Not so fast but maybe furious?

The Starting Line - The Contract

In 2011, Sanpoint Pty Limited (the Appellant) entered into a ‘Racing Entitlement Contract’ (Contract) with V8 Supercars Holdings Pty Limited (the First Respondent).  The Contract entitled the Appellant to race a vehicle in the V8 Supercars Championship (Rights) and amongst other things stipulated the following:

1. Clause 5.1(d) should a team fail to submit an Entry Registration Form for the following year’s racing events by 1 December, the Team surrendered its rights under the Contract on the first day of the following year for subsequent sale by the First Respondent.
2. Clause 10.1(b) in the event that a Team is required to surrender its rights under the Contract, the First Respondent will ensure that the price paid for the rights is as commercially advantageous as possible having regard to the current market situation by offering the Contract to the market by tender.

In the Pits - A Tender Surrender

The Appellant did not submit an Entry Registration Form by 1 December 2013 and thereby surrendered its Rights and Contract on 1 January 2014. In June 2014 the First Respondent invited expressions of interest by way of tender for the Appellant’s surrendered Contract (the Tender Process).

Although five people registered their interest during the Tender Process, on 1 August 2014 the Tender Process ended with no bids having been received.

After the conclusion of the Tender Process, the Contract and Rights were sold by the First Respondent to Australian Motor Racing Partners Pty Limited (the Second Respondent) one of its related companies for $20,000.00. The Contract and Rights were originally purchased by the Appellant for $1,386,957.56 in 2011.

The Separate Race - Backdoor Negotiations

Prior to and during the Tender Process the First Respondent was in discussions with Archer Capital Limited (Archer) regarding a potential corporate takeover of the First Respondent by Archer. The objective of this takeover was to provide a greater incentive to Contract holders to continue to renew their Contracts.

During these negotiations, three financial ‘offers’ of various certainty were made regarding the takeover which would have resulted in a significant financial benefit being conferred on each of the Rights holders.

Crucially, while the First Respondent made the potential bidders aware that takeover negotiations were occurring with a view to incentivise the position of Contract holders, they failed to disclose any further specific details.

The Qualifiers / First Lap - Supreme Court Proceedings

The Appellant initially brought proceedings in the Supreme Court on the basis that the First Respondent had breached Clause 10(b) by failing to disclose relevant information to potential bidders and thereby not ensuring that the price paid for the Rights was as commercially advantageous as possible having regard to the then market. The Appellant sought damages for its ensuing losses.

The primary judge held that the First Respondent did not breach the Contract and that the Appellant was not entitled to damages.

Interestingly, in an earlier hearing determining several separate questions relating to the proper construction of the Contract (V8 Supercars Holdings Pty Limited v Lucas Dumbrell Investments Pty Limited [2014] NSWSC 1391), Pembroke J heavily criticised the drafting of the Contract and in particular Clause 10.1. His Honour stated that the underlying reason for the disputes surrounding the Contract was the “wholly amateur quality of the drafting of the [Contract]” and the Contract could not possibly “have been drafted by a competent and qualified lawyer”.

The Photo Finish - The Appeal

Although the appeal was ultimately dismissed on account of the Appellant’s failure to adduce evidence which substantiated its alleged losses, the Court of Appeal held that the First Respondent had in fact breached the terms of the Contract in failing to disclose the offers that had been made relating to its corporate restructure.

The Court of Appeal held that obligation to ensure that the price paid was ‘as commercially advantageous as possible’ within ‘the current market situation’ meant that if there was activity in the market that was likely to have had an impact on the decisions of a potential bidder, including whether to place a bid, that information had to be disclosed.

In this case Archer had made a firm offer prior to the Tender Process beginning which would have given contract holders a better return than could otherwise be expected. The Court of Appeal held that this was activity within the market that was likely to have an impact on the decisions of a potential bidder.

Consequently, on Appeal the First Respondent was found to have breached clause 10(b) of the Contract.

The Court of Appeal also emphasised that in this scenario the First Respondent had a similar obligation to disclose any material that may have impacted negatively on any consideration a potential bidder may have given to the making of a bid.

Ultimately the poor drafting of the Contract by the First Respondent and their breaches of that Contract cost significant amounts of money, time and stress for all parties involved. To avoid these complications make sure that next time you are considering a corporate restructure or drafting an important commercial contract you contact Richard Lyne or Hugh Farquhar on 02 9234 1500.