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  • Unreported Judgment

Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd

 

[2020] QCA 132

 

SUPREME COURT OF QUEENSLAND

 

CITATION:

Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd & Anor [2020] QCA 132

PARTIES:

MIDDLEMOUNT SOUTH PTY LTD
ACN 611 632 314
(appellant)
v
ANGLO AMERICAN METALLURGICAL COAL ASSETS PTY LTD
ACN 081 022 246
(first respondent)
ANGLO AMERICAN AUSTRALIA LIMITED
ACN 004 892 371
(second respondent)

FILE NO/S:

Appeal No 10553 of 2019

SC No 1489 of 2018

DIVISION:

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:

Supreme Court at Brisbane – [2019] QSC 211 (Jackson J)

DELIVERED ON:

16 June 2020

DELIVERED AT:

Brisbane

HEARING DATE:

13 February 2020

JUDGES:

Holmes CJ and Morrison JA and Lyons SJA

ORDERS:

  1. The appeal is allowed.
  2. The parties are to provide submissions as to final orders and costs by 5 pm on 30 June 2020.

CATCHWORDS:

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION – INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS – where a share purchase agreement contained a clause setting out the principles and policies governing the preparation of accounts to arrive at the final purchase amount – where an Independent Accountant was engaged under the agreement to make an expert determination in relation to disputed matters arising from the preparation of the accounts – where the appellant challenged the validity of the expert determination of the Independent Accountant in relation to particular disputed matters – where the primary judge declared that the expert determination was final and binding – whether the Independent Accountant erred in its application of the clause governing preparation of the accounts – whether the primary judge erred in his construction of the relevant clause and in failing to find that the Independent Accountant had not performed the task set for it – whether the expert determination is valid

Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367; [2015] NSWCA 275, applied

Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314, applied

McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; [2000] HCA 65, applied

COUNSEL:

A Crowe QC, with S B Whitten, for the appellant

P R Franco QC, with S R Eggins, for the respondents

SOLICITORS:

Sparke Helmore for the appellant

Minter Ellison for the respondents

  1. [1]
    HOLMES CJ:  The appellant, Middlemount South Pty Ltd (“Middlemount”), entered a share purchase agreement (“the Agreement”) with the first respondent, Anglo American Metallurgical Coal Assets Pty Ltd (“Anglo American”), by which it agreed to buy the shares of a mining company (“the Company”) from Anglo American.  The second respondent, Anglo American Australia Limited, acted as Anglo American’s guarantor.  The Agreement provided for the purchase price to be paid by way, initially, of an amount estimated by Anglo American, with Middlemount after completion to calculate the final amount due and provide it, with accounts for the Company, to Anglo American.  In preparing the accounts, Middlemount was to apply a prescribed hierarchy of approaches set out in a schedule to the Agreement.  Clause 8 of the Agreement, which provided for that process, also provided for any dispute to be resolved by an “Independent Accountant”.  That occurred; the firm of PricewaterhouseCoopers was engaged as the Independent Accountant and made an expert determination, but Middlemount challenged its validity in relation to particular matters.  A judge of the trial division, however, declared that the expert determination was final and binding.  Middlemount now appeals that decision, arguing that the primary judge erred in his construction of the clause which set the hierarchy by which Middlemount was to prepare the accounts and in failing to find that the Independent Accountant had not performed the task set for it.

The relevant clauses of the Agreement

  1. [2]
    Clause 5 of the Agreement set out the parties’ obligations before completion, which included a requirement that Anglo American ensure that the Company’s business was carried on

“…in the ordinary course and substantially consistent with past practice…”.

Clause 5.7 required Anglo American to provide the “Estimated Final Completion Amount”, which consisted of a base amount together with an “Estimated Completion Adjustment Amount”, at least three days before the completion date.  The Estimated Final Completion Amount was to be calculated as at the end of the last month preceding settlement; which in this case was July 2016, completion taking place on 29 August 2016.  Clause 8 of the Agreement dealt with the “Completion Accounts”.  Clauses 8.1 and 8.2 required Middlemount to prepare them as at the completion date and to calculate the “Final Completion Amount” in accordance with principles set out in sch 11 and with sch 12 to the Agreement.  The purchase price was then, under cl 8.7, to be adjusted accordingly, and any shortfall or excess made good, as the case might require.

  1. [3]
    Clause 1.1 of sch 11 to the Agreement set out the “Principles and Policies” applicable to the preparation of the Completion Accounts:

“The Completion Accounts must be prepared in accordance with, in order of precedence:

  1. (a)
    The format prescribed in Schedule 12C (with a worked example of Schedule 12C based on the trial balance set out at Schedule 12B);
  2. (b)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a), the specific principles, policies and procedures set out in part 1.2 of this Schedule 11.
  3. (c)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a) or (b), in a manner consistent with the principles, policies and procedures used to prepare the trial balance.
  4. (d)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a), (b) or (c), in a manner consistent with the principles, policies and procedures used to prepare the Accounts; and
  5. (e)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a), (b), (c) or (d), in accordance with Accounting Standards.”
  1. [4]
    The parties agreed that sub-clauses (a) and (b) were not applicable.  It was admitted on the pleadings that the expression “trial balance” in cl 1.1(c) meant the monthly trial balances carried out for the Company prior to August 2016 (rather than any particular trial balance).  “Accounts” (referred to in cl 1.1(d)) was defined in the Agreement.  It meant the Company’s (and its subsidiaries’) special purpose financial report for the financial year ending 31 December 2015 (the Company operating on a calendar year), consisting of a balance sheet, profit and loss statement and statement of cash flows, together with the notes to, and director’s reports in respect of, the accounts.  Schedule 12, which was titled “Completion Accounts”, included two pro forma documents: sch 12A, which set out items for inclusion or exclusion and allocation to categories in the calculation of the Estimated Completion Adjustment Amount, and sch 12C, which similarly set out the items for the Completion Accounts.  The third document in sch 12 was sch 12B, which was an “illustrative” example of accounts, taken from 31 December 2014.
  2. [5]
    Clause 8.5 provided for the dispute resolution procedure.  In particular, cl 8.5(h) provided as follows:

“The Independent Accountant must act as an expert and not as an arbitrator and its written determination will be final and binding on the parties in the absence of manifest error and the Completion Accounts or the Final Completion Amount (as applicable) will be deemed to be amended accordingly and will be taken to comprise the final Completion Accounts and the Final Completion Amount and will be final and binding on the parties.”

