FEDERAL COURT OF AUSTRALIA

El-Rihani v Hotait [2020] FCA 912

ORDERS

THE COURT ORDERS THAT:

1.    The separate questions be answered as follows:

Question 1:

Does a proper construction of clause 10.2 of the Deed of Separation dated 19 December 2016 (the Deed) mean that claims could only be lodged in accordance with the terms of the Deed for liabilities arising after the date the Deed was entered into on 19 December 2016?

    Answer:

No.

Question 2:

Can a claim for contribution thereto be made in respect of liabilities incurred prior to 19 December 2016?

    Answer:

Yes.

Question 3:

Is the entirety of the Deed, with respect to the liabilities of Skyworks NSW Pty Ltd, frustrated by virtue of the appointment of a liquidator to Skyworks NSW on 6 June 2018 and the liquidator’s rights to any funds paid to reduce or remove creditors of Skyworks NSW?

Answer:

No.

Question 4:

Does a party have standing to make a claim for contribution for liabilities to Skyworks NSW in circumstances where a party has not made any contribution to the liabilities prior to making the claim?

Answer:

The issue of standing to make a claim does not arise having regard to the terms of cl 10.5 of the Deed of Separation. The parties have standing to enforce cl 10.5 of the Deed from the time Skyworks NSW’s liabilities exceed the amount in the Trust Account.

Question 5:

Was Mr El Rihani deprived of standing to make a claim for contribution to the alleged debts of Skyworks NSW in circumstances of Skyworks NSW being in liquidation?

Answer:

The answer to Question 4 does not change because Skyworks NSW is in liquidation. Clause 10.5 of the Deed remains enforceable notwithstanding that Skyworks NSW is being wound up.

2.    The matter be listed for a case management hearing at a date to be determined.

3.    Costs relating to the hearing and determination of the separate questions be reserved.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. 

REASONS FOR JUDGMENT

FARRELL J

Introduction

1    For several years, the plaintiff, Hussein (Sam) El Rihani (Mr El Rihani), and the defendant, Billal (Bill) Hotait (Mr Hotait), together carried on a business involving construction and property development of mostly multi-level residential premises. The entities through which that business was carried on included, among other entities, Skyworks NSW Pty Ltd, Beauchamp Developments Pty Ltd, and Parramatta Project Pty Ltd. The relationship between Mr El Rihani and Mr Hotait deteriorated and, after early 2015, Mr El Rihani and Mr Hotait did not undertake any new business together.

2    The projects undertaken by Mr Hotait and Mr El Rihani included “residential building work” for the purposes of the Home Building Act 1989 (NSW). Entities that undertake that work are required by that Act to give statutorily prescribed warranties which are enforceable against them for seven years, six years, or two years (depending on when the work is completed).]

3    By a deed dated 19 December 2016 entitled “Deed of Separation” (or Deed) made between Mr El Rihani and Parramatta Project on the one side; and Mr Hotait and Beauchamp Developments on the other side, and subject to its terms, Mr El Rihani and Mr Hotait formally agreed on a basis for the separation and termination of their construction and property development business in respect of entities including Skyworks NSW by, among other things, the transfer of ownership and control of Beauchamp Developments to Mr Hotait and Parramatta Project to Mr El Rihani.

4    After entry into the Deed of Separation, the only building work undertaken by Skyworks NSW was to rectify defects in residential building work done under contracts completed or terminated before or on that date.

5    In proceedings NSD1514/2017 commenced in this Court on 1 September 2017, Mr Hotait sought an order under s 461(1)(k) of the Corporations Act 2001 (Cth) that Skyworks NSW be wound up on the just and equitable ground, under s 461(1)(e) on the basis that directors acted in their own interest rather than that of the members as a whole, or s 233(1)(a) on the basis that Skyworks NSW’s conduct was contrary to the interests of its members or otherwise oppressive or unfairly prejudicial to a member or members. Skyworks NSW and Mr El Rihani were named as defendants in those proceedings.

6    On 14 March 2018, Mr El Rihani commenced proceedings in the Supreme Court of New South Wales seeking an order restraining Mr Hotait from continuing with the winding up proceedings in this Court and damages for breach of the Deed of Separation. On 6 April 2018, on Mr Hotait’s application, the Supreme Court made orders transferring those proceedings to this Court. The transferred proceedings were numbered NSD807/2018.

7    On 6 June 2018, by consent of the parties, this Court made orders winding up Skyworks NSW under s 461(1)(k) of the Corporations Act and appointing Liam Bailey of O’Brien Palmer as its liquidator.

8    An amended statement of claim and a defence have been filed in proceedings NSD807/2018.

Separate hearing

9    On 7 February 2019, by consent, the Court made an order pursuant to r 30.01 of the Federal Court Rules 2011 (Cth) that the matters raised in the defence filed on 23 January 2019 at [26] be the subject of a separate hearing. Paragraph [26] of the defence is as follows:

Further, and in respect of the entirety of the Statement of Claim, the defendant states:

(a)    clause 10.2 of the Deed states that the funds payable pursuant to the Deed, with respect to [Skyworks NSW], are to be held on account of future liabilities;

(b)    a proper construction of clause 10.2 of the Deed means claims could only be lodged in accordance with the terms of the Deed for liabilities arising after the date the Deed was entered into on 19 December 2016;

(c)    as a result of paragraphs 26(a) and 26(b) of this defence, the defendant is not liable for any claims made for liabilities incurred prior to 19 December 2016;

(d)    further, the entirety of the Deed with respect to the liabilities of [Skyworks NSW] is frustrated by virtue of the appointment of a liquidator to [Skyworks NSW] on 6 June 2018 and the liquidator's rights to any funds paid to reduce or remove creditors of [Skyworks NSW];

(e)    further, or in the alternative, the plaintiff does not have standing to make a claim for contribution for liabilities to [Skyworks NSW] in circumstances where the plaintiff has not made any contribution to the liabilities prior to making their claim;

(f)    further, the plaintiff does not have entitlement or standing to make a claim for contribution to the alleged debts of [Skyworks NSW] in circumstances whereby [Skyworks NSW] is the subject of liquidation.

Questions for Separate Hearing arising from the defence at [26]

10    The parties formulated the questions for the separate hearing as follows (as written):

As clause 10.2 of the Deed states that the funds payable into the Trust Account pursuant to the Deed, with respect to Skyworks NSW, are to be held on account of “future liabilities” [26(a)];

(a)    does a proper construction of clause 10.2 of the Deed mean that claims could only be lodged in accordance with the terms of the Deed for liabilities arising after the date of the Deed was entered into on 19 December 2016? [26(b)]

(b)    can a claim for contribution thereto be made in respect of liabilities incurred prior to 19 December 2016? [26(c)]

(c)    Is the entirety of the Deed, with respect to the liabilities of Skyworks, frustrated by virtue of the appointment of a liquidator to Skyworks NSW on 6 June 2018 and the liquidator's rights to any funds paid to reduce or remove creditors of Skyworks NSW? [26(d)]

(d)    Does a party have standing to make a claim for contribution for liabilities to Skyworks NSW in circumstances where a party has not made any contribution to the liabilities prior to making the claim? [26(e)]

(e)    Was Mr El Rihani deprived of standing to make a claim for contribution to the alleged debts of Skyworks NSW in circumstances of Skyworks NSW being in liquidation? [26(f)]

11    Put shortly, the questions raised by the defence at [26] appear to be:

(1)    Should the term “future liabilities” in cl 10.2 of the Deed of Separation be read restrictively, as contended by Mr Hotait, as applying only to liabilities which arose and were invoiced after 19 December 2016 when the Deed of Separation was signed (which are the Category C liabilities, as defined below) or should it be read as applying to both liabilities unpaid on 19 December 2016 and those which arose for payment after that date having regard to the context and purpose of the whole Deed, as contended by Mr El Rihani;

(2)    Can a party who has not made a contribution to the Trust Account (as defined in cl 1.7(t) of the Deed of Separation) call upon the other party to make a contribution; and

(3)    Did the fact that Skyworks NSW went into liquidation on 6 June 2018 affect obligations to contribute funds to the Trust Account under cl 10.5 of the Deed of Separation?

Agreed facts for the purposes of the separate hearing

12    By a document filed on 4 June 2019 pursuant to orders of the Court, the parties agreed many of the facts referred to in the Introduction above and the following facts for the purpose of determination of the separate questions (Agreed Facts).

13    On about 19 or 20 December 2016, the El Rihani entities (as defined in the Deed of Separation), made the “BD Payments” (as defined in the Deed) in a nett amount of $1,096,482.09 to Mr Hotait in accordance with cll 3.1(a) and 16 and Annexure A to the Deed of Separation.

14    Pursuant to cl 10 of the Deed of Separation, the following amounts were contributed to the Trust Account (as defined in cl 1.1(t) of that Deed):

(1)    $200,000.00 on 21 December 2016 contributed by Mr El Rihani;

(2)    $200,000.00 on 23 December 2016 contributed by Mr Hotait;

and on each of 16 and 28 March 2017, a further $100,000 was paid into the Trust Account, the circumstances of which do not arise for determination on the separate question.

15    The Court understands from the Agreed Facts set out in [14] above that an aggregate amount of $600,000 was contributed to the Trust Account.

16    For the purpose only of the determination of the separate questions, an assumption is to be made that Mr El Rihani, purportedly pursuant to cl 10 of the Deed of Separation, made requests for a contribution to the Trust Account, as follows (Requests):

(1)    On 28 March 2017 for 50 per cent of the amount sought;

(2)    On or about 20 September 2017 for 50 per cent of the amount sought; and

(3)    On or about 23 October 2018, for 50 per cent of the amount sought.

17    In respect of the requests referred to at [16], Mr Hotait disputed that he had the obligation to make any payment in respect of the purported requests.

18    The parties agreed that the payments made out of the Trust Account between 23 December 2016 and 3 May 2017 can be separated into three categories of liabilities:

(1)    Liabilities for work done and/or goods provided and invoiced to Skyworks NSW before 19 December 2016 (Category A);

(2)    Liabilities for work done and/or goods provided to Skyworks NSW before 19 December 2016, but invoiced thereafter (Category B); and

(3)    Liabilities for work done and/or goods provided and invoiced to Skyworks NSW after 19 December 2016 (Category C).

19    On 16 August 2019, the parties filed particulars of payments out of the Trust Account and the date of related invoices (the Particulars) which are said to relate to the Agreed Facts at [11] and [14] of that document. The Agreed Facts at [11] state that, in accordance with cl 10 of the Deed of Separation, $380,088.93 had been paid out of the Trust Account to creditors of Skyworks NSW by 3 May 2017, leaving a balance of $10,484.96. The Court notes that:

(1)    The Particulars relate to invoices issued between 21 December 2012 and 30 March 2017 to an aggregate amount of $718,843.96. Invoices referred to in the Particulars as having been issued between 21 December 2012 and 31 December 2015 and unpaid as at 19 December 2016 were for an amount of $60,855.15. At least a further $73,914.07 was invoiced between 1 January 2016 and 19 September 2016, being a date three months before the execution of the Deed on 19 December 2016, and remained unpaid on 19 December 2016. The aggregate amount said in the Particulars to be in Category A (excluding those amounts which were said to be in both Category A and Category B without differentiation) was $398,377.38. Mr El Rihani submitted that an aggregate amount of $434,894.41 had been invoiced and was unpaid on or before 19 December 2016 and that does not appear to be in dispute.

