FEDERAL COURT OF AUSTRALIA

Avzur Hotels Pty Ltd v Ivanhoe Entertainment Pty Ltd [2009] FCA 701

CONTRACTS – contract for sale of business – contract containing a nomination clause – effect of

Commissioner of State Revenue v Politis [2004] VSC 126

Harry v Fidelity Nominees Pty Ltd (1985) 41 SASR 458

Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427

Salter v Gilbertson (2003) 6 VR 466

Tonelli v Komirra Pty Ltd [1972] VR 737

AVZUR HOTELS PTY LTD v IVANHOE ENTERTAINMENT PTY LTD, MARIO NICHOLAS SCERRI, JOHN WILLIAM WEEKLEY and JOSEPH SCERRI

VID 1026 of 2008

FINKELSTEIN J

30 JUNE 2009

MELBOURNE

THE COURT ORDERS THAT:

            1.         The question stated under O 29 of the Federal Court Rules 1979 (Cth) be answered as follows:

            Question:          “Does Avzur Hotels Pty Ltd have standing to bring an action against Ivanhoe Entertainment Pty Ltd, Mario Scerri and John William Weekley for breach of the sale of business agreement dated 23 February 2007 between Ivanhoe Entertainment Pty Ltd, Taylor McKay Pty Ltd, Mario Scerri and John William Weekley?”

                        Answer:            “Yes”.

2.         The first, second and third respondents pay the applicant’s costs of the reserved question, such costs to be taxed in default of agreement.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

1                          A basic principle of the common law is that, as a general rule, A cannot sue B for an injury B has done to C.  C is the proper plaintiff because C is the injured party in whom the cause of action is vested.  A preliminary issue that has arisen in this case is whether this common law principle is attracted.  More particularly, the question is whether the applicant, Avzur Hotels Pty Ltd, has standing to sue the first respondent, Ivanhoe Entertainment Pty Ltd, for damages for breach of contract.  It has been agreed that this question should be determined before trial. 

2                          The contract in question is a sale of business agreement dated 23 February 2007.  The business is that of a hotelier conducted at 120 Upper Heidelberg Road, Ivanhoe.  The original contracting parties to the sale agreement are Ivanhoe Entertainment as vendor, Taylor McKay Pty Ltd as purchaser, and the second and third respondents, Mario Scerri and John William Weekley, as warrantors. Ricky John Munday and John William Upham guarantee the purchaser’s obligations under the agreement.  By the sale agreement Ivanhoe Entertainment sold the business to Taylor McKay for approximately $15 million.  The sale agreement contains certain warranties concerning the business’ takings and expenses. 

3                          Avzur Hotels sues for the breach of the warranties.  It also seeks to recover damages in other causes of action.  While Avzur Hotels was not an original party to the sale agreement, it came into the picture in the following way.  The sale agreement relevantly provides in clause 41 that: 

41.1      Nomination

The Purchaser may nominate a substitute or additional purchaser (Nominee) under this agreement by delivering to the Vendor or the Vendor’s solicitor within fourteen (14) days after the date of this agreement:

(a)        a nomination form signed by the Purchaser and the Nominee in the form annexed to this contract as Annexure “A” and any other documentation reasonably required by the Vendor in respect of the said nomination; and

as a condition precedent to nomination, where the nominee is or includes a corporation (other than a corporation listed on the Australian Stock Exchange) a guarantee signed by every director of the corporation in the form annexed to this contract as Annexure “B”,

PROVIDED ALWAYS that the Nominee holds as at the date of nomination a current venue operator’s licence.

…

Joint and several liability

The Purchaser and the Nominee are jointly and severally liable for the performance of the obligations of the Purchaser under this agreement (including without limitation the obligations of confidentiality contained in clause 42) and payment of any expense resulting from the nomination.

4                          Aspects of the nomination form (Annexure “A”) should be referred to.  The form requires the insertion of the following details:  “Vendor”, “Purchaser”, “Purchaser’s Guarantors”, “Business”, “Nominee” and “Date of Agreement”.  Then it provides: 

As the Business is expressed as sold to the Purchaser ‘and/or Nominee’ (or similar words) then under the conditions of the [sale] Agreement the Purchaser nominates the Nominee as substitute purchaser to take a transfer of the Business in lieu of the Purchaser.

The Purchaser and the Nominee agree and acknowledge to the Vendor that they are jointly and severally liable for the performance of the obligations of the Purchaser under the Agreement (including without limitation the obligations of confidentiality in clause 42 of the Agreement) and payment of any expense resulting from this nomination (including any duty).

The Purchaser and the Purchaser’s Guarantors further acknowledge to the Vendor that the nomination of the Nominee does not nullify their obligations under the Agreement.”

5                          The form of guarantee (Annexure “B”) is also relevant.  Clause 3 provides that the guarantor:

[I]rrevocably and unconditionally guarantees to the Vendor: 

(a)        the due and punctual payment of all monies which the Nominee must pay (as purchaser) under the Contract [i.e. the sale agreement], including all monies which the Nominee must pay due to any default; and

the performance and observance of all terms and conditions of the Contract by the Nominee,

and if at any time the Nominee defaults in the payment of any monies or compliance with any of the terms and conditions under the Contract then the Guarantor must on demand pay all monies payable by the Nominee or comply with those terms and conditions or both.