The areas of dispute

  1. [6]
    Two issues decided by the Independent Accountant were the subject of findings by the primary judge and are in turn the subject of the appeal grounds here.  The first concerns the accounting treatment of spare parts obtained for maintenance of a loader, while the second relates to adjustments made for anticipated port and rail charges.  Those disputes arose as follows.
  2. [7]
    Anglo American duly provided the Estimated Completion Adjustment Amount to Middlemount on 23 August 2016, and the contract settled six days later.  Subsequently, Anglo American provided Middlemount with a trial balance for August 2016 for the Completion Accounts.  In all of the monthly trial balances which it prepared for the Company over the period from December 2015 to July 2016, Anglo American had posted the acquisition costs of loader spare parts bought in December 2015 as expense items, although they were not in fact used, as intended, in repairing the loader.  However, in its August 2016 trial balance, Anglo American for the first time treated the costs of the spare parts as inventory, and thus a capital item.
  3. [8]
    Although the Company adopted the calendar year as its financial year, its contracts with rail and port infrastructure providers operated on the basis of the Australian financial year, ending 30 June.  Anglo American dealt with the Company’s liabilities for rail and port costs as accruals accounts, estimating the monthly amounts of its liabilities in advance, using an averaged figure.  In its August 2016 trial balance it revised its accrual figure for those liabilities downwards, acting on advice from the infrastructure providers as to the amounts actually owing for the 2016 Australian financial year.  (This was referred to as a “true-up”.)  In November 2015, it had made a similar adjustment on the basis of information provided at the end of the 2015 Australian financial year.
  4. [9]
    On 31 October 2016, Middlemount provided the Completion Accounts which it had prepared, together with its calculation of the Final Completion Amount, to Anglo American.  It had adjusted Anglo American’s trial balance figures by adding accruals to offset the capitalised value of the loader spare parts and to reverse the reduction in the port and rail charges accruals.  Anglo American delivered a Dispute Notice, triggering the dispute resolution procedure in cl 8.1.  The Independent Accountant was engaged, with the terms of its engagement set out in a letter signed by its representative.  It was to consider whether the Completion Accounts had been prepared in accordance with the terms of the Agreement, having regard to the disputed matters.  Among other things, it would rely on the information provided by the parties, not seeking to verify its truth.
  5. [10]
    In its submissions to the Independent Accountant, Anglo American claimed that capitalising the spare parts as inventory in the August 2016 trial balance was in accordance with the Company’s “Process for Management of Goods Holding” manual (“the Goods Holding policy”), which indicated that parts not used within 45 days, but needed later, should be booked into stock.  It was also consistent with

“…the Company’s policy with respect to spare parts and consumables, as disclosed in the FY15 Financial report…”

That report was the 2015 special purpose financial report, which by definition in the Agreement constituted the “Accounts” referred to in sch 11 cl 1.1(d).  The policy was contained in a note to the report and referred to the capitalisation and depreciation of “major capital spare parts”.  The note also dealt with the valuation of spare parts, specifying, among other things, that “obsolete or damaged inventories” were to be valued at their net realisable value.

  1. [11]
    Middlemount argued, on the other hand, that the capitalisation approach was a departure from what the relevant provision of sch 11 cl 1.1(c), required, because it was not

“consistent with the principles, policies and procedures used to prepare the trial balance”.

The Company’s normal practice was to deal with the cost of spare parts as expenses.

  1. [12]
    As to the port and rail charges, Anglo American pointed again to a note to the Company’s 2015 special purpose financial report, to the effect that its financial statements were prepared on the basis of Australian Accounting Standards.  In compliance with those Standards, it said, the principles, policies and procedures used to prepare the trial balance were to recognise the liability for rail and port costs only where it was probable that a present obligation could result in an outflow of resources and the amount required to settle the obligation could be measured reliably.  Middlemount contended that the true-up was not consistent with the principles, policies and procedures used to complete earlier trial balances, because in the previous year Anglo American’s policy or procedure was to accrue the charges on a monthly basis and not to amend the accrual figure until late in the calendar year.

The expert determination

  1. [13]
    Setting out the scope of its work, the Independent Accountant said that in forming its opinion on the disputed matters, it had considered the requirements in the Agreement for the preparation of the Completion Accounts, the information provided by Middlemount and Anglo American, the accounting policies and procedures which the Company had consistently applied in the preparation and maintaining of its trial balance, and (more contentiously)

“…

  • Common industry practice in relation to the relevant accounting practices; then
  • Who benefited / incurred loss based on the supporting evidence provided”.
  1. [14]
    In its determination as to how the spare parts should be accounted for, the Independent Accountant decided that sch 11 cl 1.1(a) and cl 1.1(b) had no application; which led it, it said, to consider cl 1.1(c).  It set out the following reasoning:

“We note that the Vendor expensed the spare parts in the Trial Balance in December 2015 and January 2016 when they were purchased.  The spare parts remained in the Income Statement until an adjustment was made by the Vendor in August 2016, capitalising the spare parts in inventory.

The order of precedence gives weight to the ‘consistent application of the principles, policies and procedures used to prepare the trial balance.’  Only where a ‘consistent’ trend cannot be established shall the Completion Accounts be prepared in a manner consistent with the principles, policies and procedures used to prepare the Accounts or in accordance with the Australian Accounting Standards.

As such, we consider the “consistent” treatment in preparing the Trial Balance relating to this item to be the expensing of the spare parts.  Although capitalisation did not occur until the preparation of the August 2016 Trial Balance, this accounting position is consistent with the accounting policies, procedures and principles which should have been applied (ie; capitalised) in accordance with the Management of Goods Holding policy.

Hence, such policy (capitalisation) should be applied in the preparation of the Trial Balance which is also consistent with the accounting policy applied in preparing the trial balance for the 2015 Annual Report of the Vendor.”

  1. [15]
    Under the heading “Our view – other considerations”, the Independent Accountant went on to say

“Notwithstanding the above, we have further considered the physical condition and location of the spare parts inventory at Completion Date in arriving at our decision.”

It noted that the spare parts had been transferred to Middlemount and remained available for use (“with no evidence to suggest damage or obsolescence”) in maintaining and repairing the loader, so that they were properly to be regarded as an asset now under the control of the latter.  Under the heading, “Final Determination”, the conclusion was drawn on the evidence that

“…whilst the Vendor did not account for the capitalisation of the spare parts on a timely basis, it is appropriate that such an adjustment be made in preparing the Completion Accounts with respect to the Loader spare parts, consistent with the Vendor’s accounting policy.  Consequently, we find in favour of the vendor’s position noting that the Purchaser can benefit from those assets in the future.”

The spare parts were appropriately to be treated as a capital item in the Completion Accounts.

  1. [16]
    In relation to the port and rail charges, the Independent Accountant accepted that Anglo American had made the true-up on the providers’ notification of the final positions for the contract year ended 30 June 2016.  It found that the approach in the August 2016 trial balance of adjusting the position to record an accrual for port and rail charges only where obligations remained un-invoiced was consistent with Anglo American’s policy of only recognising a liability where there was a present obligation that required future payment.  That was

“…also consistent with how the Trial Balance was finalised for the purposes of preparing the ‘Annual Financial Statements’ and in accordance with the Accounting Standards”.