(2)    Although the Agreed Facts at [11] referred to an amount of $380,088.93, the Particulars filed on 4 June 2019 say that an amount of $580,088.93 had been paid out of the Trust Account between 23 December 2016 and 3 May 2017. Counsel for the parties agreed that $580,088.93 was the correct amount leaving a shortfall of invoiced amounts of $138,755.03.

(3)    The parties are unable to explain why the Agreed Facts at [11] stated that the “balance” figure remaining in the Trust Account was $10,484.96, not $19,911.07, but counsel for the parties agreed that $10,484.96 reflects the bank account statement for the Trust Account.

20    Invoices to an aggregate amount of $255,237.14 were said to be in Categories B and C, that is invoices raised after the Deed of Separation was signed, albeit that Category B liabilities were incurred before 19 December 2016.

Deed of Separation

21    The parties to the Deed of Separation are Mr Hotait, Mr El Rihani, Beauchamp Developments and Parramatta Project.

22    The “Introduction” to the Deed of Separation states that:

A.    Hotait and El Rihani, through their nominated entities and personally, have engaged in various joint business ventures in the property development and construction industry.

B.    Hotait and El Rihani have agreed to separate from each other and to do all things necessary to procure their nominated entities to separate from each other to bring about the end of their joint business ventures.

C.    The parties have reached an agreement in accordance with the terms of this document.

23    Clause 1 contains definitions. There is no definition of “liabilities” or “future liabilities”.

24    Clause 2 provides as follows:

2.    Agreement

2.1    Hotait and El Rihani have agreed to separate and end their business relationship in accordance with this document.

2.2    The parties agree that they must not take any steps to revive, recover or otherwise re-establish the business ventures which are contemplated by this document unless both parties agree in writing.

25    One of the purposes of the Deed of Separation was to effect the immediate transfer of:

(1)    Mr Hotait’s shares and interests in Parramatta Project to Mr El Rihani; and

(2)    Mr El Rihani’s shares and interests in Beauchamp Developments to Mr Hotait.

26    Clause 8 provides for:

(1)    The sale of shares in Parramatta Project by Mr Hotait to Mr El Rihani or his nominee.

(2)    Mr El Rihani to be responsible for the assessment and payment of stamp duty and notifications consequent on the sale.

(3)    Mr Hotait to be responsible for any capital gains tax incurred on the sale and the parties agree that GST is not payable.

(4)    Mr Hotait to warrant only that he is the absolute owner of the shares and Mr El Rihani to acknowledge that he is not relying on any representation in relation to the sale.

(5)    Mr Hotait to resign as a director and secretary of Parramatta Project immediately and Mr El Rihani to notify ASIC of those facts.

(6)    Mechanical provisions dealing with constitutional compliance and board meetings relating to the sale and transfer of the shares.

(7)    Agreement that on completion of the sale of the shares in Parramatta Project to Mr El Rihani, all existing agreements between the parties in relation to Parramatta Project, such as shareholders agreements, are immediately terminated.

(8)    Mr El Rihani to assume responsibility for the conduct, management and operations of Parramatta Project and Mr Hotait to cease all involvement with those functions.

(9)    Mr El Rihani to release Mr Hotait against claims relating to shares which arose from any period up to the date of the Deed.

(10)    Mr El Rihani to indemnify Mr Hotait against any claim by a third party in connection with Parramatta Project “past, present or future”.

(11)    The parties to do everything necessary to terminate the construction contract between Parramatta Project and Skyworks NSW by 15 February 2017 and Skyworks NSW to forfeit the retention sum under that contract. Parramatta Project was to enter into a new construction contract with another builder nominated by Mr El Rihani.

(12)    Upon completion of the sale of the shares in Parramatta Project, Mr El Rihani to procure that all finance facilities obtained by Parramatta Project are amended so that Mr Hotait and the Hotait Entities (as defined in the Deed) are not named as a guarantor or obligor under them. All such finance facilities are to be refinanced and new facilities entered into whereby Mr Hotait and the Hotait Entities are not named as a guarantor or obligor.

(13)    If Mr El Rihani was “unable” to comply with the requirement to have the finance facilities relating to Parramatta Project amended to remove Mr Hotait as a guarantor or obligor by 15 February 2017 and he had not remedied that default within 14 days of Mr Hotait serving a default notice in relation to that non-compliance, Mr El Rihani “shall pay [Mr] Hotait liquidated damages at the rate of $1,081.00 per day from the expiry of the 14 day period until such time as [Mr] El Rihani complies”. The parties agreed that payment of that sum constitutes a genuine pre-estimate of the loss and damage that would be suffered as a result of the non-compliance.

(14)    Mr El Rihani to be responsible for the tax liabilities of Parramatta Project.

27    Clause 9 generally contains the same provisions as cl 8 (with the obligations of Mr Hotait and Mr El Rihani being reversed) with respect to the sale of shares in Beauchamp Developments, with slight differences (which are not presently relevant) with respect to the termination of the building contract between Beauchamp Developments and Skyworks NSW.

28    The Deed of Separation provided for the way a number of companies which were not parties to the Deed were to be dealt with. Clause 3 deals with Equipment for Hire Pty Ltd. Upon execution of the Deed of Separation, Mr El Rihani was required to pay an Equipment Fee to Mr Hotait and the assets of the company were to be transferred to Mr El Rihani or his nominee: cl 3.1(a) and (b).

29    Once those steps are complete, the parties are required to attend to the steps necessary to effect deregistration of Equipment for Hire: cl 3.2. The steps required are set out in cll 3.3-3.5 as follows:

(1)    Pass all necessary shareholder resolutions for deregistration,

(2)    Ensure that the company ceases business immediately,

(3)    Ensure the company’s assets are reduced to less than $1,000,

(4)    Distribute profits to shareholders equally,

(5)    Pay all of the company’s outstanding liabilities,

(6)    Cause the conclusion of all legal proceedings involving the company,

(7)    Pay all fees and penalties to the Australian Securities and Investments Commission (ASIC),

(8)    After the preceding matters have been completed, lodge a Form 6010 with ASIC and the filing fee must be borne by the parties equally, and

(9)    Mr Hotait and Mr El Rihani must contribute equally to the company’s tax liabilities.

30    Clauses 4, 6 and 7 provided for the deregistration of Skyworks Group Pty Ltd, Hornsby Projects Pty Ltd and Skye Form Pty Ltd respectively in the same way as Equipment for Hire.

31    Clause 5.1-5.3 deals with Skyworks NSW differently. Those clauses provide as follows:

5.1    The parties agree and acknowledge that Skyworks NSW:

(a)    is presently the contracted builder for the development project undertaken by Parramatta Project;

(b)    is presently the contracted builder for the development project undertaken by Beauchamp Developments;

(c)    is presently the contracted builder for other projects in the state of New South Wales;

(d)    will receive payments in respect of goods and services provided by Skyworks NSW as a contracting builder for projects in the state of New South Wales;

(e)    will have its construction contracts with Parramatta Project and Beauchamp Developments terminated by mutual agreement in accordance with clauses 8.16 and 9.16

5.2    The parties must cause for the following to be transferred to the Trust Account to be dealt with in accordance with clause 10:

(a)    upon execution of this Deed, all current funds held in the financial accounts of Skyworks NSW;

  (b)    all future payments to be made to Skyworks NSW of any nature.

5.3    Upon satisfaction of an event contemplated by clause 10.14 and the distribution of all funds held in the Trust Account (if any), the parties must cause Skyworks NSW to be deregistered unless the parties unanimously agree to sell Skyworks NSW.

32    It is common ground that no payments met the description in cl 5.2 so that the only moneys paid to the Trust Account were those contributed by Mr Hotait and Mr El Rihani as referred to at [14] above in the aggregate amount set out at [15] above.

33    Clause 10 of the Deed provides as follows (as written):

10.    Trust Account

10.1    The parties acknowledge and agree that moneys shall be held in the Trust Account on behalf of Skyworks NSW.

10.2    The parties agree that these funds shall be held in the Trust Account on account of future liabilities of Skyworks NSW, including, but not limited to, potential building defect liabilities arising from construction works undertaken by Skyworks NSW in the state of New South Wales.

10.3    The parties acting reasonably and in good faith, agree to direct Madison Marcus Law Firm Pty Ltd to pay the liabilities of Skyworks NSW from the Trust Account.

10.4    Upon execution of this Deed, El Rihani and Hotait agree to each pay $200,000.00 into the Trust Account.

10.5    In the event that any liability exceeds the amount held in the Trust Account at any given time, Hotait and El Rihani each agree to contribute equally to the amount exceeding the amount held up to a maximum of an additional $100,000.00 each on each occasion. If:

(a)    Hotait cannot advance the additional funds required, El Rihani may advance the shortfall and such advance shall be a debt due and payable and accrue interest of 5% per annum payable by Hotait until such time that the advance plus all interest is repaid. To the extent that any monies remain outstanding from Hotait to El Rihani, that indebtedness shall constitute a charge over any real property held by Beauchamp Developments and/or Hotait and such charge may be registered by El Rihani as a charge and constitutes in El Rihani a caveatable interest. Hotait and Beauchamp Developments shall neither raise complaint nor require the lapsing of a caveat or a charge, as the case may be, where El Rihani registered such interest pursuant to this Deed. This chargeable interest accrues and is applicable under the Real Property Act 1900 (NSW) and applicable interstate land registration acts and under the common law; or

(b)    El Rihani cannot advance the additional funds required, Hotait may advance the shortfall and such advance shall be a debt due and payable and accrue interest of 5% per annum payable by El Rihani until such time that the advance plus all interest is repaid. To the extent that any monies remain outstanding from El Rihani to Hotait, that indebtedness shall constitute a charge over any real property held by Parramatta Project and/or El Rihani and such charge may be registered by Hotait as a charge and constitutes in Hotait a caveatable interest. El Rihani and Parramatta Project shall neither raise complaint nor require the lapsing of a caveat or a charge, as the case may be, where Hotait registered such interest pursuant to this Deed. This chargeable interest accrues and is applicable under the Real Property Act 1900 (NSW) and applicable interstate land registration acts and under the common law.

10.6    If Hotait or El Rihani form the view that the funds held in the Trust Account ought to be used to pay an liability on behalf of Skyworks NSW, then that party shall notify the other party in writing of:

(a)    the nature of the liability; and

(b)    the amount of the liability.

