By Tamara James, Lawyer, and Stefan Sudweeks, Partner

It’s accepted authority that a Court will, when necessary, consider evidence of the surrounding circumstances and the intention of the parties when a contract term is ambiguous but “is not justified in disregarding unambiguous language simply because the contract would have a more commercial and businesslike operation…” (Macfarlan JA in Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55] and upheld in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45).  In Jireh, the primary judge considered a clause in a letter of agreement regarding the payment of commission.  The primary judge, while noting that the relevant clause was not ambiguous and did not require words to be read in, found that commission was payable in circumstances that were not set out in the clause but because it gave “the provision a commercial and business-like operation”. The decision of the primary judge was overturned by the court of appeal with the High Court later refusing special leave to appeal and upholding the NSW Court of Appeal decision. Jireh remains good law, having been confirmed in subsequent High Court decisions.

In a decision that appears, on its face, to be contrary to the position in Jireh, in QBT Pty Ltd v Wilson [2024] NSWCA 114 the NSW Court of Appeal upheld a first instance judgment which seemed to extend the instances when a Court will remedy contractual terms to include instances where a clause is clear and effective but leads to a commercially absurd result. However, on closer analysis, this is not the case and Jireh remains good law.

The Facts

STA Travel Academic Pty Ltd was a joint venture owned by TravelEdge Pty Ltd (TravelEdge) and STA Travel Holding AG (STA). In 2019, QBT Pty Ltd (QBT) entered into a share sale agreement with TravelEdge to purchase its 40% interest.  The purchase price was made up of three amounts: a completion amount, a deferred amount and an earn-out amount.  It was the clause that related to payment of the deferred amount which resulted in a commercially absurd result, leading to the trial proceedings before Ball J.

The contract set out the date of payment for the deferred amount as:

“…the date 10 Business Days after the earlier of:

(a)          receipt of written consent from STA Travel Holding AG to the change in control of the Company triggered at Completion for the purposes of the STA JV Agreement; and

(b)          payment of the STA JV Stake Purchase Price by STA Travel Holding AG to the Company.”

After completion, the deferred amount was paid into escrow and QBT was to obtain written consent from STA in accordance with the above term.  Instead, QBT entered into negotiations with STA to purchase its 60% share of the joint venture.  TravelEdge followed up QBT regarding obtaining STA’s consent. QBT finally told TravelEdge that it was negotiating the purchase of STA’s shares. TravelEdge responded saying “bidding is not consistent with getting consent”.

Several months later TravelEdge contacted STA directly and subsequently provided to it a draft letter for STA to sign and return which letter gave the requisite consent.  Before the money was paid out of escrow STA filed for insolvency in Switzerland and the joint venture was placed into voluntary administration.

The Court’s decision

Submissions made by TravelEdge before the primary judge were that the correct reading of the contract, having regard to the parties’ intentions was that the deferred amount had to be paid one way or another.  The primary judge accepted that having regard to the surrounding provisions namely:

1. The third component of payment, being the earn-out amount, included the phase “(if any)” which was not found in the clause setting out the deferred amount;
2. Clause 4.3 said that “the purchaser must pay…” the deferred amount and that the amount would be held in escrow until it became payable;
3. Consideration that a literal construction of conditions in clause 4.4 would not cover circumstances where no consent was received in writing; and
4. A construction of the terms that gave “consent in writing” primacy produced a commercial absurd result.

The primary judge, having regard to the commercially absurd result, put it plainly:

“it makes no commercial sense for [TravelEdge] to receive nothing …when the obvious purpose of the Deferred Amount was to compensate [TravelEdge] for the value of the shares TravelEdge held…”

In other words, distinguishable from Jireh, the case of QBT Pty Ltd v Wilson [2024] NSWCA 114 was not a matter of the court reading an unambiguous term and altering it to provide a commercial or business-like operation but rather the court determined the meaning (the intentions of the parties) in circumstances where the agreement was silent on what occurred if consent was not received which ultimately would lead to an outcome where TravelEdge transferred ownership of its shares and it would not receive the full consideration under the share sale agreement.

The primary judge acknowledged that to give effect to the intention of the parties, there would need to be a substantial amendment to the agreement or, using the words of His Honour, “doing some violence to the language”, by giving priority to the payment obligation at (b) of the clause rather than written consent at (a) of the clause to avoid the commercially absurd result.

QBT appealed that decision.  In submissions, QBT placed significance on the primacy of the written consent requirement and that the primary judge’s decision had the overall effect of a “radical” rewriting of the contract which ought not have been done unless the literal construction of the terms was absurd or opposed to reason in accordance with various authorities identified by QBT.  TravelEdge submitted that QBT was incorrectly characterising the transaction as a “purchase of consent” rather than a “purchase of shares” and that the words of the contract needed to be read and interpreted as a whole.  The Court of Appeal noted the primary judge’s observations as correct saying that “…it may be necessary to ignore words in a particular provision…. In each case… the object of the court is to ‘carry into effect the real intention of the parties as gathered  from the instrument as a whole’”.

The Court of Appeal did not find QBT’s submissions persuasive and accordingly held that the terms produced an absurd result and the contract should, as was done by the primary judge, be construed in accordance the parties’ clear intention from the written contract as a whole.

Conclusion

QBT Pty Ltd v Wilson [2024] NSWCA 114, while at first glance appears to be contrary to the decision arrived at in Jireh International Pty Ltd v Western Export Services Inc [2011] NSWCA 137 at [55] and upheld in Western Export Services Inc v Jireh International Pty Ltd [2011] HCA 45, instead seeks to rectify an absurd result, contrary to the intentions of the parties and established contractual principals, resulting from the agreement being silent on possible outcomes relating to the requirement for consent from STA, which subsequently went into liquidation. Had the clause been read literally, TravelEdge would not have received proper consideration for its shares as intended under the share sale agreement.