The Completion Accounts were effectively reporting period accounts, although for a shorter reporting period than usual, and it was appropriate to adjust to reflect the true financial obligation at the completion date.  The Independent Accountant had verified the accuracy of Anglo American’s figures in conjunction with its assessment of “industry practice” in respect of invoice processing for the relevant liabilities.  It found in favour of Anglo American, as it had

“…no evidence to support a greater liability obligation to be included in the Completion Accounts”.

The contentions at first instance about the expert determination

  1. [17]
    In the proceeding below, Middlemount submitted generally that the Independent Accountant should have confined its considerations to sch 11 cl 1.1(c), neither party having contended that cl 1.1(d) applied.  The Independent Accountant had listed, as matters it had considered, industry practice and who had benefited or incurred loss, neither of which were within its scope of work.  In respect of the spare parts issue, Middlemount argued that cl 1.1(c) was focused on the principles, policies and procedures actually used to prepare the trial balance, not what ought to have been done; and as the Independent Accountant had found, the “principles policies and procedures” used  in accounting for the spare parts were expensing.  However, it then went on, impermissibly, to consider other matters: that capitalisation was consistent with a policy which ought to have been applied (the Goods Holding policy); that capitalisation ought to have been applied as consistent with the accounting policy used in preparing the trial balance for the 2015 Annual Report; that there was a benefit to Middlemount in having the spare parts available for use in maintaining the loader; and that, given the spare parts remained intact and had been transferred to Middlemount, they met the definition of an asset under Accounting Standards.  The last was in, effect, the application of cl 1.1(e), when cl 1.1(c) had already been found to apply.
  2. [18]
    Anglo American maintained that the Independent Accountant in fact had dealt with the spare parts issue in conformity with cl 1.1(c).  It, Anglo American, had invited the Independent Accountant to infer what principles, policies and procedures it had used to prepare the trial balances from other documents.  The latter was also entitled to consider cl 1.1(d) and cl 1.1(e) principles, policies and procedures in order to identify those used for cl 1.1(c) purposes.  While regarding the consistent application of the expensing treatment in the earlier trial balances as relevant, the Independent Accountant had noted that the capitalisation approach in the August 2016 trial balance conformed with Anglo American’s accounting policies, in the form of its Goods Holding policy.  Implicit in that finding was a conclusion that the earlier treatment of the spare parts as an expense was oversight, rather than representing the application of a principle, policy or procedure.
  3. [19]
    The Independent Accountant’s observations about the availability of the spare parts for Middlemount’s use did not, Anglo American contended, affect its conclusion.  The reference to the spare parts not being damaged or obsolete was drawn from the note to the 2015 special purpose financial report.  The observation that the parts satisfied the definition of an asset was relevant to the conclusion that the delay in capitalising them was an oversight.  In the alternative, even if the Independent Accountant had found that the treatment of the parts as an expense was as a result of the application of a principle, policy or procedure, it also had found that the Goods Holding policy was a cl 1.1(c) principle, policy or procedure, to which, as it was entitled to, it gave a greater weight.
  4. [20]
    In relation to the port and rail charges, Middlemount submitted that the Independent Accountant had regard to the fact that a true-up would occur prior to the preparation of the annual financial statements; but that was a matter relevant to cl 1.1(d) and cl 1.1(e), not cl 1.1(c).  It had characterised the Completion Accounts as representing a set of reporting period accounts, so that it was appropriate to make the true-up to reflect the actual financial obligation.  That was not the task assigned to it, as opposed to determining how the monthly trial balances had been prepared previously.  By verifying Anglo American’s calculations to arrive at an accurate estimate of the port and rail accrual, it had also misapprehended its task.  Finally, the consistent treatment of the rail and port costs in the monthly trial balances, as the Independent Accountant should have found, was not to adjust them to reflect the actual amounts owed, but to perform the true-up late in the calendar year.
  5. [21]
    Anglo American countered that the Independent Accountant had found that its policy was to adopt the most reliable measure of the probable liability for rail and port costs and had made that finding under cl 1.1(c).  Alternatively, in the absence of a cl 1.1(c) principle policy or procedure, the Independent Accountant was entitled to look to the policy of adopting the most reliable figure as relevant under cl 1.1(d) or cl 1.1(e).

The primary judge’s decision

  1. [22]
    The primary judge, uncontentiously, accepted as a definition of “trial balance” that it was an

“…organised list of all general ledger accounts together with the balances at a date”.

Dealing with the loader spare parts issue, his Honour rejected Middlemount’s contention that because the spare parts costs had been posted to an expense account over the preceding months, cl 1.1(c) required that the Completion Accounts be prepared on the same basis.  He observed that the fact of an item’s being posted to a particular account was not an accounting principle or policy, although it might have occurred in accordance with such a principle or policy.  It could be said that a regular posting of an item in a particular way amounted to an accounting procedure, but that could not be absolute, because it would make it impossible to correct any error which had persisted over a number of monthly trial balances.  In addition, the accounting treatment of an item could change, depending on its use; in this case, if the inventory parts were intended for consumption, the underlying principle for posting their cost to an expense account was evident, while if they were to be held for use at some indefinite future time, the principle for posting them as a capital asset was apparent.

  1. [23]
    In determining the principles, policies or procedures employed in preparing the monthly trial balances, the Independent Accountant was not obliged to confine its considerations to the entering of items in the December 2015 - July 2016 trial balances.  The primary judge concluded his consideration of this issue by rejecting the proposition that the Independent Accountant was necessarily required to apply cl 1.1(c) or to conclude that the treatment of the relevant spare parts in the December to July trial balances amounted to a procedure which dictated how the spare parts were to be treated for the Completion Accounts.  Middlemount’s challenge to the expert determination on that basis failed.
  2. [24]
    As to the rail and port charges, the primary judge noted that since the true-up depended on information provided by rail and port infrastructure suppliers at the end of the financial year, the true-up for the financial year ended 30 June 2016 could not have been performed before July 2016; so the fact that there had been no correction of the kind in any of the 2016 monthly trial balances before then could not amount to a policy or procedure.  The approach contended for by Anglo American and accepted by the Independent Accountant, of adopting the methodology which best reflected the actual liability for rail and port costs and adjusting accordingly in the August trial balance, did not assist as to whether there was any policy or procedure used in preparing the monthly trial balances before then for the purposes of cl 1.1(c).  But whether there was any policy or procedure as to the month or months in which the true-up was to be carried out was itself a matter of fact for determination by the Independent Accountant.  Error in the finding of fact on that point could not affect the validity of the expert determination.
  3. [25]
    The primary judge declared the determination valid and binding.