10.7    The party receiving notice under clause 10.7, shall have three (3) business days from the date of receipt to respond in liability to the party issuing the notice, specifying whether:

(a)    the expense is agreed; or

(b)    the liability is disputed and the reasons for the dispute.

10.8    If the party receiving notice under clause 10.7 fails to respond within three (3) business days from the date of receipt, then that party is deemed to have agreed to the liability claimed.

10.9    If a liability claim is agreed by operation of clause 10.8(a) or clause 10.9, then the party issuing the notice under clause 10.7 shall be authorised to complete and execute a document in substantially the same form as Annexure B and deliver same to the addressee which shall have the effect of authorising Madison Marcus Law Firm Pty Ltd to deal with the funds in the Trust Account in accordance with same.

10.10    If a liability claim is not agreed by operation of clause 10.7(b), then the parties shall meet within three (3) Business Days after the disagreement arose, acting reasonably and in good faith with a view to resolving the dispute and reaching an agreement. If an agreement is reached at the meeting, the parties shall both complete and execute a document in substantially the same form as Annexure B and deliver same to the addressee which shall have the effect of authorising Madison Marcus Law Firm Pty Ltd to deal with the funds in the Trust Account in accordance with same.

10.11    If the parties cannot agree to direct Madison Marcus Law Firm Pty Ltd to pay a liability of Skyworks NSW from the Trust Account and the steps in clauses 10.6 to 10.10 have been adhered to, then the parties agree that a President of the Law Society of New South Wales shall appoint a suitably qualified expert to determine (after considering submissions made by each party):

   (a)    the amount of the liability to be paid;

   (b)    when the liability is to be paid;

   (c)    any steps to be taken by the parties to reduce the liability; and

(d)    whether proceedings, negotiations or a dispute resolution mechanism ought to be instituted to object to the whole or part of the liability.

10.12    The parties agree to be unconditionally bound by the decision of the appointed expert and irrevocably authorise Madison Marcus Law Firm Pty Ltd to apply the funds held in the Trust Account in accordance with the appointed expert's decision.

10.13    The costs associated with the appointment of the expert and the expert's costs shall be borne by the parties equally.

10.14    Upon either of the following events occurring:

(a)    the expiry of all building defect warranty periods which Skyworks NSW must comply by contract, statue or common law (excluding tort) and receipt of all funds payable to Skyworks NSW; or

   (b)    agreement between the parties in writing,

the following shall occur:

(i)    the funds held in the Trust Account shall be distributed to the parties equally (if there are funds available for distribution). For this purpose, the parties agree to provide written authority to Madison Marcus Law Firm Pty Ltd to deal with the funds held in the Trust Account in accordance with this clause; and

(ii)    Skyworks NSW is to be deregistered in accordance with clause 5.3.

34    Clause 11 provides for notification of defects and authorisation of Madison Marcus Law Firm to apply funds held in the Trust Account in relation to them.

35    Clause 12 requires Mr Hotait and Mr El Rihani to maintain net assets of $1 million in each of Beauchamp Developments and Parramatta Project respectively until the expiry of all building warranty defect periods which they must comply with under contract, statute or common law (excluding tort), or until written agreement by Mr Hotait and Mr El Rihani.

36    Clauses 13, 14, 15 and 17 contain provisions familiar in such arrangements, including provisions dealing with confidentiality, non-disparagement, further assurance and indemnity, counterparts, independent legal advice, costs, governing law, amendments, severability, the status of pre-contractual negotiations and entire agreement, and the reasonableness of the document.

37    Clause 16 provides as follows:

16. Schedule of Calculations

16.1    The parties agree and acknowledge that the payments to be made under this document have been calculated with reference to the financial position and calculations detailed in Annexure A.

16.2    The parties have read, inspected and understood Annexure A and agree with the contents and calculations set out therein.

  16.3    Each party waives any right it has to object to:

(a)    the contents of Annexure A;

(b)    the amounts which are payable by the parties under this Deed.

38    There is no “force majeure” clause.

39    Annexure A to the Deed was headed “Schedule of Calculations” and provided as follows (as written):

*Notwithstanding any other provision of this Deed to the contrary, El Rihani shall have until 15 February 2017 to replace the Hovik Bond. For this purpose, the payment in this Annexure A that relates to the Hovik Bond shall be disregarded when the BD Payments are paid on exchange of this Deed and completely disregarded if El Rihani successfully replaces the Hovik Bond. If El Rihani is unable to replace the Hovik bond by 15 February 2017, then the payment in this Annexure A that relates to the Hovik Bond shall be payable by El Rihani to Hotait within 14 days of a written demand from Hotait

Future liabilities issue

Legal principles

40    Mr El Rihani’s written submissions in chief and in reply cite no authority for the propositions contained in them. At the hearing, senior counsel for Mr El Rihani indicated that he did not seek to cavil with the authorities relied on by Mr Hotait.

41    Mr Hotait relied on the following statements of principle from the High Court’s decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104 (Mount Bruce Mining) at [46]-[51] (French CJ, Nettle and Gordon JJ) (footnotes omitted):

46    The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.

47.    In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.

48.    Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.

49.    However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.

50.    Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.

51.    Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties … intended to produce a commercial result”. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

42    Mr Hotait also relied on the following observations of the Court of Appeal of New South Wales in Newey v Westpac Banking Corporation [2014] NSWCA 319 (Newey) at [90]-[91] (Gleeson JA, Basten and Meagher JJA agreeing):

90    Nonetheless it is also important to bear in mind the extent to which context and legitimate surrounding circumstances can be used as an aid in the construction of a written agreement. In McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) [2011] NSWCA 315; 81 NSWLR 690 at [17]-[18] Bathurst CJ (Macfarlan JA and Sackville AJA agreeing) said:

“[17] ... Whilst it is correct in my opinion that context and the surrounding circumstances known to both parties can be taken into account (see Codelfa Construction Pty Ltd v State Rail Authority of New South Wales at 350, 352) even in cases where there is an absence of apparent ambiguity (Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd at [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151 at [8]; Park v Brothers [2005] HCA 73; (2005) 80 ALJR 317 at [39]; Franklins Pty Ltd v Metcash Trading Ltd at [14], [63], [305]) that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109.

[18] This does not mean that there are not exceptional cases where, to use the words of Lord Hoffmann, something has clearly gone wrong with the language so as to interpret it in accordance with the ordinary rules of syntax makes no commercial sense: see Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38; [2009] 1 AC 1101 at [15]-[16]; Jireh International Pty Ltd v Western Exports Services Inc [2011] NSWCA 137 at [55], [60]. In such a case, in my opinion, a court is entitled to depart from the ordinary meaning to give effect to what objectively speaking the parties intended ... .”

91    The reference in McGrath v Sturesteps at [17] to the well-known observation of Gibbs J in Australian Broadcasting Commission v Australasian Performing Right Association Ltd at 109, is a strong reminder that there is no licence for “judicial rewriting” of an agreement: Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at [27] (Basten JA; Giles and Tobias JJA agreeing); Franklins at [23] (Allsop P). The ability of courts to give commercial agreements a commercial and business-like interpretation is constrained by the language used by the parties. If, after considering the contract as a whole and the background circumstances known to both parties, a court concludes that the language of a contract is unambiguous, the Court must give effect to that language unless to do so would give the contract an absurd operation: Jireh International Pty Ltd v Western Exports Services Inc at [55] (Macfarlan JA; Young JA and Tobias AJA agreeing).

Mr El Rihani’s submissions summarised

43    Mr El Rihani submitted that the term “future liabilities” in cl 10.2 of the Deed of Separation refers to the liabilities of Skyworks NSW which were unpaid as at 19 December 2016 (the date the Deed was entered into) or which thereafter arose for payment. He says that meaning emerges both from consideration of the express terms of the Deed as a whole (consistently with Mount Bruce Mining at [48]) and upon consideration of the Deed in the context in which execution occurred (consistently with Mount Bruce Mining at [49]).

44    Mr El Rihani submitted that the following may be observed about the express terms of the Deed of Separation.

45    First, Recital B of the “Introduction” contains an express purpose of the Deed of Separation:

Hotait and El Rihani have agreed to separate from each other and to do all things necessary to procure their nominated entities to separate from each other to bring about the end of their joint business ventures.

46    Second, Skyworks NSW was one of “their” entities, but not a party to the Deed.

47    Third, one specific purpose of the Deed of Separation is to effect the immediate transfer of shares in Beauchamp Developments to Mr Hotait and Parramatta Project to Mr El Rihani: cll 8 and 9.

48    Fourth, cl 5 provides for the continuing joint control of Skyworks NSW by Mr Hotait and Mr El Rihani:

(1)    By cl 5.1, the parties agree that Skyworks NSW “presently” (that is, at 19 December 2016) undertakes “residential building work” and is a contracted builder for development work undertaken by Parramatta Project, Beauchamp Developments and third parties and that it will receive payments in respect of goods and services provided by it in that role.

(2)    Clause 5.2 provides for (a) all currently held funds (that is, as at 19 December 2016) and (b) all future payments to Skyworks NSW of any nature to be paid to the Trust Account.

(3)    Clause 5.3 provides for deregistration of Skyworks NSW or (if unanimously agreed), its sale upon satisfaction of the events contemplated by cl 10.14 being expiration of the building defects warranty periods and distribution of the balance of moneys in the Trust Account to Mr El Rihani and Mr Hotait. Deregistration is therefore the default position unless Mr Hotait and Mr El Rihani agree that Skyworks NSW should be sold.

(4)    With the exception of cl 5.4(c) (Skyworks NSW’s builder’s licence to be cancelled in a manner which does not damage the prospects of Mr El Rihani and Mr Hotait to obtain builder’s licences), cll 5.4-5.6 generally provide for the same regime to effect deregistration of Skyworks NSW as that provided for Equipment for Hire, Skyworks Group, Hornsby Projects and Skye Form in cll 3, 4, 6, and 7. That includes (among other things) deregistration to be effected by resolution of the company’s shareholders, the company having ceased trading, and “all outstanding liabilities” of the company having been paid. These provisions reflect the requirements of s 601AA(2) of the Corporations Act applicable to voluntary deregistration of companies. However, while cll 3, 4, 6 and 7 provide for deregistration of the relevant companies “within a reasonable time” after execution of the Deed of Separation, the effect of cl 5.3 and cl 10.14 is that Skyworks NSW would remain under joint control for an indefinite period before cl 5.4 (and cl 5.4(f) in particular) came into operation.

49    Fifth, cl 10 provides for operation of the Trust Account:

(1)    Under cl 10.2, funds deposited in the Trust Account were to be “held … on account of future liabilities of Skyworks NSW …”.

(2)    Under cl 10.4, $200,000 was to be deposited upon execution of the Deed by each of Mr Hotait and Mr El Rihani.

(3)    Under cll 10.3 and 10.6, the balance of the Trust Account from time to time was to be used “to pay the liabilities of Skyworks NSW”.