6                          It is also necessary to mention clause 13 of the sale agreement.  Clause 13.1 makes the sale agreement conditional upon Tattersall’s Gaming Pty Ltd granting the purchaser a venue operators agreement to operate 100 gaming machines.  The clause goes on to provide (at cl 13.5) that:  “Where the Purchaser nominates a substitute or alternative purchaser under clause 41, all references in clause 13 to ‘the Purchaser’ shall be read and construed as ‘the Purchaser or the Nominees’”. 

7                          When the sale agreement was executed, the vendor knew that Taylor McKay intended to appoint Avzur Hotels as substitute purchaser.  This is apparent from the annexures to the sale agreement.  For example: (a) Annexure A (the nomination form) and Annexure B (the guarantee) specify that Avzur Hotels is the nominee (and will therefore be appointed as substitute purchaser); (b) Annexure B identifies the guarantors (i.e. the directors of Avzur Hotels) by name; and (c) Annexure C (an acknowledgment that confidential information relating  to the business will be kept confidential which, in accordance with clause 42, must be signed by the directors of the substitute purchaser if that purchaser is a company) also identifies the directors of Avzur Hotels as the persons providing the acknowledgement. 

8                          In the event, the execution of the sale agreement and the nomination of Avzur Hotels occurred simultaneously or almost simultaneously.  It is by reason of its nomination that Avzur Hotels asserts title to sue for breach of the agreement.  Its standing to sue depends upon whether the nomination clause authorises Taylor McKay to nominate a purchaser to stand in its place, or as a co-purchaser, under the sale agreement or whether the effect of the nomination is simply to nominate the person who will take a transfer of the business.  

9                          Ordinarily when a purchaser is described as “A or his nominee”, A is treated as having the power to nominate the person to whom the property purchased is to be transferred.  The nominee does not become a party to the contract, much less a party with the rights and obligations of the purchaser:  Tonelli v Komirra Pty Ltd [1972] VR 737.  On the other hand, a contract may permit the purchaser to nominate a person that will stand in his place as the purchaser but, of course, under a novated contract:  Salter v Gilbertson (2003) 6 VR 466, 473-475; Commissioner of State Revenue v Politis [2004] VSC 126 at [16].  A nomination clause will have that effect only if it clearly so provides:  Harry v Fidelity Nominees Pty Ltd (1985) 41 SASR 458, 460 per King CJ (“I would be most unwilling to construe a contract as containing a provision of such unusual character [a substitution clause] … unless the language of the contract was quite clear”); Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427, 432 per Cooke J (“And in the absence of compelling language I do not think the court should impute to the parties an intention to allow an original signatory to substitute for himself a man of straw”).  In Salter v Gilbertson (at 473) Phillips JA adopted the need to show a “compelling language” test.   

10                        How then is the sale agreement to be construed?  Does it permit the appointment of a purchaser in substitution for, or in addition to, Taylor McKay or is the nomination no more than a direction to the vendor to transfer the business to the nominee? 

11                        In Harry v Fidelity Nominees Pty Ltd at 460 King CJ said:  “The notion of a vendor binding himself to accept an unknown nominee in place of the named purchaser as the party to whom he must look exclusively for the performance of the contract is unusual.”  But, as the applicant has pointed out, Ivanhoe Entertainment did not bind itself to an “unknown nominee”.  There is no doubt that Ivanhoe Entertainment knew the identity of the “substitute purchaser”.  Avzur Hotels and its directors were named in the annexures. 

12                        The following clauses from the various documents to which reference has been made show that a nominee may be a purchaser either in substitution for, or in addition to, Taylor McKay:  (a) Clause 41 of the sale agreement describes the nominee as a “substitute or additional purchaser”; (b) Clause 41 of the sale agreement and the nomination form both provide that the purchaser and the nominee are to be jointly and severally liable for the performance of the obligations of the purchaser under the sale agreement; (c) Clause 3 of the guarantee provides that the guarantor guarantees the performance by the nominee of “all terms and conditions of the contract”; and (d) Clause 13.5 of the sale agreement specifies that, where the purchaser nominates a substitute purchaser, for the purposes of clause 13, “the Purchaser” means “the Purchaser or the Nominee”. 

13                        When read in isolation, the form of nomination adopted by Taylor McKay is ambiguous at least as regards the position of its nominee.  The form provides that the nominee is the “substitute purchaser to take a transfer of the Business in lieu of the Purchaser” (emphasis added).  The form is ambiguous to the extent that it fails to make clear which option is being pursued:  is the nominee to be a substitute purchaser or is he simply taking a transfer of the business?  But, when read in the context of the remainder of the nomination form, as well as the provisions of the sale agreement and guarantee, it is clear that the nominee (Avzur Hotels) was intended to be a substitute purchaser with all the rights and obligations attached to that position. 

14                        For the forgoing reasons, I will answer the question raised for determination under O 29 as follows:

            Question:          “Does Avzur Hotels Pty Ltd have standing to bring an action against Ivanhoe Entertainment Pty Ltd, Mario Scerri and John William Weekley for breach of the sale of business agreement dated 23 February 2007 between Ivanhoe Entertainment Pty Ltd, Taylor McKay Pty Ltd, Mario Scerri and John William Weekley?”

            Answer:            “Yes”.

15                        In the circumstances, Avzur Hotels should have its costs of the reserved question.

Associate:

Dated:         30 June 2009