The parties’ submissions on appeal

  1. [26]
    Middlemount reiterated its argument as to the proper construction of cl 1.1(c), that it was concerned with the principles, policies and procedures actually used in preparing the trial balance: the historical treatment of items.  A reasonable business person entering a contract would want the certainty, in estimating a likely price, of knowing that the procedures in fact used in the past would be applied.  The primary judge had wrongly construed the clause as allowing the Independent Accountant to consider for itself principles, policies and procedures other than those used to prepare the monthly trial balances, rather than confining itself to the entries made in the accounts for the December 2015 to July 2016 period.  The Independent Accountant could not, it was contended, use its own expertise or apply principles, procedures and policies inconsistent with that historical treatment.
  2. [27]
    The primary judge had wrongly failed, Middlemount submitted, to recognise that once the Independent Accountant had made the factual finding as to the principles, procedures and policies applied in accounting for the spare parts in the trial balance, it was irrelevant to consider whether it was appropriate to repost the items into inventory in August 2016.  His Honour had also erred in failing to find that the Independent Accountant had gone beyond its task by taking into account, generally, common industry practice and benefit or loss to the parties, and specifically, in relation to the spare parts, that the Company’s Goods Holding policy should have been applied, that the spare parts were intact, under Middlemount’s control and available for its benefit, and that they met the definition of an asset for the purposes of Accounting Standards.
  1. [28]
    In accepting that the Independent Accountant was entitled to take other matters into account, the primary judge had erred by taking into account the possible need to correct error was a consideration.  Generally speaking, accounting treatment could, of course, change with circumstances, but cl 1.1(c) was concerned with the historical treatment of an item.  If cl 1.1 did not permit an alteration where error occurred, that was the result of a poor commercial decision on the part of Anglo American, in failing to ensure that the clause provided for sufficient flexibility.
  2. [29]
    In the contention of Anglo American, the Independent Accountant had made no finding that there was a principle, policy or procedure of expensing spare parts.  Rather than using any of those terms, it had referred to “consistent treatment”, in relation to that item.  Instead it had accepted that there was a policy which should have been applied but had not been, because of an oversight.  In relation to the complaint that the Independent Accountant had wrongly taken into account the location of the spare parts and that they satisfied the definition of an asset under the Australian Accounting Standards, Anglo American argued that the relevant observations were made after the Independent Accountant had already reached the conclusion that capitalisation was consistent with Anglo American’s policy.  In any event, the fact that the parts were an asset under the Accounting Standards made it more likely that Anglo American’s treatment of them as an expense in the monthly trial balances was an error.
  3. [30]
    In circumstances where there were conflicting cl 1.1(c) principles, policies or procedures – the expense treatment, on the one hand, as opposed to the Goods Holding policy, on the other – the Independent Accountant had the power to resolve the conflict.  Alternatively, it could properly regard the item as “not covered” by cl 1.1(c); so that it could consider the principles, policies or procedures used to prepare the Completion Accounts under cl 1.1(d), or, failing that, under cl 1.1(e), the Accounting Standards.
  1. [31]
    The primary judge had not concluded that the Independent Accountant was at liberty to apply its expertise in disregard of the hierarchy in cl 1.1 or to apply principles, policies and procedures retrospectively.  His conclusion was merely that the Independent Accountant was required to identify for itself the principles, policies and procedures used and was not restricted in doing so to the actual treatment of an item in earlier trial balances.  His Honour was entitled to have regard to the fact that if Middlemount’s construction of cl 1.1(c) were correct, Anglo American would not be able to correct persistent errors; approaching construction on the basis of what commercial parties were likely or unlikely to have intended was a proper approach.  It was unnecessary for Anglo American to insist on a drafting of the clause that excluded errors, because on no sensible construction could an error amount to a principle, policy or procedure.  Nor was there any basis for an assumption that the accounting treatment of an item could not vary over time, as was assumed by Middlemount’s construction.
  2. [32]
    In relation to the rail and port charges, Middlemount argued that the primary judge had erred in failing to find that the relevant cl 1.1(c) policy or procedure was to maintain the accruals in the monthly trial balances and perform the true-up late in the calendar year, in November.  That error was produced, it was submitted, by his Honour’s overlooking the fact that the Company operated on a calendar year as its financial year, and in consequence regarding it as logical to make an adjustment in August 2016, shortly after the end of the Australian financial year on 30 June.  The judge’s oversight as to the duration of the Company’s financial year was to be discerned from his reference to the Company’s having performed a true-up for the financial year ending 30 June 2015 of a similar kind to that undertaken in August 2016 for the financial year ending 30 June 2016.
  3. [33]
    Both the Independent Accountant and the primary judge had erred in failing to make a finding as to whether there was a policy in relation to when the true-up was undertaken.  The Independent Accountant had found there was a policy to make the adjustment, but omitted to deal with when that policy was applied or to address Middlemount’s argument on the point.  The Independent Accountant’s statement that the true-up policy was consistent with the approach to preparation of the trial balance for the annual financial statements was an erroneous application of cl 1.1(d) when it should have made its determination under cl 1.1(c).  Its conclusion in fact fitted with the timing for the true-up for which Middlemount contended, since the financial statements were prepared for the end of the calendar year.  Finally, the Independent Accountant had taken into account common industry practice, which was an irrelevant consideration, and in doing so had departed from the agreed regime for determination of the issues.
  1. [34]
    Anglo American contended that the primary judge had correctly found that whether there was any policy of adjusting the rail and port costs by way of the true-up late in the calendar year was a question of fact for the decision of the Independent Accountant.  It was to be inferred from the Independent Accountant’s finding that there was no evidence to support a greater liability obligation that it had rejected Middlemount’s case that there was a policy of carrying out the true-up late in the year.  By notice of contention, Anglo American argued that in any case it ought to be concluded that there was no such principle, policy or procedure.  The Independent Accountant’s finding that there was, on the other hand, a policy of recognising liability on a present obligation, was a cl 1.1(c) policy.  Its reference to industry practice was made in connection with its consideration of the invoices in relation to the port and rail charges, which was appropriate once it concluded that the policy was to adopt the best estimate of rail and port costs.  The primary judge had made no error as to the financial year reporting period for the Company.  His Honour’s references to the financial year ending 30 June were made in the context of the rail and port contracts, which were aligned to that period.