(4)    Under cl 10.5, Mr Hotait and Mr El Rihani agreed that “[i]n the event that any liability exceeds the amount held in the Trust Account at any given time” they “each agree to contribute equally to the amount exceeding the amount held up to a maximum of an additional $100,000 each on each [such] occasion”.

(5)    Under cl 10.6, disbursement of money from the Trust Account required agreement between Mr Hotait and Mr El Rihani.

(6)    Under cl 10.7, either Mr Hotait or Mr El Rihani could oppose a payment proposed by the other on the grounds that it was not a liability of Skyworks NSW and/or its quantum exceeded the true liability of Skyworks NSW.

(7)    Under cll 10.11 to 10.13, continuing disagreement between Mr Hotait and Mr El Rihani about a proposed payment was to be resolved by expert determination.

(8)    Under cl 10.14, operation of the Trust Account would terminate upon the expiry of the last of the defects warranty periods applicable to any residential building work done by Skyworks NSW or the parties agreeing in writing that that should occur, whichever first occurred.

50    Sixth the term “future liabilities” is used only once, in cl 10.2. Importantly, it is not repeated again in the rest of cl 10 relating to the operation of the Trust Account. The term “liabilities” is used in cll 10.3, 10.5, 10.7, 10.9, 10.10 and 11, but in all those cases it is unqualified.

51    Seventh, the term “future” only appears in five places:

(1)    In cl 10.2;

(2)    In cl 5.2, which requires all “current funds” in the financial accounts of Skyworks NSW and all “future payments” made to Skyworks NSW of any nature to be paid to the Trust Account “to be dealt with in accordance with clause 10”;

(3)    cl 5.4(c), which requires Skyworks NSW’s building licence to be cancelled in a manner which does not damage the prospects of Mr Hotait or Mr El Rihani “obtaining alternative building licences in the future”; and

(4)    In cll 8.14 and 9.14, being reciprocal indemnities given by Mr El Rihani to Mr Hotait in relation to “Claims” by a third party in connection with Parramatta Project “past, present or future” and vice versa in relation to Beauchamp Developments.

52    Mr El Rihani submitted that properly interpreted, the Deed of Separation contemplates that all of Skyworks NSW’s liabilities, incurred both before and after the date of the Deed, would be discharged and Skyworks NSW would be voluntarily deregistered under s 601AA(2) of the Corporations Act unless Mr El Rihani and Mr Hotait agreed that it should be sold. On Mr Hotait’s construction of cl 10.2, liabilities arising from building defect warranties prescribed under the Home Building Act would not be covered, but for the fact that they are expressly referred to in cl 10.2. Indeed, Mr Hotait says that Category B liabilities are not covered, even though the contingent liability for all warranty claims arise by the end of the construction period. It is important that cl 10.2 uses the words “including but not limited to potential building defects” so that if contingent liabilities are embraced, so are actual liabilities. Building defects are an example of the matters covered by the words used earlier in cl 10.2, not an extension as contended by Mr Hotait.

53    He says that, by reference to cll 5.2, 5.3, 5.4 and 10.14 the Deed of Separation alone, a reasonable business person would not have understood the reference to “future liabilities” in cl 10.2 to mean that only some of Skyworks NSW’s creditors would be paid out of the Trust Account. The fact that cl 5.2 contemplated moneys received from Skyworks NSW’s debtors being used to augment the Trust Account would lead one to expect that the moneys in the Trust Fund would be available to meet all of its outstanding liabilities.

54    Senior counsel for Mr El Rihani submitted that a fundamental purpose of the Deed of Separation is to provide a scheme for obtaining the voluntary deregistration of Skyworks NSW and those entities that were to remain in joint ownership. Senior counsel noted that the Deed of Separation contemplated that only one of their joint entities (Skyworks NSW) would continue in joint ownership for any lengthy period (to deal with the run-off of building defect warranty claims), having regard to cl 10.14. That purpose would be confounded if, as submitted by Mr Hotait, the financial support contemplated by cll 5.2, 10.4 and 10.5 of the Deed of Separation could only be used to satisfy liabilities of Skyworks NSW which became due and payable after 19 December 2016, being the date of the Deed. That is because, even though cl 5.4(f) requires the payment of all “outstanding liabilities” as a condition of voluntary deregistration, Skyworks NSW would be exposed to judgements over a potentially long period until the date for termination under cl 10.14 so that Skyworks NSW would be liable to be wound up for non-payment of Category A liabilities before the building defect warranty periods elapsed and Skyworks NSW’s sale or voluntary deregistration could be achieved. Senior counsel posed the question: why would two business people who were going their separate ways do that? He asserts that that is the outcome if Mr Hotait’s preferred interpretation of cl 10.2 were correct.

55    Mr El Rihani says that the objective circumstances in existence at the time the Deed was executed suggest that cl 10.2 of the Deed of Separation should be interpreted as Mr El Rihani contends, because then the Trust Account is available to all creditors who had not been paid.

56    Mr El Rihani submitted that, if one looks beyond the terms of the Deed of Separation to the context in which it was executed, the Particulars disclose that, as at 19 December 2016, amounts owed by Skyworks NSW in respect of work done before and invoiced before that date (that is Category A liabilities) amounted to $434,894.41. That is a known objective circumstance. It is entirely orthodox to take that circumstance into account: see Mount Bruce Mining at [49].

57    Senior counsel submitted that it is not in dispute that the only moneys that went into the Trust Fund was $600,000 contributed by the parties, despite cl 5.2 of the Deed of Separation. From that, it can be inferred that there were no funds held by Skyworks NSW as at 19 December 2016 and there were no payments received from any other source after that date. The Particulars disclose that Category A and Category B liabilities were paid from the Trust Account between 23 December 2016 and 3 May 2017. Those payments only occurred because Mr Hotait and Mr El Rihani “acting reasonably and in good faith” directed the law firm operating the Trust Account to pay those liabilities: see cl 10.3 of the Deed. Those payments were made before any dispute arose about the meaning of “future liabilities”. 

58    Taking the objective circumstance disclosed by the Particulars that Skyworks NSW had unpaid invoices to an amount of $434,894.41 on 19 December 2016 and the fact that no further moneys were paid into the Trust Account in accordance with cl 5.2, it should be inferred that Skyworks NSW was then, but for the support of Mr El Rihani and Mr Hotait in accordance with cl 10, unable to meet its liabilities then due and payable and their support was necessary if the Deed of Separation was to achieve the indefinite continuing existence of Skyworks NSW until its voluntary deregistration or sale following the end of the statutorily prescribed building defects warranty periods.

59    Mr El Rihani submitted that, while the matters raised in [57] are post-contractual conduct and he accepts that, generally, such conduct cannot be used to establish the legal meaning of a phrase or the construction of some part of an agreement, post-contractual conduct may be relied upon as a fact if it is otherwise relevant. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations: see Mount Bruce Mining at [50]. Senior counsel for Mr El Rihani submitted that examples of situations in which post-contractual conduct may be taken into account are to establish the subject-matter of an agreement or who the contracting parties are.

60    Senior counsel for Mr El Rihani submitted that, in this case, the post-contractual conduct serves to identify the subject-matter of cl 10.2. He says that, in this case the difference between the subject-matter of cl 10.2 and construction of the term “future liabilities” is not meaningful. The rationale for evidence of post-contractual conduct being inadmissible for the purpose of construing a document is not applicable in this case because the relevant conduct was a joint act of Mr Hotait and Mr El Rihani. Payments out of the Trust Account could only be made by their agreement having regard to cll 10.7, 10.8 and 10.9 of the Deed of Separation. So the conduct on which Mr El Rihani seeks to rely is not affected by the concern that it manifests nothing more than a subjective view.

61    The facts that there were over $400,000 of debts in Category A which had already fallen due for payment by Skyworks NSW on 19 December 2016 and that they were paid within three months after the Deed was executed, in circumstances where (on Mr Hotait’s interpretation) there is no other mechanism in the Deed for dealing with Category A liabilities until the end of the building defects warranty period or agreement between the parties (having regard to cl 5.3, 5.4(f) and 10.14), points to the construction for which Mr El Rihani contends because the commercial purposes contemplated by the Deed under cll 5.3 and 10.14 would be confounded if Mr Hotait were correct. The word “future” simply means something prospective. There is nothing anomalous in reading “future liabilities” in context to include those liabilities existing at 19 December 2016 which remained to be paid at or after that date and it is consistent with the apparent commercial purposes of the Deed. In the circumstances, the interpretation for which Mr Hotait contends is anomalous and uncommercial.

62    Senior counsel submitted that Mr El Rihani’s approach to establishing the subject-matter of “future liabilities” in cl 10.2 wholly reflects the observations made by the High Court in Mount Bruce Mining on which Mr Hotait relies and it would not involve the Court departing from the ordinary meaning of the words: see Newey at [90] which cites McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liq) [2011] NSWCA 315; (2011) 81 NSWLR 690 (McGrath) at [17].

Mr Hotait’s submissions summarised

63    Mr Hotait submitted that the purpose of the Deed of Separation was to provide a mechanism for separating the commercial interests of Mr Hotait and Mr El Rihani from each other so as to bring an end to the joint-venture arrangement and then for the handling of building defect warranty claims going forward. The separation included a consideration of adjustment of assets and liabilities in existence on 19 December 2016 and the transfer of money to finalise the outstanding liabilities as at that date under cl 16 and Annexure A, consistently with the Deed’s purpose. That engagement with the division of assets and liabilities “must be relevant to the intention of the parties and the intention of the Deed with respect to future liabilities”. The manner in which cl 11 deals with potential building defect claims is consistent with that analysis.

64    Counsel for Mr Hotait submitted that Skyworks NSW was the only entity where it was anticipated that there would be an ongoing “partnership” for the run-off of building defects warranty liabilities and how the Deed of Separation dealt with other entities does not assist in the matter at hand.

65    Mr Hotait says that the intention of the parties is to be derived from the language used in cl 10.2 of the Deed of Separation. He says that the word “future” is clear in its operation and it has a real purpose to play: see Mount Bruce Mining at [46]-[51]. Given its ordinary meaning, the word “future” applies to liabilities that accrue after 19 December 2016, not those that accrued before that date. On the face of the document, liabilities that accrued before that date ought to have been taken into account before the execution of the Deed. Given that meaning, “future” has an entirely satisfactory effect and can hardly be said to be unjust.

