The court was asked to determine the proper construction of a complex sales agreement between the parties, after a dispute arose over the purchase price for the Metalicus businesses. In large part, the parties agreed on a fixed figure of $33 million for its retail and wholesale operations, with further payments to be made based on how profitable the business was in the 2008 financial year, and whether it met anticipated profit earnings. To that end, the two parties agreed on a detailed budget for the financial year.
The core dispute arose in late 2008, when the parties expressed different interpretations of how strictly the business was to have complied with this budget. The sellers argued that a strict interpretation of the 2008 budget should be observed, as any unbudgeted expenditure could affect profit earnings and constitute a breach of the agreement.
Additional expenses, such as launching an expensive advertising campaign just before the completion date for instance, could negatively affect Metalicus’ profit earnings and result in a smaller payout.
The thrust of the buyer’s argument was the business was not required to strictly observe the budget. The buyer argued the intention of the 2008 budget, as expressed in the agreement, was to ensure the business endeavoured to achieve the profit targets by conducting the Metalicus business in the same manner it had been conducted prior to entering into the sale agreement. Any variance of the budget wouldn’t necessarily constitute a breach, so long as the buyer acted in accordance with other obligations imposed on it under the contract.
The buyer further contended that adopting a strict interpretation of the budget was an opportunistic attempt by the sellers to increase earnings
for the year, which would in turn increase the total payout for the business. Supreme Court of Victoria judge Clyde Croft agreed that a strict interpretation of the budget failed to take account of the commercial reality of Metalicus as a business.
“The 2008 budget was designed to give ... operating guidance,” he said. “Not interfere in the minutiae of its spending decisions or impose a ‘straightjacket’ on the conduct of the business which, in a variety of unanticipated circumstances, may be very destructive in terms of business performance.”
Judge Croft found in favour of the buyer, agreeing that a strict interpretation of the contract wasn’t necessary and awarded declarations to that effect, but reserved the question of costs in the proceeding. PAS Group chief executive Eric Morris declined to comment at length on the case but said he was “happy” with the judge’s decision.
“There is one final outstanding matter which needs to be resolved but I am not in a position to comment on this,” Morris said.
Assia Benmedjdoub