Consideration

  1. [35]
    Where parties to a contract have agreed, as Middlemount and Anglo American did, that an expert determination shall be final and binding, mistake or error on the part of the expert will not invalidate the decision unless it is of a kind which shows that the expert determination has not been made in accordance with the contract.[1]  The question for the primary judge, relevant to this appeal, was whether the Independent Accountant had failed to perform the task it had contracted to perform;[2] in this case, to determine whether the Completion Accounts had been prepared in accordance with the terms of the Agreement, and, relevantly, sch 11 cl 1.1(c)-(e), taking those subclauses in order of precedence.
  2. [36]
    As to the construction of cl 1.1(c), I accept Middlemount’s submission that the use of the word “used” is significant.  As a commercial contract, the Agreement is to be “given a businesslike interpretation”.[3]  Commercial common sense would indicate that in an arrangement such as cl 8 contemplated, of arriving at a final amount after completion, the purchaser would intend, and the vendor would accept, that there be an assurance that accounting practices would not be varied from those of the past; so that the Company’s accounts of prior months would give some guidance as to what could be expected in the figures giving rise to the final purchase price.  That is consistent with the intention underlying the obligation contained in cl 5.1 of the Agreement on Anglo American to carry on the company’s business pending completion

“…in the ordinary course and substantially consistent with past practice…”

For those reasons, I accept Middlemount’s submission that cl 1.1(c) contemplated dealing with items consistently with principles, policies and procedures actually used in the preparation of the monthly trial balances.  It would not, for example, be sufficient to meet this description that Anglo American had a documented policy which had not in fact been applied in the preparation of the monthly trial balances.

  1. [37]
    It does not, however, follow that it was the past treatment of the very spare parts in question, as opposed to the way spare parts held for future use were usually dealt with in monthly trial balances, that was relevant.  I would not, with respect, disagree with much of what the learned primary judge said in relation to the spare parts issue.  The Independent Accountant did not have to confine its considerations to how items were presented in the December 2015 – July 2016 trial balances, to apply cl 1.1(c) if it was not apposite, or to conclude that the treatment of the spare parts in those trial balances constituted a procedure within the meaning of the clause.  But there is, I consider, error in this: that his Honour failed to address Middlemount’s contention that the expert determination found that there was a principle, policy or procedure used to prepare monthly trial balances where spare parts were concerned, and it was to expense them.
  2. [38]
    Moreover, the expert determination did, in my view, contain the finding that the (relevant) procedure used in preparing the trial balance over the preceding eight month period was expensing of spare parts.  Dealing with the issue, the Independent Accountant began by identifying that it was considering the principles, policies and procedures used to prepare the trial balance in terms of cl 1.1(c).  In that connection it made the statement that it was only if a “consistent trend” could not be established that the principles policies and procedures used for the Accounts or the Accounting Standards could be applied; making it clear that it regarded the relevant exercise under cl 1.1(c) as determining whether there was such a trend; if there were, neither cl 1.1(d) nor cl 1.1(e) would have any application.
  3. [39]
    The next sentence of the determination commenced “As such”, indicating that it related to the previous consideration of a consistent trend for the purposes of cl 1.1(c).  What followed in that sentence was the finding that the “‘consistent’ treatment” in preparing the monthly trial balances was the expensing treatment.  In the context where the Independent Accountant had specifically directed itself to cl 1.1(c) and the “principles, policies and procedures used to prepare the Trial Balance”, this can only be regarded as a finding that this was the procedure used in the monthly trial balances.
  4. [40]
    But the Independent Accountant then moved from what had been done to what should have been done in accordance with the Goods Holding policy, giving the latter as its reason for concluding that capitalisation was appropriate.  The difficulty with Anglo American’s alternative argument, that if the Independent Accountant had made a finding of a procedure of expensing in the monthly trial balances, it had also found that the Goods Holding policy was a cl 1.1 (c) policy and given it greater weight, is this: the Goods Holding policy was a policy which, in the Independent Accountant’s view, should have been applied; there was no finding that it had been used.  That is reiterated under the heading “Final Determination”.  The expert’s conclusion there was that Anglo American had not “account[ed] for the capitalisation of the spare parts on a timely basis”, but that the adjustment ought to be made consistent with its accounting policy.  That is only consistent with a view that capitalisation of spare parts was not the approach which had been used in the monthly trial balances, but was now appropriate for the preparation of the Completion Accounts.
  5. [41]
    Having reached the view that capitalisation ought be applied, the Independent Accountant observed that it was “also consistent” with the accounting policy applied in preparing the trial balance for the 2015 Annual Report (the special purpose financial report).  This reference is puzzling, because no party had produced or referred to any particular trial balance prepared for that report or suggested that capitalisation had been applied to the treatment of spare parts in such a trial balance.  One infers that the Independent Accountant assumed that there had been a trial balance prepared in connection with the preparation of the 2015 Annual Report, and that because the report itself contained a note referring to capitalisation as one of the accounting policies applied in the preparation of the annual financial statements, the policy had been used for that purpose.
  6. [42]
    However that may be, there was no evidence that any trial balance which might have been prepared in that context could be characterised as a monthly trial balance, and the Independent Accountant did not make any such finding.  Such a trial balance would not itself fall within the definition of “Accounts”, but it might be arguable that a policy used in its preparation could be regarded as a policy used in the preparation of the Accounts for the purposes of cl 1.1(d).  However, the Independent Accountant did not express that view or make any finding on the point.  And, in any event, it had already made a finding under cl 1.1(c).
  7. [43]
    The Independent Accountant plainly regarded the capitalisation of the spare parts as consistent with the policy which should have been used for the monthly trial balances and as the approach to be preferred.  But it did not say that it regarded the expensing as a mistake or oversight and hence as incapable of being regarded as a principle, policy or procedure.  It made no finding as to why the expensing treatment was used.  And although consideration of the Company’s documented policy or its methodology in a trial balance prepared for the purposes of its annual financial statements might be relevant to the making of a finding about the principles, policies and procedures actually used for preparation of the monthly trial balances, the Independent Accountant said nothing in its determination which would suggest that they actually were considered in that way, in its analysis of the trial balances or in connection with the application of cl 1.1(c).
  8. [44]
    By turning its attention from what was done to what should have been done, the Independent Accountant strayed from the task it was contracted to perform; which was to apply the finding it had made under cl 1.1(c), as to the consistent treatment of spare parts in monthly trial balances, to its review of the Completion Accounts.  It departed further from that task when it considered the fact that the spare parts were in Middlemount’s possession and available for its use.  A mere observation to that effect would not necessarily have indicated such a departure, but the Independent Accountant actually articulated that this was a factor in its decision-making:

“…we have further considered the physical decision and location of the spare parts inventory at Completion Date in arriving at our decision”.