66    Mr Hotait further submitted that, albeit that the clause is not in its terms restrictive, cl 10.2 not only uses the term “future liabilities” but it goes on to use the words “potential building defect liabilities”. A “potential” occurrence must, of its nature, be something which might occur in the future. Had the words employed in cl 10.2 been “on account of liabilities of Skyworks NSW” Mr El Rihani’s position would have greater force with respect to liabilities that had accrued before or at the time of execution of the Deed. The methodology employed in cll 10.6-10.13 for payment of liabilities out of the Trust Account and in cl 11 for identifying defects which should be paid out of the Trust Account reflect the language of cl 10.2. Counsel submitted that a reasonable reading of the Deed was that it was “geared towards” the potential for building defect claims to arise. He submitted that, taking into account those matters together with cl 5.1(d) and cl 16 and Annexure A, giving “future” its ordinary meaning in cl 10.2 is consistent with the purpose of the Deed. That purpose was to separate everything else out, close everything else down and keep Skyworks NSW as a mechanism for handling building defect claims which arise after 19 December 2016. He says that there is a consistency throughout the document that militates for finding that there is no ambiguity in the term “future liabilities”.

67    Mr Hotait says that, in light of the clear words of cl 10.2, to engage with the factual contextual considerations outside the Deed of Separation itself as urged by Mr El Rihani (such as having regard to the Particulars) would be to engage in a process which the High Court has encouraged courts not to do where there is no ambiguity in the document to be interpreted. The mere assertion by one party that there is a lack of clarity does not, by its assertion, amount to a basis to engage in the process of determining what is meant by a particular phrase or the need to go beyond the words themselves and consider surrounding intentions or other matters. In this case, there is no need to have regard to surrounding matters in order to give business efficacy to the terms in the document. The Deed of Separation itself provides clarity.

68    While Mr Hotait concedes that context and the surrounding circumstances known to both parties can be taken into account even in cases where there is an absence of apparent ambiguity, he says that does not permit the Court to depart from the ordinary meaning of the words used by the parties merely because it regards the result as inconvenient or unjust. He acknowledges that there may be exceptional cases where something has clearly gone wrong with the language so that to interpret it in accordance with ordinary rules of syntax makes no commercial sense (see Newey at [17]-[18]), but says this is not such a case.

69    That said, Mr Hotait submitted that the Particulars that fall within Category A liabilities, being expenses incurred and invoiced prior to 19 December 2016, cannot be considered “future liabilities” as contemplated by the Deed when applying the ordinary definition of “future”. To interpret “future liabilities” as proposed by Mr El Rihani would require that the presence of the word “future” be totally disregarded. Category B liabilities, being expenses incurred before 19 December 2016 but for which an invoice was raised after that date, are also excluded by virtue of the phrase “future liabilities”.

70    For the purposes only of the determination of the separate issue Mr El Rihani concedes that Category C liabilities are caught by the phrase “future liabilities” and says that they are exactly the kind of liabilities contemplated by the phrase.

71    In his written submissions at [15], Mr Hotait submitted that it is an Agreed Fact that, after entry into the Deed of Separation, the only building work undertaken by Skyworks NSW was rectification of defects in residential building work done under contracts completed or terminated before or on 19 December 2016. He says that is consistent with the intent of the Deed and the clear wording of cl 10.2.

72    Counsel for Mr Hotait submitted that Mr El Rihani’s premise that the only money available to Skyworks NSW would be sourced from Mr El Rihani and Mr Hotait under cll 10.4 and 10.5 cannot be accepted in light of the clear words of cl 5.1(d) which anticipate that Skyworks NSW would receive “payments in respect of goods and services provided by Skyworks NSW as a contracted builder for projects in the state of New South Wales”. When queried as to how that submission was made in light of the Agreed Fact referred to at [71] above, counsel noted, and it was not disputed, that the liquidator recovered moneys from a developer in proceedings commenced before the liquidation commenced (the amount was not disclosed to the Court) and that the Agreed Fact does not amount to an agreed fact that Skyworks NSW would have no further income from sources other than Mr Hotait and Mr El Rihani. Counsel submitted that, accordingly, there is no inconsistency between the Agreed Fact, the terms of cl 5.1(d), the existence of outstanding debts as at 19 December 2016 and the interpretation of cl 10.2 for which Mr Hotait contends.

73    Counsel further submitted that the Agreed Fact that funds were paid out of the Trust Account to meet Category A and Category B liabilities does not permit the Court to draw conclusions that may or may not be correct about the manner or reason for the payments having a bearing on the meaning of cl 10.2, albeit that there is a mechanism in the Deed for approval of invoices for payment. The Agreed Fact is that amounts were contributed to and paid out of the Trust Account and nothing more.

74    Counsel rejected the proposition that the interpretation for which Mr Hotait contends has the consequence that creditors to whom debts were incurred before 19 December 2016 (in either Category A or Category B) would be left to “just hang”, relying on the existence of cl 5.1(d). Counsel submitted that, even if it were true that the Deed did not account for the payment of Category A and B liabilities and that would produce an unjust outcome, in the face of the consistency in the document, that unpalatable outcome would not be inconsistent with creating a trust fund to address liabilities which arise after the date the Deed of Separation was executed so that the Deed can be construed without regard to extraneous factors. Counsel conceded that such an interpretation would be inconsistent with a default position that Skyworks NSW would be voluntarily deregistered after all building defect warranty periods had elapsed.

75    Mr Hotait submitted that what Mr El Rihani seeks to do is to imply into the Deed of Separation a term that is inconsistent with the precise wording of the clause. However, terms may only be implied into a contract where it is necessary to give the agreement efficacy: see BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 at 283. In accordance with that decision of the Privy Council, a term may only be implied if it is reasonable, equitable, necessary to give business efficacy to the contract, capable of clear expression, and so obvious that it goes without saying. No term will be implied if a contract is effective without it or, importantly, the term is contrary to an express term of the document.

Mr El Rihani’s submissions in reply summarised

76    Senior counsel for Mr El Rihani submitted that:

(1)    There is nothing in cl 11 of the Deed of Separation that changes the construction or effect of cl 10. Clause 11 deals with claims for unliquidated liabilities which requires a different methodology to determine the quantum of the liability because it requires consideration of what steps might need to be taken and at what cost to remediate a defect. The words “including but not limited to” in cl 10.2 are not words of extension, the “potential building defect liabilities” which follow them are an example of the “future liabilities” with which the clause deals. The words “potential building defect liabilities” in cl 10.2 simply refers to claims, since liability for building defect warranties accrues at the time construction work takes place. If claims and liabilities are interchangeable, that supports the interpretation of cl 10.2 for which Mr El Rihani contends.

(2)    Mr Hotait’s submissions concerning cl 16 and Annexure A should not be accepted because all that we know about Annexure A is that it does not deal with Skyworks NSW. Annexure A deals with adjustments between Mr Hotait and Mr El Rihani personally in relation to the companies that they will come to own individually and takes into account the transfer of property from Equipment for Hire to Mr El Rihani or his nominee (which the Court takes to be the transactions referred to in cl 3.1). Further, if it had been intended that Annexure A deal with adjustment of Skyworks NSW’s existing liabilities, it would be expected that there would be a clause similar to cl 3.1 or cll 9.14 and 9.15.

(3)    The authorities relied on by Mr Hotait are inconsistent with his submissions concerning when surrounding circumstances may be taken into account in construing a document. Those authorities make it clear that apparent ambiguity is not required before surrounding circumstances may be taken into account: see Newey at [90] relying on McGrath at [17].

(4)    Clauses 5.3 and 5.5 assume that Skyworks NSW would only be deregistered on the basis of a resolution of its shareholders and with no outstanding liabilities, that is, on the basis that it was solvent. It is therefore necessary that cl 10 provided a mechanism for the payment of creditors of Skyworks NSW extant as at 19 December 2016 so that its affairs, including its assets and liabilities, could be run-off and wound up in an orderly way.

Consideration

77    The parties accept, as they must, that the starting point for determination of the rights and liabilities of parties under a provision of a commercial contract is that the determination must be undertaken objectively, by reference to the language used in the text of the contract, the contract’s context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and the commercial purpose or objects to be secured by the contract. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task on the assumption that the parties intended to produce a commercial result. It is necessary to ask what a reasonable businessperson would have understood the contract’s terms to mean: Mount Bruce Mining at [46], [47] and [51].

78    Where there is a constructional choice, it may be necessary to have recourse to objective events, circumstances and things external to the contract in identifying the commercial purpose or objects of the contract. However, circumstances and things external to the contract cannot be adduced to contradict a contract’s plain meaning: Mount Bruce Mining at [48]-[49]. Events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction may be referred to. That may include the contract’s history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations: Mount Bruce Mining at [50].

79    In its terms, cl 10.2 provides as follows:

The parties agree that these funds shall be held in the Trust Account on account of future liabilities of Skyworks NSW, including, but not limited to, potential building defect liabilities arising from construction works undertaken by Skyworks NSW in the state of New South Wales.

80    “Future liabilities” is not a term of common usage and does not have a commonly accepted meaning. The Court does not accept Mr Hotait’s submission that “future” when used in the term “future liabilities” in the context of cl 10.2, cl 10 as a whole or the Deed as a whole is clear in its operation.

81    The Macquarie Dictionary defines “future” when used as an adjective as “that is to be or come hereafter: future events; at some future date.”

82    The Oxford English Dictionary relevantly defines “future” when used as an adjective as follows:

(1)    That is to be, or will be, hereafter. Often qualifying a noun, with the sense: The person or thing that is expected to be (what the noun denotes).

(2)    Of or pertaining to time to come especially in grammar of a tense: Relating to time to come; describing an event yet to happen.

(3)    Loosely used for: subsequent (to a specified past epoch).

83    The Oxford English Dictionary defines “liability” as:

(1)    The condition of being liable or answerable by law or equity;

(2)    The condition of being liable or subject to something, apt or likely to do something; and

(3)    That for which one is liable; especially plural the debts or pecuniary obligations of a person or company.

84    The Macquarie Dictionary defines “liability” as:

(1)    An obligation, especially for payment; debt or pecuniary obligations (opposed to asset);

(2)    Something disadvantageous; and

(3)    The state or fact of being liable: liability to jury duty; liability to disease.

85    On a restrictive interpretation of the word “future”, it would mean only a liability which comes into existence after the execution of the Deed of Separation. That is the meaning for which Mr Hotait contends. There is some support for that view to be derived from the way the word “future” is used in other clauses of the Deed (see [51] above) where it is plain that “future” relates to things which will come into being after 19 December 2016. Clause 5.2(b), which requires “future payments” to Skyworks NSW to be paid to the Trust Account, is juxtaposed to cl 5.2(a), which requires all “current funds” in Skyworks NSW’s financial accounts at the time of execution of the Deed to be paid into the Trust Account. Clause 5.4(c) requires Skyworks NSW’s builder’s license to be cancelled in a way which does not prejudice Mr Hotait or Mr El Rihani getting a builder’s licence thereafter; clearly something to be done after the Deed was executed. Clauses 8.14 and 9.14 relate to indemnities for claims made by third parties in connection with Beauchamp Developments and Parramatta Project which are “past present or future”.

