If the parties to ancillary agreements are also party to the main sale agreement, it would now seem prudent for the documents to expressly deal with how the scheduled ancillary agreements can be amended.
Share and business sale agreements commonly contain the final agreed form of ancillary agreements in various schedules to the main sale agreement. The ancillary agreements are usually entered into either at the same time that the main sale agreement is signed or on completion of the sale agreement. Usually the ancillary agreements are to be entered into between the buyer and the seller under the main sale agreement, but often they can be between some of their associates or even involve third parties who are neither privy to nor in any way interested in the main sale agreement.
The full court of the Supreme Court of South Australia has recently held that a seller's consent was required in order to amend a scheduled ancillary agreement between the buyer and a third party even though the seller was not party to the ancillary agreement. Moreover, the court held that the seller's consent was required even though the amendment was agreed to by both parties to the ancillary agreement and the amendment occurred approximately two years after completion of the main sale agreement.
As a result of the court's decision, the parties to an ancillary agreement will have significantly less flexibility to vary the terms of their agreement. The case therefore raises important implications for the way in which the agreed form of scheduled agreements are referred to in the main sale agreement. The reasoning in the case is not confined to sale agreements: it is equally relevant to other contexts such as project documents and suites of finance agreements.
Sekisui Rib Loc Australia (SRLA) invented technology for manufacturing pipes using steel reinforced profile. SRLA granted an exclusive, perpetual and worldwide licence of this technology to Plastream Pipe Technologies.
Rocla sought to expand its concrete pipes business into pipes made from PVC and steel reinforced profile. It entered into a business sale agreement for the purchase of SRLA's pipe-winding business. Apart from SRLA and Rocla, Plastream was also party to the business sale agreement together with the entity within the SRLA group that actually carried on the pipe-winding business operations.
On the same day that the parties entered into the business sale agreement, several ancillary agreements were also entered into. The final agreed form of these ancillary agreements were set out in separate schedules to the business sale agreement. One of the ancillary agreements was a sub-licence from Plastream to Rocla of the technology for manufacturing steel reinforced profile. SRLA also entered into a separate supply agreement with Rocla to supply Rocla with steel reinforced profile.
The sub-licence from Plastream contained an option in favour of Rocla to purchase a production line which produced Plastream pipe including steel reinforced profile. The option could be exercised at any time within 20 months after the date on which the sub-licence was entered into (being the same date on which the BSA was also entered into).
The supply agreement between SRLA and Rocla commenced on completion of the sale agreement and continued until the "Termination Date" which was defined to mean the later of various possible dates including, if the option was exercised, the date on which Rocla completed the acquisition of the Plastream pipe production line.
Plastream and Rocla agreed to vary the sub-licence by extending the date by which the option could be exercised. The flow-through consequence of this was that the duration of the supply agreement between SRLA and Rocla was automatically extended.
SRLA alleged that the variation was invalid because its consent was required but was not obtained. It argued that the main sale agreement and the ancillary agreements comprised a "single transaction" such that the clauses in the main sale agreement relating to amendments to that agreement also needed to be complied with in relation to any amendments to the ancillary agreements. In this regard, the main sale agreement stated that "This Agreement can only be varied by the parties in writing". The sale agreement defined the "Agreement" to mean "this agreement, including any schedule or annexure to it". The sale agreement also contained a definition of "Transaction Documents" which included the sale agreement and each of the scheduled ancillary agreements. The "entire agreement" clause in the sale agreement stated that: "This Agreement and the other Transaction Documents contain everything the parties have agreed in relation to the subject matter they deal with".
While most of the ancillary agreements contained an express clause about how they could be amended, the sub-licence was silent in relation to how it could be amended.
Based on the facts set out in the judgment, it appears that there were no interdependence clauses in any of the agreements. It is also unclear whether the supply agreement contained an interpretive clause to the effect that references in the supply agreement to the sub-licence were references to that document as amended from time to time.
The full court agreed with SRLA. In doing it so, it overturned the trial judge's findings.
Not only did the full court agree with SRLA's "single transaction" interpretation of the provisions in the business sale agreement, the court would also have been prepared to imply a consent requirement into the business sale agreement if the express terms of the sale agreement did not apply. The court considered that the implied term was necessary for business efficacy and also satisfied the other criteria for implied terms as set out in BP Refinery v Westernport.
In relation to business efficacy, the court thought it would be an "unsatisfactory position" for SRLA if the option exercise date could be extended without its consent as this would indirectly result in SRLA's obligations under the supply agreement being extended for a potentially indefinite period. The court readily concluded that the implied term was "so obvious as to go without saying", albeit the court provided very little reasoning for this conclusion.
The decision of the full court is likely to come as a surprise to many people who deal with sale agreements. SRLA was not party to the sub-licence yet its consent was required in order to vary it. Based on the court's reasoning, there is no limit to the time period during which variations to the sub-licence would require SRLA's consent. Additionally, the court expressly stated that "any variation" to any one of the scheduled agreements (including the sub-licence) would still require SRLA's consent. It seems from the court's reasoning that this would include variations that were immaterial or would have no flow through impact on SRLA. This results in a significant reduction in the flexibility of the parties to ancillary agreements to vary the terms of their agreements over time as their commercial objectives change.
Although not discussed in the case, the court's reasoning may also mean that the sub-licence could not be novated or assigned without SRLA's consent. Additionally, and while not discussed in the case, the court's interpretation of the express clauses in the main sale agreement could potentially mean that a seller's consent could be required for amendments to an ancillary agreement even if only one of the parties to the ancillary agreement is also party to the main sale agreement.
Overall, it is submitted that if parties to a sale agreement intend the vendor to have an open ended and unqualified consent right for any variations to ancillary agreements to which it is not a party, it is likely that the parties would deal with this very clearly in the sale agreement. In the current case, and given the indirect interplay between the sub-licence and the supply agreement, SRLA could also have protected itself by including wording in the supply agreement to address the risk of the sub-licence being varied.
Rocla did not seek to appeal to the High Court.
The full court's decision means that parties to sale agreements will need to closely consider how the "Agreement" should (if at all) be defined, particularly in relation to whether it includes all of the schedules and annexures. Even if the "Agreement" is not defined, consideration should be given to whether the boilerplate interpretive provisions apply such that a reference to the agreement includes all of its schedules and annexures. Overall, if the parties to ancillary agreements are also party to the main sale agreement, it would now seem prudent for the documents to expressly deal with how the scheduled ancillary agreements can be amended (whether before or after completion).
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.