Ltd, and Dockside Holdings Pty Ltd v Rakio Pty Ltd.  Ms Clark for the defendant submitted that the Court in these circumstances has the discretion to substitute the word “mediator” with the word “arbitrator”, otherwise unintended absurd consequences would flow from the fact that the agreement on its face refers to a dispute resolution in accordance with the Rules of the SIAC .  Ms Clark submitted that while the text of clause 28.3 refers to a mediator, because it states that the determination will appear in accordance with the rules of the SIAC, it is clear that the parties intended to resolve the dispute by arbitration, pursuant to those rules.  In further support of the argument, I was referred to a passage from Cheshire and Fifoot’s Law of Contract at paragraph 10.35:

    Literal meaning not applied if this leads to an absurd result.  Notwithstanding the hegemony of the objective approach, the literal, plain, natural or ordinary meaning of language used by the parties will not always be applied by the court: ‘There is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning’.  Clearly this is even more true of the words of oral undertakings.

    The court will therefore decline to apply a literal meaning where this leads to an irrational result.  Modern appellate decisions have given new life to a dictum of Dixon CJ and Fullagar J, delivered in Fitzgerald v Masters, that in a contract ‘words may be supplied, omitted or corrected in order to avoid absurdity or inconsistency’.  In Fitzgerald the dictum was applied to a clause in which, as a result of a drafting slip, the word ‘inconsistent’ was inserted instead of the word ‘consistent’.  However, the application of this dictum has since been extended beyond the mere correction of obvious and minor errors, to the open modification of important provisions in commercial contracts.

    The leading case is Westpac Banking Corp v Tanzone Pty Ltd:

    A clause in a lease provided for biennial reviews of rent, based on the rate of inflation, but calculated according to a formula which, if literally applied, led to rent increases that far outstripped the effect of inflation by accelerating margins.  For example, on the fifth, sixth and seventh review the rent increased by 68.5, 81.5 and 84 per cent respectively.

    The New South Wales Court of Appeal held that the literal meaning of the rent review clause produced an absurd result, and ‘corrected’ it by adding words which produced instead a result that ‘properly reflects the intention of the parties to be gathered objectively from the whole context of the lease’.  It adopted the words of the trial judge:

    The question is whether these words lead to an absurd result looking at the situation in 1985 [when the contract was made].  If they do then they should be construed so as to avoid the absurdity by supplying, omitting or correcting words.

    In construing the clause as if it contained the additional words, the court was neither resolving an ambiguity nor rectifying the contract. The principle that the literal meaning of the language will be ‘corrected’ to avoid absurd consequences does not depend on the presence of ambiguity.   On the contrary, it applies when the literal sense of words is all too clear.  Nor does it depend on proof of a mistake in recording the agreement.  The principle applies whenever it is established that unintended absurd consequences follow from the application of the literal meaning.

    However, it is not enough to show that the literal meaning results in absurdity; it is also necessary to establish what the correct wording should be; the court cannot be left to speculate on how the absurdity should be avoided.

    Moreover, the ostensible meaning of the parties’ language prevails unless its application produces a result which is more than merely unreasonable.  The fact that the literal meaning benefits one party at the expense of the other is not in itself a reason for departing from it.  The law leaves it to the parties ‘to understand obligations created by commercial contracts, assess the inherent risk and make decisions as to the most economical way of providing for them’.   (citations omitted)

    Affidavits filed by the parties

15. Certain paragraphs in the affidavit of Mr Timothy Atkin were the subject of an objection by the plaintiffs.  In particular, the plaintiffs objected to the contents of paragraphs 4, 8, 12 and 13 and I shall deal with those objections now.
16. The affidavit of Mr Bullock sworn on 1 August 2018 exhibited a number of emails between the solicitors for the respective parties.  That exchange took place between 29 May 2013 and 27 June 2013 in which the parties discussed various iterations of the draft agreement.  The documents exhibited show that the relevant clause in the first draft of the agreement exchanged is identical with the relevant clause in the final draft.  In all, five iterations of the draft agreement were tendered.  There were no changes to the relevant clause throughout.
17. Counsel for the plaintiffs objected to paragraph 4 of the affidavit of Mr Atkin.  That paragraph referred to the MOU between the plaintiffs and Eka Software Solutions Private Limited (India).