86    The Court also accepts that the use of the word “potential” in relation to building defect claims in cl 10.2 carries a sense of something to arise in the future and cl 11 deals with how “notification from a third party requesting, compelling or otherwise requiring Skyworks NSW to attend to rectification of defective workmanship or materials” would be dealt with if such a notification was received by a party to the Deed. Absent other matters referred to below, these matters would suggest that “future” when used in cl 10.2 should be interpreted with the restrictive meaning.

87    Even on the restricted interpretation, Category C liabilities are liabilities comprehended by cl 10.2 because they are liabilities for work done or goods provided for which an invoice was issued after 19 December 2016. Although Mr Hotait conceded that Category C liabilities are “future liabilities” for the purpose only of determination of the separate questions, there is nothing in cll 10 or 11 or elsewhere in the Deed or the commercial purposes to be served by the Deed which casts doubt on that interpretation.

88    Further, even on the restricted interpretation, and contrary to Mr Hotait’s submissions, liabilities of the kind which fall within Category B would also be “future liabilities” for the purposes of cl 10.2. That is because, in the absence of some unusual contractual provision to the contrary, whether or not there was a contingent liability for work done or goods provided before the issue of an invoice, the right or ability to claim for payment arises at the time the invoice is issued and that is (according to the definition of Category B liabilities) after 19 December 2016. This interpretation of cl 10.2 is consistent with its terms: “future liabilities” and includes “potential building defects”. Such defects are incurred at the time of construction, but claims for them are to be addressed under cl 11. That construction of cl 10.2 also serves the purposes identified below.

89    However, the word “future” as applied to “liabilities” is also susceptible of a less restrictive interpretation. The most common dictionary meaning of “future” as an adjective is a description of a thing “that is to be, or will be, hereafter”. In context, that could include a liability that is outstanding in the future (whenever it was incurred) and a liability that comes into existence at a time to come. That is the meaning for which Mr El Rihani contends.

90    To ascertain what liabilities may be comprehended by the term “future liabilities” it is necessary and appropriate to consider cl 10.2 in the context of cl 10 and of the Deed as a whole and in the circumstances that existed at the time the Deed was executed and the commercial purposes to be served. For the reasons that follow, the Court considers that the less restrictive interpretation is the most appropriate. In saying this, the Court has taken into account the following matters.

91    First, the matters referred to at [85]-[86] above in relation to the language of cl 10.2 which weigh in favour of the more restrictive interpretation.

92    Second, cl 10 as a whole. The Court does not accept Mr Hotait’s submission that cll 10.6 to 10.13 for the payment of liabilities out of the Trust Account support the interpretation of cl 10.2 for which he contends. Other than in cl 10.2, cl 10 employs the word “liabilities” without qualification. For instance, cl 10.3 contains an agreement by the parties, acting reasonably and in good faith, to agree to direct the law firm which operated the Trust Account to “pay the liabilities of Skyworks NSW” from the Trust Account. The balance of cl 10 is directed to the mechanical process whereby Mr Hotait and Mr El Rihani have the opportunity to consider whether claimed liabilities of Skyworks NSW are accepted and breaking deadlocks on that issue. Those provisions are not cast in terms which would suggest that the liabilities to which they refer must be incurred and claims first made after 19 December 2016. The process is clearly designed to ensure that liabilities are identified and processed to a point of rejection or payment, which would be necessary in order to get Skyworks NSW to a point whereby it might be voluntarily deregistered as contemplated by cl 10.14.

93    Third, the express purposes of the Deed are the separation of the interests of Mr Hotait and Mr El Rihani and to end their business relationship: Introduction at B and cl 2.1. The parties agree that a purpose of the Deed was to use Skyworks NSW as a vehicle to run-off residential building defects warranty claims. In the Court’s view, another purpose to be derived from the Deed of Separation was that those entities to remain in their joint ownership after 19 December 2016 (being Equipment for Hire, Skyworks Group, Hornsby Projects, Skye Form and Skyworks NSW) would be deregistered solvently and under their joint supervision. While it is true that there was provision for Mr Hotait and Mr El Rihani to agree that Skyworks NSW be sold, the default position was that it would be deregistered after the residential building defects warranty period had expired and on the basis that the ability of Mr El Rihani and Mr Hotait to obtain another builder’s licence was not prejudiced by the manner in which Skyworks NSW’s builder’s licence was cancelled.

94    The mechanisms by which those purposes would be achieved was:

(1)    The transfer of shares in Parramatta Project from Mr Hotait to Mr El Rihani and the transfer of shares in Beauchamp Developments from Mr El Rihani to Mr Hotait, with each providing indemnity to the other for liabilities of those companies respectively (cll 8 and 9).

(2)    The companies which were to remain jointly held were to be deregistered voluntarily having satisfied the requirements of s 601AA(2) of the Corporations Act: that is the effect of the requirements of cll 3.3, 4.2, 5.4, 6.2 and 7.2 which track the requirements of s 601AA(2) and the obligation to file with ASIC a Form 6010 imposed under cll 3.4, 4.3, 5.5, 6.3 and 7.3.

(3)    Adjustments for nominated assets and liabilities as provided in cl 16 and Annexure A.

(4)    The establishment of the Trust Account by payment of funds held in Skyworks NSW’s financial accounts at the time of execution of the Deed or as received by Skyworks NSW thereafter into it and the contribution of $200,000 each by Mr Hotait and Mr El Rihani, with further amounts to be contributed by them as necessary.

(5)    Mechanisms in cll 10.6 to 10.13 and cl 11 for liabilities and potential building defects to be agreed or referred for expert determination following which a law firm would be authorised to pay the liabilities out of the Trust Account which it operated under cll 10 and 11.

95    As at the date the Deed of Separation was executed:

(1)    The relationship between Mr El Rihani and Mr Hotait had deteriorated. They undertook no new business together from early 2015 and they carried on business together until the end of 2015: Agreed Facts 1 and 4.

(2)    Based on the Particulars, there was over $400,000 in liabilities which had fallen due for payment over a period commencing in December 2012.

(3)    There were no funds in Skyworks NSW’s financial accounts. That is to be inferred from the obligation imposed by cl 5.2(a) and the fact that it is agreed that only $600,000, being the contributions made by Mr Hotait and Mr El Rihani, were ever paid into the Trust Account. Neither party contended that there was money in Skyworks NSW’s financial accounts at 19 December 2016.

(4)    To meet “future liabilities”, Skyworks NSW required the support of Mr El Rihani and Mr Hotait. That is to be inferred from cl 10.4 (in particular) and cl 10.5, since those clauses would have been unnecessary if Skyworks NSW was able to pay all of its debts from its own resources. The fact that cl 5.1(d) noted that Skyworks NSW would receive payments in respect of goods and services as a contracted builder does not indicate that those payments were expected to be sufficient to meet its ongoing liabilities or overcome the inference to be drawn not only from cll 10.4 and 10.5, but also from cll 5.4(f) and 5.6.

96    Mr Hotait submitted that the separation of Mr Hotait’s and Mr El Rihani’s business interests under the Deed of Separation included a consideration of adjustment of assets and liabilities in existence on 19 December 2016 and the transfer of money to finalise the outstanding liabilities as at that date under cl 16 and Annexure A, consistently with the Deed’s purpose. He submitted that that engagement with the division of assets and liabilities “must be relevant to the intention of the parties and the intention of the Deed with respect to future liabilities”.

97    Although Mr Hotait appears to have suggested that cl 16 and Annexure A are relevant to the interpretation of cl 10.2 on the basis that all adjustments for Skyworks NSW’s pre-existing liabilities were or should be taken to have been provided for in cl 16 and Annexure A, it is difficult to see how those adjustments were relevant to Skyworks NSW. Annexure A appears to have been designed to record the calculation on the basis of which Mr El Rihani was to make the “BD Payment” to Mr Hotait. No evidence was advanced nor submission made which identified any liability or asset referred to in Annexure A which related to Skyworks NSW or how cl 16 and Annexure A had any bearing on how liabilities of Skyworks NSW outstanding on 19 December 2016 were to be addressed. In contrast, it is apparent that the transfer of assets of Equipment for Hire to Mr El Rihani required under cl 3.1(a) of the Deed are adjusted for at F in Annexure A. The Court does not accept Mr Hotait’s submission that cl 16 and Annexure A have any bearing on how cl 10.2 should be interpreted.

98    Mr Hotait submitted that it is an Agreed Fact that, after entry into the Deed of Separation, the only building work undertaken by Skyworks NSW was rectification of defects in residential building work done under contracts completed or terminated before or on 19 December 2016. He says that is consistent with the intent of the Deed and the clear wording of cl 10.2 that only liabilities which accrue and are invoiced after that date be paid out of the Trust Account. The Court does not accept that submission: if the intention of the Deed were that cl 10.2 applied only to claims for building defects made after 19 December 2016, cll 10.6 to 10.13 would arguably have been unnecessary in light of cl 11 which deals with that subject-matter.

99    The Court accepts Mr El Rihani’s submission that the purpose of achieving solvent voluntary deregistration of Skyworks NSW would be materially prejudiced if cl 10.2 did not encompass Category A and Category B liabilities since, on Mr Hotait’s preferred interpretation, payment of those liabilities would be indefinitely deferred until the time at which deregistration was sought under cl 5.4(f), thus running the risk that a creditor would seek its winding up on the basis of its unpaid debts. Mr Hotait relied on cl 5.1(d) to submit that the Deed envisages that there would be a source from which Category A and Category B liabilities might be paid, being construction work undertaken for third parties and payment for goods and services so supplied. The Court does not accept that submission.

100    On the restrictive interpretation for which Mr Hotait contends, cl 10.2 would only permit payment of liabilities which were incurred or claims for building defect liabilities which were made after 19 December 2016. Clause 5.2(b) requires all “future payments” received by Skyworks NSW to be paid into that Trust Account. On Mr Hotait’s interpretation of “future liabilities” in cl 10.2, those moneys could not be used to pay liabilities accrued or invoiced before 19 December 2016 out of the company’s own money. In fact, the interaction of cll 5.1(d), 5.2(b) and 10.2 is, as Mr El Rihani submitted, an argument in favour of “future liabilities” when used in cl 10.2 including Category A and Category B liabilities, otherwise Skyworks NSW’s assets would be denied to a class of creditors entitled to claim on them.

101    The risk that Skyworks NSW’s inability to pay Category A and Category B liabilities out of the Trust Account might lead to its involuntary winding up is a powerful consideration against Mr Hotait’s preferred restrictive interpretation of cl 10.2. It does not, as contended by Mr Hotait, require the Court to ignore the word “future” in that clause or to imply a term into the Deed. There is no obvious reason why commercial people ending their relationship on the basis that the entities which would remain in their joint ownership would be voluntarily deregistered would intend the interpretation for which Mr Hotait contends. In the Court’s view it is unnecessary to go beyond the terms of the Deed of Separation and the known circumstances at the time the Deed was executed as set out at [95] above to determine the subject-matter of the Deed in this regard. The Court has therefore not, in determining the meaning of “future liabilities”, taken into account the use to which moneys contributed to the Trust Account were put having regard to the Particulars.

