Contractual Construction of the Absurd: Lessons from the NSW Court of Appeal in QBT v Wilson

The following article was published by Lexology on 10 September 2024:

On 15 May 2024, in QBT Pty Ltd v Wilson & Ors [2024] NSWCA 114 [1] , the New South Wales Court of Appeal (Bell CJ, Ward P and Leeming JA) unanimously upheld the principle that where the literal meaning of a written contract is absurd and the Court can confidently identify how that absurdity should be resolved, the process of construction can omit words, insert new words or alter the existing language.

Relevant facts

The respondents (being the plaintiffs at first instance) held all the shares in TravelEdge Pty Ltd (TravelEdge).

The Shareholders’ Agreement

TravelEdge owned 40% of the shares in STA Travel Academic Pty Ltd (STA Travel Academic), with STA Travel Holding AG (STA Travel Holding) owning the remaining 60% of the shares in STA Travel Academic.

Under a Shareholders’ Agreement between those two joint venturers, a failure by a party to notify the other of any “Change of “Control” constituted an “Event of Default” unless the other had consented in writing to the Change of Control.  Further, the occurrence of an Event of Default enlivened a right in the non-defaulting shareholder (after the giving of a notice to rectify and a failure by the defaulting shareholder to rectify the Event of Default) to compulsorily acquire the other party’s shareholding in STA Travel Academic. 

The Share Sale Agreement

In late 2019, the plaintiffs/respondents entered into a Share Sale Agreement with the defendant/appellant (QBT) for the sale to QBT of their entire shareholding in TravelEdge (SSA).

The purchase price under the SSA consisted of 3 amounts, one of which was a “Deferred Amount”.  Clause 4.4 of the SSA expressed when the Deferred Amount would be payable, as follows:

            4.4        Calculation of Deferred Amount

                        The Deferred Amount is equal to:

(a)        if STA Travel Holding AG consents in writing to the change in control of [TravelEdge] triggered by Completion (STA Consent Event) and accordingly, [TravelEdge] retains its shareholding in STA Travel Academic in accordance with the STA JV Agreement,

            Deferred Amount = $4,000,000; or

(b)        if STA Travel Holding AG does not consent in writing to change of control of [TravelEdge] triggered by Completion and elects to purchase the STA JV Stake (STA Non-Consent Event),

            Deferred Amount = STA JV Stake Purchase Price + $4,000,000 – STA Earnings Amount.

Soon after completion under the SSA and in the midst of the Covid-19 pandemic, STA Travel Holding AG went into administration. At the time of doing so, it had neither consented in writing to the “Change of Control” triggered by completion under the SSA nor exercised its right to acquire TravelEdge’s shareholding in STA Travel Academic. As such, in terms, neither limb of clause 4.4 of the SSA had been satisfied.

Subsequently TravelEdge (under the ownership of QBT) purchased from the administrator the remaining 60% of the shares in STA Travel Academic, so that it ultimately owned 100% of STA Travel Academic.

In the litigation, the plaintiffs/respondents sued for payment of the Deferred Amount in the sum of $4 million while QBT contended that no Deferred Amount was payable.

The decision at first instance

At first instance ([2023] NSWSC 1255), Ball J held that the Deferred Amount in the sum of $4 million was payable even though STA Travel Holding had not expressly consented in writing to the “Change of Control”.

In substance, his Honour determined that clause 4.4 was intended to apply depending only on whether TravelEdge retained its 40% shareholding in STA Travel Academic.

The Court of Appeal

In upholding the decision at first instance, the NSW Court of Appeal (Leeming JA, with whom Bell CJ and Ward P agreed) found that:

·         there was an “obvious error” in clause 4.4, that was “not a typographical error, but a conceptual one”; and

·         if clause 4.4 were to bear its ordinary literal meaning, there would be a windfall gain for QBT, which would retain the benefit of the shares in STA Travel Academic held by TravelEdge without having paid for that benefit, which “cannot be something to which the parties are taken to have agreed. It is commercially absurd …”.

The Court of Appeal held that where there are obvious errors in a written contract, and where it is clear how the absurdity that results from those errors is to be resolved, the errors can be resolved by construction even though that may involve “doing some violence” to the language of the contract. That violence may involve the omission or insertion of words or alteration of the existing language of the contract. 

In construing the SSA in this case, the Court of Appeal did not consider that it was necessary for it to identify the particular changes to the language of the contract that were required to resolve the errors in the existing language. Rather, it was sufficient for the Court to construe the SSA based on what the effect of the language ought to have been, so that it would reflect the objective intention of the parties.

The Court of Appeal expressly rejected QBT’s contention that its approach (and the approach at first instance) involved a “radical rewriting” of clause 4.4. Rather, it held that its approach to construction in this instance was less radical than examples in other cases, including rewriting:

·         “John” for “Mary” [2] ; or

·         “consistent” for “inconsistent” [3] .

Key Takeaways

The NSW Court of Appeal has affirmed that Courts will take a practical and commercially sensible approach to the construction of commercial contracts. A Court may construe a contract in a way that does not give rise to absurdity, where the literal meaning would do so and the Court can confidently identify how the absurdity is to be resolved.

That said, there is also a cautionary note for drafters of contracts, in that the Court of Appeal observed that where absurdity is present but it is not clear how the absurdity is to be resolved, “then the principles of construction are not available to authorise a departure from the ordinary literal meaning”.

Disclosure:

• Buchanan Rees Dispute Lawyers acted for the successful plaintiffs/respondents. 
  
  
• An application by QBT for special leave to appeal was refused by the High Court of Australia on 5 September 2024.