In the decision of Zaps Transport (Aust) Pty Ltd v PJG Warehousing & Distribution Pty Ltd  NSWCA 97, the New South Wales Court of Appeal considered two clauses contained within the standard form business sale agreement used in New South Wales. They considered two principal questions:
- Was the vendor of a business entitled to the balance of the purchase price of the business it sold to the purchaser upon the purchaser’s failure to complete?
- Was the vendor also entitled to interest under the relevant clause in the business sale agreement?
It is useful to set out the facts of the case before turning to the Court’s reasoning.
On 13 July 2007, PJG Warehousing entered into a contract for the sale of its business to Zaps Transport. The form of the contract was the standard sale of business document used in New South Wales, namely the “Contract for the sale of business – 2004 edition”. As is the case in most transactions of the sale of a business, the purchaser paid a deposit. In this instance, however, such was the size of the deposit, namely $650,000, the purchaser took immediate possession of the business. The purchaser was obliged to pay the balance of the deposit, being $70,000, after a 30 day settlement period.
However, Zaps Transport failed to provide the balance of the purchase price after the settlement period. Accordingly, PJG Warehousing commenced proceedings in the District Court of New South Wales for the balance of the purchase price. Rather than claim interest in accordance with the Civil Procedure Act, PJG Warehousing claimed interest under special condition 9 of the contract. That condition stated that if the purchaser did not complete “without default by the vendor”, then interest would accrue on the outstanding amount. The reason why that clause became the centerpiece of the appeal was that interest ran on the settlement sum calculated at 12 per cent per annum compounded daily.
Decision at First Instance
PJG Warehousing commenced proceedings in the District Court of New South Wales seeking payment of the balance of the purchase price as well as interest on that amount per special condition 9 of the contract.
By way of cross claim, Zaps Transport alleged breach by PJG Warehousing of special condition 16 of the contract. In essence, special condition 16 of the contract outlined an obligation by PJG Warehousing to assist in the business and introduce Zaps Transport to all of PJG’s clients. This was an important point given that unlike most business sale transactions, the purchaser assumed control of the business upon payment of the deposit rather than upon completion.
At first instance, the Court found wholly in favour of PJG Warehousing and dismissed the cross claim of Zaps Transport.
Issues on Appeal
Issue 1 – Were the vendors entitled to interest under the Contract on the amount awarded by the primary judge as the Contract price?
The judge at first instance found that the vendors were entitled to interest on the balance of the purchase price in accordance with special condition 9 of the contract.
On appeal, the principal argument put forward by Zaps Transport was that the trial judge had erred in awarding interest under special condition 9 of the contract because the vendors were in ‘default’ in accordance with the special condition. The reason advanced for the default was that PJG Warehousing had repudiated the contract because they had not calculated the relevant adjustment amount relevant to employee entitlements, thereby meaning that that PJG Warehousing was not entitled to completion.
In essence, the Court of Appeal rejected that argument because Zaps Transport did not squarely raise that point before the trial judge. It is a matter well settled that absent clearly defined extraordinary circumstances, a party is not entitled to raise on appeal any argument which was not raised at first instance. The consequence was that the Court found that the decision of the trial judge should not be overturned and that PJG Warehouse was entitled to interest under the contract.
Issue 2 – Was there any breach by the vendor of special condition 16?
Given the relatively narrow compass of the second issue considered by the Court of Appeal, it is worth setting out in full the wording of the special condition:
It is an essential term and condition of this contract that Peter Gooding of the vendor shall assist the purchaser for the period commencing immediately after the date of this contract of successive working days until completion, during ordinary working hours, without remuneration:
a) to provide tuition for the purchaser in the conduct of the business, including know how and the use of maintenance [sic] of plant, equipment and software programs;
b) to assist and facilitate the purchaser in obtaining the benefit of the goodwill of the business;
c) to introduce the purchaser to suppliers dealing with the business customers and clients of the business.
The thrust of the argument by Zaps Transport was that the actions of the PJG Warehousing were wholly deficient in ‘assisting’ with the obligations outlined in special condition 16 as Mr Gooding was not physically present during the time between execution of the contract and completion. Indeed, the argument was that Mr Gooding was required to remain effectively employed by the business up until completion. The argument by PJG Warehousing was that the obligation to assist was only enlivened upon request by Zaps Transport.
At first instance, the Court reviewed the evidence provided by the parties and found that there had been no failure to assist by PJG Warehousing. On appeal, the Court was essentially asked to determine the meaning of ‘assist’ within the context of special condition 16.
The principles of contractual interpretation are well settled. The High Court’s decision in Electricity Generation Corporation v Woodside Energy Ltd  HCA 7 contains the most recent restatement of principles of contractual interpretation. In that case, the Court stated that a number of factors determine the meaning of terms in a commercial contract including the language used by the parties, the surrounding circumstances and the commercial purpose of the contract.
After examining the various meanings of special condition 16 and considering the commercial context in which the words should be understood, the Court of Appeal held that the obligation on Mr Gooding of PJG Warehousing was to take reasonable steps to assist Zaps Transport. The reasonable steps were to be understood as encompassing the matters referred to in special condition 16 but did not provide any positive obligation to attend or remain at a particular location for any agreed period of time. Further, the obligations were only enlivened upon specific request by the purchaser.
After all, having taken control of the business upon payment of the deposit, it would make little sense for the vendor to remain, in any real sense, in control of the business rather than take direction from the purchaser.
In any business sale, it is imperative that proper thought is given to the special conditions. Not that any party contemplates failing to complete but for a variety of reasons, real care needs to be given to any interest penalty associated with failure to complete.
If, as is normally the case, the parties intend to use the time between execution and completion for a ‘handover’ of the business, it is crucial that the special conditions outline very clearly the obligations of each party.
The experience of Zaps Transport is a cautionary tale for any prospective purchaser. If you intend to effectively pay for the business ‘up front’, it is wise to ensure that you have adequately outlined what you expect the vendor to do and how the vendor will assist you up to the time of completion.
If you have any questions about selling or buying a business, get in touch with our lawyers on 1300 544 755.