102    Accordingly, of the questions set out at [10] above, question (a) should be answered “no” and question (b) should be answered “yes”.

Was the obligation to contribute under cl 10.5 of the Deed of Separation frustrated by the appointment of a liquidator to Skyworks NSW on 6 June 2018?

Mr Hotait’s submissions

103    Mr Hotait submitted as follows.

104    On 6 June 2018, the Court made consent orders in proceedings NSD1514/2017 winding up Skyworks NSW pursuant to s 461(1)(k) of the Corporations Act and a liquidator was appointed and continues in office. As a result, the continued joint control of Skyworks NSW by Mr Hotait and Mr El Rihani under cl 5 of the Deed of Separation has been superseded by the appointment of the liquidator who now has control of Skyworks NSW’s affairs. As directors, Mr Hotait and Mr El Rihani must not perform or exercise a function or power of that office after the appointment of a liquidator (see s 198G of the Corporations Act). For them to do so would constitute an offence. The liquidator now has control of Skyworks NSW’s assets. The directors are precluded from dealing with the liabilities of Skyworks NSW, which are also subject to the liquidator’s control.

105    The Trust Account is or, at the very least, appears to be the property of Skyworks NSW as funds held or to be held in it are to be utilised for its benefit to enable it to meet its liabilities: see cl 10.1 of the Deed. Money in the Trust Account may only be returned to Mr El Rihani and Mr Hotait after all such liabilities have been paid: see cl 10.14. In those circumstances, the Trust Account must be taken into the control or custody of the liquidator: see s 474(1) of the Corporations Act. It is then for the liquidator to determine how those funds, as assets of Skyworks NSW, are to be dealt with instead of Mr Hotait and Mr El Rihani.

106    It is important to note that Mr Hotait agrees that an assumption may be made that the Requests were made for the purpose only of determination of the separate questions (see [16] above) and no concession has been made that the Requests were validly made. That issue remains to be determined at a later date. However, on the assumption that requests were validly made, the steps envisaged in cll 10.6-10.13 of the Deed cannot now be taken because a liquidator has been appointed.

107    Calls for the payment of money into the Trust Account may, under cl 10.5 the Deed of Separation, only be made for specified purposes and payment out of the Trust Account may only be made by agreement between Mr El Rihani and Mr Hotait or under the dispute resolution process specified in cl 10. However, it is not now possible to employ the processes specified in cll 10.6 to 10.13 due to the appointment of a liquidator which precludes Mr Hotait and Mr El Rihani from exercising any control over the property of Skyworks NSW. If there were funds in the Trust Account, the liquidator would have access to those funds and the manner in which any debt or asset of Skyworks NSW may now be dealt with falls to be determined by the liquidator in accordance with the provisions of the Corporations Act. Mr Hotait and Mr El Rihani could not authorise payment of a specific creditor out of the Trust Account. In any event, any such payment made out of the Trust Account in accordance with the terms of the Deed is or is likely to be considered to be an unfair preference payment under s 588FA of the Corporations Act.

108    Accordingly, the Deed of Separation can have no effect once a liquidator has been appointed and control of Skyworks NSW is removed from Mr Hotait and Mr El Rihani. Skyworks NSW was wound up by consent. The Deed and its operation in so far as it relates to Skyworks NSW was thereby frustrated.

Mr El Rihani’s submissions

109    Mr El Rihani submitted as follows.

110    The commencement of liquidation does not, of itself, cause a company to cease to exist. Dissolution occurs at the conclusion of both the voluntary deregistration process and administration in winding up. It is true that cl 5.4 of the Deed of Separation can no longer be applied, but that is without prejudice to the obligation of the parties to make contributions to the Trust Account under cl 10.5 which is directed to the object of achieving solvent dissolution of Skyworks NSW. Each of Mr El Rihani and Mr Hotait remain liable to contribute to the Trust Account in accordance with the Requests made by Mr El Rihani in March and September 2017 and October 2018.

111    The appointment of a liquidator to Skyworks NSW did not frustrate or otherwise impede the operation of the Trust Account. Money can still efficaciously be deposited in the Trust Account “on behalf of Skyworks NSW” (cl 10.1 of the Deed) to pay its liabilities, and those liabilities could be paid out of the Trust Account under the Deed. Why would that obligation be frustrated by liquidation? Liquidation is not foreign to the purpose for which the fund is established, which is to pay all “future liabilities”, whatever that term might mean.

112    The fact that a first person benefits by payment of money from a second person to a third person does not, thereby, convert the money into property of the first person. The money in the Trust Account is not “property” of Skyworks NSW which comes under the control of the liquidator under s 474 of the Corporations Act. Section 474 is about liquidators taking property of a company into the liquidator’s custody and control to protect it; it does not convert something which might appear to be property of the company into property of the company. In this case, the liquidator would have had to seek an order under s 474(2) vesting the moneys in the Trust Account in the liquidator and, at that point, anyone interested would have had the opportunity to resist that order on the basis the fund was not the property of Skyworks NSW.

113    The language of cl 10.1 is the high point of Mr Hotait’s submissions but cl 10.1 is qualified by the words in cl 10.2 “on account of future liabilities of Skyworks NSW”. It is those liabilities which are the subject of the balance of cl 10. The Trust Account is a vehicle for payment of Skyworks NSW’s creditors by Mr Hotait and Mr El Rihani; they are third party payments which are not undue preferences within the meaning of s 588FA of the Corporations Act. Section 588FA requires transactions to which the company is a party, but Skyworks NSW is not a party to the Deed or the operation of the Trust Account and money in it is not “property” of Skyworks NSW as defined in s 9 of the Corporations Act.

114    Mr Hotait is incorrect to contend that money in the Trust Account can only be returned to him and Mr El Rihani after all creditors have been paid. What Mr Hotait and Mr El Rihani did by agreeing to cl 10 of the Deed was to undertake to each other to provide money to their solicitor’s trust account (cll 10.4 and 10.5) to meet “future liabilities” and that solicitor is required to deal with the money in accordance with Mr Hotait and Mr El Rihani’s agreement or an expert determination (cll 10.6 to 10.13); the solicitors did not operate the Trust Account on Skyworks NSW’s instructions and there is nothing in the Deed of Separation that suggests that the solicitors would be entitled to do so. Contrary to Mr Hotait’s submissions, Mr Hotait and Mr El Rihani can terminate the Deed by agreement and need not wait until all creditors have been paid (cl 10.14(b)). All of that makes the contention that moneys in the Trust Account are the property of Skyworks NSW infeasible. It suggests that the Trust Account was simply a fund under the control of Mr Hotait and Mr El Rihani. Money contributed to the Trust Account is not money delivered to Skyworks NSW. All of that is inconsistent with the money in the Trust Account being “property” of Skyworks NSW. Factually, no property of Skyworks NSW was ever contributed to the Trust Account by Skyworks NSW.

115    Contrary to submissions made by Mr Hotait, the structure of cl 10 is that consideration of whether an asserted liability should be paid is to be made under cl 10.6 after contributions to the Trust Account have been made under cll 10.4 and 10.5. That does not assist Mr Hotait’s argument that funds in the Trust Account are an asset of Skyworks NSW. Even if Mr Hotait and Mr El Rihani were wrong in rejecting a creditor’s assertion that Skyworks NSW owed the creditor money, that would not make any funds in the Trust Account property of the Company. It is Mr Hotait’s submission that funds in the Trust Account must be property of Skyworks NSW because payments out of it benefit Skyworks NSW, but Skyworks NSW receives no benefit until a payment has been made. If, contrary to Mr El Rihani’s submissions, the decision to pay a creditor gives some property right to moneys in the Trust Account to Skyworks NSW it can only be insofar as such a determination was made. There can be no trust constituted before such a determination is made either by agreement between Mr El Rihani and Mr Hotait or expert determination.

116    If, as asserted by Mr Hotait but denied by Mr El Rihani, the money in the Trust Account is “property” of Skyworks NSW, that money would come under the control of the liquidator so that the money would be paid pari passu to Skyworks NSW’s creditors after proofs of debt have been obtained and adjudicated and not to individual creditors in respect of individual invoices. Clauses 10.6 to 10.13 would not operate. All of that points to the fact that the money in the Trust Account is not “property” of Skyworks NSW, but even if it is, that does not defeat a purpose of the Deed, which was to ensure that liabilities of creditors are met. Further, how moneys are paid out of the Trust Account it is not the matter in issue. The matter in issue concerns the obligation of Mr Hotait and Mr El Rihani to contribute to the Trust Account.

117    Any amount held in the Trust Account in excess of the amount required to pay Skyworks NSW’s liabilities can be returned to Mr Hotait and Mr El Rihani upon resulting trust as contributors to that fund.

118    Mr El Rihani submitted that it is not true that Skyworks NSW was wound up by simple consent of the parties. Mr El Rihani had indicated that he would defend the proceedings on the basis that, in light of the Deed of Separation, Mr Hotait could not rely on the just and equitable ground. The evidence provided in support of submissions made by Mr El Rihani in relation to costs of proceedings NSD1514/2017 demonstrates that Mr Hotait refused to contribute to payment of the amount claimed in a statutory demand dated 14 May 2018 issued by the Australian Taxation Office (ATO) on Skyworks NSW for an amount of $1,985,470.43. (The Court notes that counsel for Mr Hotait made no objection to the Court having reference to the materials submitted in relation to costs of proceedings NSD1514/2017.) In those changed circumstances, Mr El Rihani accepted that it was inevitable that a winding up order would be made and considered that it might as well be done in proceedings NSD1514/2017 rather than in separate proceedings brought by the ATO based on Skyworks NSW’s failure to pay a statutory demand. That does not mean that the Deed of Separation was frustrated. While it would no longer be possible for them to obtain voluntary deregistration or sale of Skyworks NSW, it remained possible for them to ensure that its “future liabilities” would be met.

Consideration

119    Frustration occurs whenever the law recognises that, without default of either party, a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Special importance attaches to an unexpected event where there must as well be such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for. This formulation derives from Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 at 729 (Lord Radcliffe) adopted in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 357 (Mason J).

120    Whether a contract has been frustrated is a question of law, determination of which depends on the terms of the contract and the circumstances of the particular case. It is not enough that an event alters the circumstances in which performance is called for; there must be a “radical” change which makes performance a thing different in substance from that contracted for.

121    Having regard to these principles, the Court is not satisfied that the entirety of the Deed of Separation with respect to the liabilities of Skyworks NSW is frustrated by virtue of the appointment of a liquidator to Skyworks NSW. Accordingly, the question in (c) at [10] above should be answered “no” for the following reasons.

122    First, the Court has determined that the term “future liabilities” encompasses Skyworks NSW’s liabilities that were unpaid at the time the Deed of Separation was executed as well as liabilities which might be incurred or claimed after that date.