  1. [45]
    It follows that I accept Middlemount’s contention that the primary judge erred in failing to find that the Independent Accountant failed to perform its contractual task in dealing with the spare parts issue, resulting in this part of its determination being invalid.
  2. [46]
    The parties were in agreement that failure to perform the contractual task in determining one aspect of the dispute did not mean that the other issue had not validly been determined.  In relation to the rail and port costs question, Anglo American’s contentions must be accepted.  The Independent Accountant, while identifying Middlemount’s contention that there was a policy of making the true-up at the end of the calendar year, did not make that finding.  Its determination that Middlemount had failed to establish any greater liability obligation was an implicit rejection of the argument.  Instead it accepted that Anglo American had made the true-up on notification of the actual amounts owing in accordance with its policy of recognising existing obligations; with, by inference, the only relevant timing aspect being that it occurred after the necessary information was received.
  3. [47]
    As the primary judge found, since the policy of adjusting to reflect the actual liability was not applied (because it could not be, before the information was available) in the monthly trial balances for 2016, it could not attract the application of cl 1.1(c).  But not having found any cl 1.1(c) principle, policy or procedure, the Independent Accountant was entitled to look to the true-up policy under cl 1.1(d), as applied (on its finding) in connection with the 2015 special purpose financial report.  Having reached its conclusion that the policy was properly applied in preparation of the Completion Accounts, it was unnecessary for it to go on to verify calculations which Anglo American had made and in that context to consider industry practice, but its doing so did not affect the determination already made.  (Benefit or loss to the parties, the second element which Middlemount submitted the Independent Accountant had wrongly identified as part of its scope of work, played no part in its considerations on this point.)
  4. [48]
    The primary judge’s references to the financial year ending 30 June are entirely explicable in light of the fact that the contracts were based on that financial year, so that it was in relation to the amounts owed at the end of June that the company was apprised of what was outstanding and accordingly adjusted its accounts.  His Honour plainly did consider that the Independent Accountant had found against the proposition that there was a particular time when the true-up had to be performed, and observed, correctly, with respect, that this was a question of fact for the determination of the Independent Accountant; so that the correctness of its conclusion, as a matter of fact, was irrelevant.  (Given Middlemount’s reliance on a single instance of the true-up having occurred towards the end of the calendar year as manifesting a principle, policy or procedure, it was not, in any event, a surprising one.)
  5. [49]
    No error is shown in the Independent Accountant’s reasoning in this regard or in his Honour’s conclusion that the latter had not departed from the contractual task in dealing with the issue.

Orders

  1. [50]
    I would allow the appeal, on the basis that the expert determination is invalid so far as it purports to decide that the spare parts should be treated as a capital item in the Completion Accounts.  The parties should provide submissions as to the final orders which should be made and costs (with, ideally, an agreed order in both respects) within fourteen days.
  2. [51]
    MORRISON JA:  I have had the advantage of reading the draft reasons prepared by the Chief Justice.  I agree with her Honour’s conclusions in relation to the issue concerning adjustments for anticipated port and rail charges.  However, I have reached a different conclusion to her Honour in respect of the issue concerning the accounting treatment of spare parts obtained for maintenance of a loader.  These reasons explain why I have come to a different conclusion.
  3. [52]
    Middlemount South Pty Ltd[4] entered into a share purchase agreement with Anglo American Metallurgical Coal Assets Pty Ltd.[5]  The agreement proceeded on the basis that the purchase price would be set by what was essentially a two-stage calculation.  At the first stage Anglo American was required to provide an estimate of the amount of the Final Completion Amount, which was the final price for the share purchase.  Under clause 5.7, Anglo American had to provide that figure (called the Estimated Final Completion Amount) prior to the completion date.  The second stage came after completion, when the purchaser, Middlemount, was to prepare the Completion Accounts and provide them to Anglo American together with Middlemount’s calculation of the Final Completion Amount:  clause 8.1.
  4. [53]
    Clause 5.7 provided:

5.7 Estimated Completion Adjustment Amount

On or before the date that is three Business Days prior to the Scheduled Completion Date, the Vendor must provide to the Purchaser the Vendor’s estimate of the amount of the Final Completion Amount (Estimated Final Completion Amount), which is to be prepared on the same basis as the Final Completion Amount, except that the estimated Final Completion Amount will be calculated as at the last End of Month Date to occur prior to (but not on) the Completion Date.”

  1. [54]
    The phrase “End of Month Date” means the Sunday closest to the last day of each calendar month: clause 1.1.  Consequently, the last End of Month Date relevant to the parties was 28 August 2016.
  2. [55]
    Thus, under clause 5.7 the Estimated Final Completion Amount was to be calculated as at 28 August 2016.
  3. [56]
    Completion took place on 29 August 2016.
  4. [57]
    On 31 October 2016 Middlemount provided Anglo American with its Completion Accounts, along with the calculation of the Final Completion Amount pursuant to clause 8.1.  The basis for the preparation of the Completion Accounts is provided in clause 8.2:

8.2 Basis of preparation

The Completion Accounts must be prepared, and the Final Completion Amount must be calculated, in accordance with the Completion Accounts principles set out in Schedule 11 and in accordance with Schedule 12.”

  1. [58]
    One can see the commercial logic to that process.  Under the Sale Agreement Anglo American, as vendor, was obliged to use reasonable endeavours to procure, that the operating companies carried on the business in the ordinary course “and substantially consistent with past practice”: clause 5.1.  As vendor, Anglo American was in a good position to calculate the Estimated Final Completion Amount, whilst the purchaser, Middlemount, did not have the same advantage even though it had access to all of Anglo American’s records under clause 5.3(a).  Once in possession of the business Middlemount had up to 40 business days after the Completion Date to compare the Completion Accounts, by which time it was in a good position to do so.
  2. [59]
    The purpose of granting the purchaser access to the books and records of the vendor is explained in clause 5.3(a).  It is “to enable the Purchaser to, as is reasonably necessary, become familiar with the Business and the affairs of the Group Companies”.  The extent of the records to which the purchaser was granted access is revealed in the definition of the word “Records” in clause 1.1:

“Records means (to the extent in the possession or control of any or all of the Vendor and the Group Companies) all original and copy records, documents, books, files, reports, accounts and plans in relation to the Shares including (without limitation) certificates of registration, minute books, statutory books and registers, books of account, originals of any tenement instruments held by the Vendor and the Group Companies and all Mining Information belonging to any or all of the Vendor and the Group Companies.”

