Australian Contract Law: A recent case study – SAS (Vic) Pty Ltd v Urban Ecological Systems Ltd [2021] VSCA 335

This choice of the Victorian Court of Attractiveness regarded the ongoing controversy as to what regard the courts could have to bordering conditions when deciphering a agreement. In dismissing the attractiveness, their Honours confirmed that the instances that a deal addresses, and the business function or objects to be secured by it, can ordinarily be determined by reference to the agreement alone. It also, yet again, exhibits the importance of clear and unambiguous drafting of conditions, including the require to clearly define crucial phrases or phrases.

What occurred?

The respondent, Urban Ecological Systems Ltd (UESL) is a meals know-how business that formulated ‘Blue Farm Technology’ a sustainable foodstuff output program, involving the expansion of veggies and fish in a glasshouse at the similar time. The squander created by the fish is transformed into fertiliser for the veggies. UESL holds the patents and mental property legal rights for Blue Farm Know-how.

In 2010, UESL entered into a joint enterprise with an trader, Steelco Developments Pty Ltd (Steelco), creating Environmentally friendly Camel Pty Ltd (Eco-friendly Camel). In July 2010, UESL granted Inexperienced Camel an exceptional licence to exploit Blue Farm Technology in Australia royalty free of charge (Australian Licence). Before long right after, Eco-friendly Camel proven a farm in rural New South Wales and started utilising Blue Farm Technologies for foodstuff output. Eco-friendly Camel was in the beginning profitable and secured a supply contract with Coles Supermarkets Australia Pty Ltd (Coles). Nonetheless, Environmentally friendly Camel was not in a position to reliably offer Coles with quality make and Coles subsequently novated the settlement to yet another supermarket.

By 2012, relations concerning UESL and Steelco experienced broken down. Steelco allegedly reneged on an arrangement that allowed UESL to appoint a bulk of the administrators on its business board, and took for by itself the board seats that it had formerly allotted to UESL. These gatherings are now the subject of litigation in the New South Wales Supreme Court, in which UESL is contending that the Australian Licence is no lengthier on foot.

By 2015, Green Camel had develop into what the trial judge explained as ‘a big obstacle’ for UESL. It was in 2015 that the applicant, SAS (VIC) Pty Ltd. (SAS), emerged seeking to support UESL with its Inexperienced Camel ‘problem’ and invest in its Blue Farm Technologies. In 2016, SAS agreed to invest $100,000 in UESL by way of funding its lawful costs incurred for the duration of the dispute with Eco-friendly Camel.

The Principal Agreement

In June 2017, UESL entered into a second settlement with SAS (Principal Settlement). The overarching purpose of the Principal Agreement was for SAS to ‘fix UESL’s Eco-friendly Camel problem’ in return for the Australian Licence. If SAS was able to attain particular defined Milestones, UESL would be necessary to terminate the Australian Licence with Eco-friendly Camel and grant it to SAS. The Principal Agreement also granted SAS an unique and unconditional licence to exploit Blue Farm Technology in New Zealand (New Zealand Licence).

Appendix 1 of the Principal Agreement outlined the intent of the events as follows:

The underlying intent of the Milestones is that SAS and UESL will do the job collectively to eliminate the present impediments to the company and established the organization on a effective path in the Australian Territory and Supplemental Territory. This could require a modify in handle of Green Camel, a alter in ownership or a mix of both equally of these.

Clause 2 of the Principal Arrangement conditionally delivered for the termination of the Australian Licence granted to Eco-friendly Camel and the granting of this licence to SAS. Below clause 2, SAS would be granted the licence only if it attained possibly ‘Milestone 2’ or ‘Milestone 3’, which have been explained as follows:

• Milestone 2 needed SAS to fork out UESL a portion of royalties from gains created by the Australian Licence or the New Zealand Licence

• Milestone 3 necessary SAS to introduce a new trader in get to influence the sale or adjust of handle of Environmentally friendly Camel.

The royalty payment

On 19 July 2019, SAS entered into a sub-licence settlement with a connected New Zealand firm, SAS (NZ) Minimal. On the exact same working day, SAS deposited $5,001 into UESL’s bank account. SAS contended that it had received $2,500 of this payment from SAS (NZ) Minimal and that it consequently represented a ‘royalties payment’ underneath Milestone 2. Accordingly, SAS claimed that it was entitled to the grant of the Australian Licence by advantage of having achieved Milestone 2, irrespective of the fact that SAS (NZ) Constrained experienced not produced any farms that utilised Blue Farm Know-how and hence experienced not produced any income from use of the New Zealand Licence.

UESL did not look at that SAS had achieved Milestone 2, as the monies paid by SAS did not originate from the revenue of the Blue Farm Engineering. SAS introduced proceedings in the Victorian County Courtroom, seeking particular functionality of the transfer of the Australian Licence, arguing that the $2,500 payment was a ‘royalties’ payment for the functions of the Principal Settlement.

How did the Courtroom of Enchantment construe the Principal Agreement?

The courts, at first instance and on charm, turned down SAS’ argument that the July 2019 payment constituted a royalties payment beneath Milestone 2. The courts approved UESL’s argument that the Principal Settlement contemplated that this sort of royalties would come up from ongoing use and output of Blue Farm Technological innovation. The courts emphasised the relevance of an aim approach to construing industrial contracts, looking for to give effect to what a sensible organization individual would have recognized the conditions of the agreement to indicate. The courts regarded SAS’ rivalry (that its payment constituted the fulfilment of Milestone 2) as resulting in a business nonsense, as the primary objective of the contract (remaining SAS ‘fixing the Eco-friendly Camel problem’) had not been obtained.

Important takeaways

This case is a seem warning to get-togethers to industrial contracts, to assure that your contracts are drafted clearly and exactly. The Court docket of Appeal was specially essential of the drafting of the Principal Arrangement, noting that it was ‘hard to read, and has clear problems’.

When the courts will attempt to give contracts a businesslike design, you need to not presume that the courts will interpret imprecise terms in a way that favours your professional passions. Somewhat, when drafting contracts, you should explicitly condition the commercial goal of the arrangement evidently inside of the text. In this case, a obvious definition of what constituted ‘royalties’ would have avoided the ambiguity and the dispute.

This decision stands as a reminder that courts will construe imprecise phrases in a way that a acceptable business person would have an understanding of the meaning of the precise phrases of the deal, not in a way that a realistic business enterprise particular person believes the phrases should be interpreted in get to make (subjective) professional sense.

When drafting contracts, make sure that all phrases are distinct and key terms are plainly described. If you are celebration to a industrial contract and come upon disagreement with the other bash about a unique time period, you must, at the earliest opportunity, review the contract and search for to make a variation that clarifies the intended which means.