123    Second, for reasons given previously, construction of the Deed of Separation as a whole reveals that a purpose of the Deed was to ensure that Skyworks NSW be deregistered voluntarily after all building defect warranty claims had been run-off and therefore on the basis that it was solvent at the time it was deregistered. The Court is not satisfied that achievement of that purpose is frustrated by the appointment of a liquidator. A consequence of voluntary deregistration is that no external administrator would be appointed, ensuring that Mr Hotait and Mr El Rihani had control of the winding down of liabilities and avoiding costs attendant on such an appointment. However, the Court is not satisfied that the incurring of such cost or any complications arising from the appointment of a liquidator involves such a radical departure from what the parties contracted for under the Deed of Separation as to amount to frustration taking into account the matters referred to below.

124    Third, it is an Agreed Fact that none of Skyworks NSW’s money has been contributed to the Trust Account. Skyworks NSW is not a party to the Deed and therefore has no obligation to contribute money to the Trust Account. The Court does not accept Mr Hotait’s contention that the money in the Trust Account or which may be contributed to it by them hereafter is property of Skyworks NSW on which the liquidator has a claim either before or after it has been determined, in accordance with the mechanisms in cll 10 and 11, that particular creditors should be paid.

125    Since the money is held in an account operated by solicitors who drew up the Deed of Separation for Mr Hotait and Mr El Rihani, not Skyworks NSW, it is not apparently money of that company. The Court does not accept that the fact that cl 10.1 of the Deed contains an express acknowledgement and agreement that moneys shall be held in an account, which is called a Trust Account, on behalf of Skyworks NSW is sufficient to constitute a trust in the context of the Deed as a whole and cl 10 in particular. Clause 10.2 provides that the moneys will be held in the Trust Account on account of future liabilities of Skyworks NSW. Clause 10.14 contains provision for the “parties”, being Mr Hotait and Beauchamp Developments on the one hand and Mr El Rihani and Parramatta Project on the other, to agree (before the end of the building defects warranty period) to direct the law firm to pay to them money in the Trust Account.

126    Although it may be true that, if Mr Hotait and Mr El Rihani had elected the course set out in cl 10.14(b), it might not have been possible to achieve voluntary deregistration of Skyworks NSW (as required by that clause) without ensuring that all of Skyworks NSW’s creditors were in fact paid (since that is a requirement of s 601AA(2)(e)), it is clear from that clause that the solicitors operating the Trust Account would have been obliged to pay them the money then in the Trust Account which had been contributed by them and it would not be the mechanism through which the creditors would be paid.

127    Further, when the mechanisms for determining the amount to be paid under cll 10 and 11 have been gone through, the solicitors are directed to pay money to Skyworks NSW’s creditors, not Skyworks NSW.

128    Those factors indicate that Skyworks NSW has no claim on the money in the Trust Account, even after the time has come for the solicitors to pay one or more creditors. Further there is nothing in either of cll 10 or 11 which suggests that a creditor would have a claim on the Trust Account should the parties to the Deed agree that a claimed amount should not be paid or an expert determination is in fact wrong. The creditors’ recourse is to Skyworks NSW, not the Trust Account.

129    Mr Hotait and Mr El Rihani wanted to end their business relationship, which is an express purpose of the Deed. It is an Agreed Fact that their relationship had deteriorated. It is plain from the general terms of the Deed that cll 10 and 11 were intended to create a mechanism whereby disputes between them concerning which creditors should be paid and for how much would be resolved, with money having been put in the hands of the solicitors to facilitate payment without any further act by Mr Hotait or Mr El Rihani or the possibility that the funds would be used for some other purpose.

130    During the course of the hearing, counsel agreed that the liquidator had made a recovery from litigation with a developer. Clause 5.2(b) of the Deed would, prior to the appointment of the liquidator, have required Mr Hotait and Mr El Rihani to ensure that the amount received in that litigation be paid to the Trust Account. It is difficult to see how cl 10.14 would have justified payment of those funds to Mr El Rihani and Mr Hotait while creditors remained outstanding since it would clearly have been company money. However, since it was the liquidator which made the recovery, those funds have never formed part of the Trust Account and, while the liquidator is in place, Mr Hotait and Mr El Rihani’s powers to direct payment of company funds to the Trust Account cannot be exercised under s 198G of the Corporations Act. Having said that, the use of the moneys recovered by the liquidator to pay creditors should reduce the nett amount that Mr El Rihani and Mr Hotait would be required to contribute to the Trust Account because the creditors would be owed less by Skyworks NSW.

131    For clarity, in circumstances where the only money contributed to the Trust Account was contributed by Mr Hotait and Mr El Rihani, the Court is satisfied that:

(1)    Skyworks NSW’s liquidator has no claim on the funds in the account.

(2)    Section 588FA has no operation since the payment of a creditor out of the Trust Account is not a transaction involving Skyworks NSW. That payment would be made by Mr Hotait and Mr El Rihani out of their own funds, acting in their personal capacity and not as directors of Skyworks NSW.

(3)    The obligations imposed on a liquidator under the Corporations Act to get in and protect a company’s assets, consider proofs of debt and pay creditors are not prejudiced by the mechanisms of the Deed of Separation. Contrary to Mr Hotait’s submission that a liquidator is “charged with the responsibility” of paying a company’s debts so that the mechanisms of the Deed may not be engaged, the Corporations Act does not preclude individuals, acting in their own right and out of their own funds, from paying the debts of a company in liquidation. The liquidator’s processes and the mechanisms of the Deed are capable of existing alongside each other.

132    Accordingly, all of cll 10 and 11 are capable of operation as are the obligations imposed on Mr Hotait and Mr El Rihani under cl 5.4(f), even though compliance with cl 5.5 would not be possible. In that way, the solvent winding up of Skyworks NSW can still be achieved. That was an important purpose provided for in the Deed of Separation.

133    Finally, the Court notes that Mr El Rihani submitted that it was Mr Hotait’s refusal to contribute to the amount claimed in the ATO’s statutory demand that resulted in his decision not to defend NSD1514/2017 and consent to the appointment of the liquidator. It appears that Mr El Rihani intends the Court to understand that the appointment of the liquidator was necessitated by Mr Hotait’s refusal to comply with cl 5.6 of the Deed so that there was “fault” attached to the allegedly frustrating event. The Court considers that it is unnecessary to decide that matter because the Court has decided that the appointment of the liquidator did not relevantly frustrate the purposes of the Deed as contended by Mr Hotait in any event.

Requests for contribution issue

134    This issue relates to separate questions (d) and (e) set out at [10] above. The parties’ submissions on this issue were sparse and Mr Hotait conceded this issue “to be the lesser of the arguments advanced”.

Submissions

135    Mr El Rihani submitted that under the Deed of Separation, contributions to be made to the Trust Account were to be in equal amounts and made contemporaneously with each other. Thereafter, the parties were to have joint control of the amounts contributed. He says that, as at the date of the Requests, he was and remains willing and able to contribute his 50% share of the value of the invoices the subject of the Requests. Mr Hotait disputed his liability to contribute to the Trust Fund on the basis that the Requests were not made pursuant to cl 10.5 because they did not relate to “future liabilities”.

136    Mr Hotait noted that Mr El Rihani has not paid to the Trust Account any amount matching the Requests. Further, under cl 10.5 of the Deed of Separation, there is a mechanism that enables contribution by one party where that party wishes to contribute but the other party either does not or cannot, but Mr El Rihani has not availed himself of this mechanism.

Consideration

137    Clause 10 including, relevantly, cl 10.5 is set out at [33] above.

138    It may be observed that neither cl 10.5 nor cl 10 as a whole contain a mechanism for either of Mr Hotait or Mr El Rihani to make requests on the other to contribute to the Trust Account. While there are mechanisms in cl 10.6 and 10.7 and subsequent clauses of cl 10 relating to approval and payment of a specific liability from the Trust Account, cl 10.5 has no such mechanism. On that basis, the question of “standing” to make a claim for contribution raised in (d) and (e) of the separate questions is moot. Having said that, there is utility in requests being made by one party to the other since, by that mechanism, the parties are put in a position to establish whether or not the occasion for contribution to the Trust Account under cl 10.5 has arisen.

139    The obligation to contribute to the Trust Account under cl 10.5 of the Deed of Separation is triggered by the existence of a liability exceeding the amount held in the Trust Account at any given time with the correlative obligation being imposed on Mr Hotait and Mr El Rihani to contribute up to $100,000 on each occasion when that trigger occurs. There is nothing in cl 10 which indicates that their individual obligation imposed by cl 10.5 is reliant on the other performing his obligations.

140    If liabilities of Skyworks NSW exceeded the amount in the Trust Account at the time the Requests were made and no contributions have since been made to the Trust Account, it may be that both Mr El Rihani and Mr Hotait are in breach of their obligations under cl 10.5. It is unnecessary for the Court to determine whether there is a breach for the purpose of determining the separate questions. Having said that, where a party who is liable to make a contribution fails to do so because the other party has indicated unwillingness to contribute that party’s share of the amounts required under cl 10.5, in an action to enforce the obligations under that clause, a Court is likely to make an order that the unwilling party make its contribution conditional on the party seeking to enforce the obligation also making its contribution.

141    Properly construed, the permission contained in subclauses (a) and (b) of cl 10.5 for a party to contribute funds on behalf of the other party is triggered only where the other party cannot, as opposed to will not, make the required contribution. That is both clear from the language used in those subclauses and from the consequence that interest becomes payable by the party which did not contribute from the time the other party makes a contribution under one of those paragraphs of cl 10.5.

142    There is no agreed fact that Mr Hotait could not, as opposed to would not, contribute to the Trust Account when the Requests were made. Accordingly, for the purposes of answering separate questions, nothing turns on the fact that Mr El Rihani did not avail himself of that mechanism.

143    The answer to the separate questions set out in paragraphs (d) and (e) is that the issue of standing does not arise having regard to the terms of cl 10.5 of the Deed of Separation and the obligation to make contributions imposed on both parties at the time Skyworks NSW’s liabilities exceed the amount in the Trust Account. For reasons previously given, the fact that Skyworks NSW is being wound up and a liquidator has been appointed does not affect that position.

What order should now be made?

144    Mr El Rihani contends that, in consequence of the answers to the separate questions, the Court should make an order that, on condition that Mr El Rihani does the same, Mr Hotait pay $1,285,410.48 into the Trust Account, being the relief claimed under the amended statement of claim at [25(a)]. Mr Hotait contends that no such orders should be made having regard to the further issues to be determined consequent upon the answers to the questions the subject of this application.

145    The Court does not accept Mr El Rihani’s submission that it is appropriate to make the order he seeks at this stage of the proceeding. Accordingly, apart from answering the separate questions, the Court will order that the matter be listed for further case management at a date to be fixed and that costs be reserved.

Associate:    

Dated:    30 June 2020