Construction of clause 1.1(c)

  1. [60]
    At the heart of the issues concerning the accounting treatment of the spare parts for the maintenance of the loader, is clause 8.2 and Schedule 11.  Clause 8.2 required the Completion Accounts to be prepared in accordance with the principles in Schedule 11.  Schedule 11 then provided:

1.1 Principles and Policies

The Completion Accounts must be prepared in accordance with, in order of precedence:

  1. (a)
    The format prescribed in Schedule 12C (with a worked example of Schedule 12C based on the trial balance set out at Schedule 12B);
  1. (b)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a), the specific principles, policies and procedures set out in part 1.2 of this Schedule 11.
  1. (c)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a) or (b), in a manner consistent with the principles, policies and procedures used to prepare the trial balance.
  1. (d)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a), (b) or (c), in a manner consistent with the principles, policies and procedures used to prepare the Accounts; and
  1. (e)
    Where an item is not covered by the accounting principles, policies and procedures referred to in clause (a), (b), (c) or (d), in accordance with the Accounting Standards.”
  1. [61]
    The relevant clause is 1.1(c) of Schedule 11.
  2. [62]
    It was common ground on the appeal that clauses 1.1(a) and (b) were inapplicable.  Even though that is so, those clauses feature in the construction of clause 1.1.  In each case sub-clause (a) and sub-clause (b) simply list the things in accordance with which the Completion Accounts must be prepared.  The first is simply a format prescribed in Schedule 12C, and the second is specific principles, policies and procedures in part 1.2 of Schedule 11.  By contrast, sub-clause (c) uses the phrase “in a manner consistent with” the relevant principles, policies and procedures.  The same phrase is used in sub-clause (d), but not in sub-clause (e).  In my view, the use of the different phrase signifies a different approach.  In each of sub-clauses (a), (b) and (e) the accounts have to be prepared “in accordance with” the relevant specification.  In other words, they must adhere to the specification.  In sub-clause (c) they simply have to be prepared “in a manner consistent with” the specification.
  3. [63]
    At the hearing below the parties were not agreed as to the meaning of the phrase “the trial balance”, where used in sub-clause (c).  Anglo American’s defence pleaded that upon the proper construction of clause 1.1(c) the reference to “the trial balance” was “a reference to the monthly trial balances prepared by the Vendor”.[6]  That was initially admitted in Middlemount’s Reply.  Therefore, on the pleadings at the time of the Independent Accountant’s hearing, the pleadings admitted that “trial balance” referred to all trial balances.  However, on 18 October 2018, after the Independent Accountant’s determination, Middlemount amended the Reply to add words pleading that the reference to “the trial balance” did not include the August 2016 trial balance.[7]  The next day, in its written submissions before the learned primary judge, Middlemount contended that the term “trial balance” excluded the August trial balance.[8]  Anglo American did not agree, contending before the learned primary judge that: (a) before the Independent Accountant, the parties had assumed it referred to all trial balances,[9] and (b) it was admitted on the pleadings that it referred to “the monthly trial balances prepared by the Vendor”.[10]
  4. [64]
    In the course of argument on the appeal, the question of the parties’ positions as to the meaning of the phrase “trial balance” in clause 1.1(c) was raised.[11]  Senior Counsel for Middlemount said his client’s position was that “the trial balances that 1.1(c) refer to do not refer to … the contentious August 2016 trial balance”, but when asked if that was a matter of agreement, said he was not sure.  Senior Counsel for Anglo American responded:

“MR FRANCO: Your Honour, can I answer it this way: we don’t play any weight on the August trial balance. We didn’t before the judge. We say the judge didn’t either. There is a pleading about it. If it’s convenient, I’ll take you to the relevant parts in the pleading.

HOLMES CJ: I don’t think it’s convenient. Thank you.

MR FRANCO: But I don’t think it ever descended – because the issue didn’t arise, it was never discussed whether no weight’s put on it because of the proper construction of 1.1(c) or just because it’s – you’d be pulling yourself up by your own bootstraps to rely on that. So - - -

HOLMES CJ: Okay.

MR FRANCO: But we don’t rely on it and we didn’t at first instance.”

  1. [65]
    The response was, in my view, merely a statement that the argument to be advanced did not depend on the term “trial balance” including the August trial balance.  That was, in fact, reflected in Anglo American’s outline on the appeal, as well as the way contentions were advanced at first instance.[12]
  2. [66]
    I do not consider that response to be a concession that the proper construction of clause 1.1(c) should ignore the August trial balance, or that the Independent Accountant’s determination ignored it.  The response could not amount to a concession binding on this Court, as to the proper construction of clause 1.1(c), or the approach of the Independent Accountant as revealed in the expert report.  The pleadings showed that whether clause 1.1(c) included the August trial balance was in issue.  In so far as the response referred to the learned primary judge’s approach, it was no more than a submission.
  3. [67]
    There is no definition of the phrase “trial balance” in the sale agreement.  However, in my view the meaning includes not only trial balances prior to August 2016 but also the August 2016 trial balance itself.  The reasons for that can be expressed rather shortly.
  4. [68]
    Firstly, there is nothing in the text of clause 1.1 which would restrict the “trial balance” to some previous edition or editions but excluding the August trial balance.
  5. [69]
    Secondly, given that clause 1.1 deals with the rules under which the Completion Accounts were to be prepared, and those were the only accounts required by the sale agreement to be prepared by the purchaser, the natural meaning of “trial balance” refers to trial balances prepared by the vendor.  There is no reason to cut down the breadth of that phrase to some but not all of the trial balances prepared by the vendor.
  6. [70]
    Thirdly, the regime under the sale agreement was one whereby the vendor was immediately obligated to provide the purchaser with access to all the relevant books and records which included “accounts” and “books of account”.  Plainly, under clause 5.3(a) the vendor was obliged to give the purchase access to all the trial balances it prepared.  That access was to assist the purchaser in its ability to prepare the “Completion Accounts”.  The Completion Accounts were defined to mean the accounts of the vendor “as at the Completion Date”, and prepared in accordance with Schedule 11.  Since the Completion Accounts were to reflect the company’s position as at the Completion Date, by which time the vendor’s Estimated Final Completion Amount had been calculated as at the day before completion, the August 2016 trial balance would form part of the accounting treatment applicable to the Completion Accounts.
  7. [71]
    Fourthly, as will appear, the Independent Accountant found that the August trial balance was prepared in August 2016.[13]  The evidence before the Independent Accountant was that: the instructions to classify the spare parts as inventory were given prior to completion;[14] the journal entries were made in August 2016, crediting Account 31450: Sundry Accruals, and debiting Account 12101: Stores Control;[15] and the spare parts ledger showed those entries were made prior to completion on 29 August 2016.[16]  Middlemount accepted that the journal and ledger entries were made before completion.[17]  Those entries would have been part of the records used to prepare the August trial balance and were ones to which Middlemount had access under clause 5.7.  That the August trial balance reflected entries made before completion of the sale agreement supports the conclusion that where clause 1.1(c) refers to “trial balance” it includes the August trial balance.
  8. [72]
    In my respectful view, the learned primary judge was right to reach the same conclusion:[18]

[78] What then was the accounting principle, policy or procedure that the Company employed in treating the acquisition of the spare parts for the loader maintenance as expenses in the December 2015 and January 2016 trial balances and the monthly trial balances thereafter, until the August 2016 trial balance and the preparation of the Completion Accounts?