18. The basis of the objection to the contents of paragraph 4 was said to be on the basis of relevance as the MOU was between the plaintiffs and another party, not the defendant.
19. Even though the related company in India was not the contracting party to the SSA I am nevertheless satisfied that there is a sufficient relationship between the companies for that MOU to give some indication of what was intended by way of dispute resolution at the very outset.  There is no dispute that Eka Software Solutions Private Limited (Singapore) is the parent company of the defendant, and that Eka Software Solutions Private Limited (India) is related to the defendant.
20. For this reason, I consider that the MOU has been a useful document to consider and is to be contrasted with the various iterations of the resolution clause contained in all of the draft agreements between the plaintiffs and the defendant.  Accordingly, I overrule the objection of counsel for the plaintiffs and find that the MOU is relevant to assist me in the matter.
21. As to the remaining objections in respect of Mr Atkin’s affidavit, paragraph 8 of that document deals with information from the defendant’s instructing solicitor, Mr McNee, and asserts his intention at the time of drafting clause 28.3 in the SSA.  To my mind the contents of paragraph 8 could be relevant in the event that I find there is some ambiguity in clause 28.3.  I acknowledge that a portion of paragraph 8 is plainly hearsay.  Nevertheless it is of some relevance in respect of any ambiguity.
22. As to paragraphs 12 and 13 of Mr Atkin’s affidavit, those paragraphs concern letters exchanged between the plaintiffs and the defendant after the contract was signed.  I accept, and there is no dispute, that those communications are not relevant in respect of the determination of this application but would only be relevant in respect of a claim for rectification.
23. I also make it clear that I have also relied on the contents of Mr Bullock’s affidavits, in particular his second affidavit sworn 1 August 2018 containing the various iterations of the draft agreement insofar as it concerns the relevant dispute resolution clause.

    Discussion

24. On its face, the terms of clause 28.3 are quite clear.  The starting point therefore is that the parties said what they meant and meant what they said.  The clause refers to a mediator and I consider that there is a very compelling argument that clause 28.3 sits contextually more coherently as a mediation agreement than an arbitration agreement.  Nevertheless, the requirement that the mediation be conducted in accordance with the rules of the SIAC is not consistent with an intention to resolve disputes by mediation.  This is because there are in fact no rules for mediation prescribed by the SIAC.  I note that counsel for the plaintiff did give evidence from the bar table that there are rules of the Singapore International Mediation Centre.
25. For this reason I consider there is some ambiguity in the clause and I have therefore had recourse to some of the pre-contractual negotiations between the parties and to a limited extent to the terms of the MOU between the plaintiffs and the parent company in Singapore in an endeavour to resolve that ambiguity.
26. It is plain enough from the clause contained in the MOU that at the outset what was proposed was that any dispute be settled by arbitration.  However, the position changed from the very first draft of the SSA as evidenced in the exchanges between the solicitors exhibited to Mr Bullock’s affidavit.  I consider it to be significant that when the SSA was signed approximately two and a half months after the MOU was entered into, the dispute resolution clause it contained did not reproduce the original proposal to arbitrate, as contained in the MOU.  Contrary to the submission of counsel for the defendant, it is not just the word “arbitrator” which was replaced with “mediator” in the respective clauses.  The dispute resolution procedures which were set out in clauses 28 and 29 from the very first iteration of that agreement were qualitatively different to the clauses contained in the MOU.  In my view, when clause 28 is considered as a whole and against the background of the original proposals, I consider it is more consistent with an agreement to mediate, rather than to arbitrate.