[79] The plaintiff submits that the answer to that question was foreclosed, so far as the Independent Accountant's task was to apply cl 1.1(c) of Schedule 11, because "whatever policies and procedures [the Company] may have had in place, the procedures in fact used to prepare the trial balance prior to August 2018 were to expense these spare parts."

[80] I do not agree.  In making the expert determination required under cl 8.5(c) to (h), the Independent Accountant was obliged to consider, for itself, the relevant principles, procedures and policies used in preparing the monthly trial balances and was not confined, in doing so, to the entries made for items in the accounts for the December 2015 to July 2016 trial balances.”

  1. [73]
    Middlemount’s contention was that because the spare parts were posted as an expense in the trial balances up to the July 2016 trial balance, the August trial balance could not reclassify them as inventory.  At its core the contention was that having posted the item as an expense in the trial balances to July 2016, that was a procedure used to prepare the trial balance in accordance with clause 1.1(c) of Schedule 11.  Once it had been “used to prepare the trial balance” it could not be reversed, notwithstanding that the spare parts had not been utilised.
  2. [74]
    I am unable to accept that contention, for a number of reasons.
  3. [75]
    Firstly, the term “trial balance” includes the August 2016 trial balance, for the reasons expressed above.  On that basis Anglo American corrected an error in the treatment of the spare parts in the trial balance, because they had not, in fact, been used.  Had they been utilised in repairing the loader they were truly to be recorded as an expense.  However, they were not used and were still held as inventory at the date of completion.
  4. [76]
    Secondly, to exclude the August 2016 trial balance and fix the principles, policies and procedure by reference to previous trial balances does not sit well with the presumed intention of commercial parties to such an agreement as this was.  That approach would deny the inclusion of any item purchased subsequent to the July 2016 trial balance.  To take a prosaic example, let it be assumed that further loader spares were purchased on the day after the completion of the July 2016 trial balance.  On Middlemount’s approach they would either sit unallocated in the accounts, but at the least would not have to be included in the Completion Accounts because they were not the subject of procedures “used to prepare the trial balance”.  Another example with similar effect is where half the spare parts were, in fact, used to repair the loader on the day after the July trial balance was done.  Yet another is if half the spare parts had been used but the entry for them had not been reformulated prior to the end of the July 2016 trial balance.  These examples are sufficient to demonstrate the illogicality of Middlemount’s contention.
  5. [77]
    Thirdly, the contention would deny the ability to correct an error in the trial balance.  In this respect I find myself in respectful agreement with the learned primary judge who observed that the treatment in prior trial balances may amount to a “procedure” for the purposes of clause 1.1(c) but went on:[19]

“But, logically, that is not an absolute proposition.  If it were, the Company would not be able to correct any error made in posting items to a particular account, simply because the error was made in the first place and then persisted, in the sense of not being corrected, over a number of monthly trial balances.  Not only that, it assumes that the accounting treatment of an item acquired cannot vary over time, depending on the transaction that is being recorded and the use to which the subject of the transaction is to be put.”

  1. [78]
    Fourthly, as identified above, the relevant journal and ledger entries were made prior to completion.  Therefore as at completion the treatment of the spare parts had already been corrected in accordance with the Management of Goods Holding policy.  Those journal and ledger entries were used to prepare the August trial balance.
  2. [79]
    Whilst it is true to say that a commercial agreement such as this should be given a businesslike interpretation,[20] the fact that the purchaser has access, from the date of the contract, to the vendor’s books and records including books of account, and the fact that the reference to “trial balance” in clause 1.1(c) includes the August 2016 trial balance, provide the purchaser with all the necessary reassurance as to the accounting practices that had been applied over time.  Insofar as there was any principle, policy or procedure that had not been actually used in a trial balance, the structure of access to the records prior to completion means that policies such as the Management of Goods Holding Policy would be known to the purchaser.

The Independent Accountant’s report

  1. [80]
    The Independent Accountant made a number of findings that are relevant to resolution of the issues:[21]
    1. (a)
      clause 1.1(c) of Schedule 11 was applicable;
    2. (b)
      prior to the August capitalisation, the spare parts had been recorded as an expense;
    3. (c)
      the adjustment made to capitalise the spare parts was made in August 2016, which was when the August trial balance was prepared;
    4. (d)
      as at August 2016 Anglo American had an existing policy used for preparing trial balances, namely the Management of Goods Holding policy;
    5. (e)
      though the spare parts had been recorded as an expense prior to the August trial balance, that was an error;[22]
    6. (f)
      the capitalisation of the spare parts in the August trial balance was consistent with the Management of Goods Holding policy; and
    7. (g)
      the capitalisation of the spare parts was also consistent with “the accounting policy applied in preparing the trial balance for the 2015 Annual report” of Anglo American.
  2. [81]
    The findings in sub-paragraphs (b)-(f) are reflected in these passages of the report:[23]

“We note that the Vendor expensed the spare parts in the Trial Balance in December 2015 and January 2016 when they were purchased.  The spare parts remained in the Income Statement until an adjustment was made by the Vendor in August 2016, capitalising the spare parts in inventory.

Although capitalisation did not occur until the preparation of the August 2016 Trial Balance, this accounting position is consistent with the accounting policies, procedures and principles which should have been applied (ie; capitalised) in accordance with the Management of Goods Holding policy.”

  1. [82]
    In my view, the Independent Accountant was saying no more than that capitalisation had occurred in the preparation of the August trial balance and that accounting position was in accordance with an existing policy that was used for the preparation of trial balances.  The reference to policies that “should have been applied” simply means that it should have been applied earlier than it was, not that it was some form of retrospective alteration.
  2. [83]
    The Independent Accountant made reference to “consistent treatment” in the sentence: “As such, we consider the “consistent” treatment in preparing the Trial Balance relating to this item to be the expensing of the spare parts.”  Self-evidently, that was a reference to the treatment of the spare parts before the August trial balance.  That was not, in my view, a finding that stands by itself.  It was part of the overall findings as to whether the treatment of the spare parts was consistent with the “principles, policies and procedures used to prepare the trial balance”.  The complete finding is in the full passage:

“As such, we consider the “consistent” treatment in preparing the Trial Balance relating to this item to be the expensing of the spare parts. Although capitalisation did not occur until the preparation of the August 2016 Trial Balance, this accounting position is consistent with the accounting policies, procedures and principles which should have been applied (ie; capitalised) in accordance with the Management of Goods Holding policy.”

  1. [84]
    That it was a combined finding that the treatment in the August trial balance was consistent with accounting policy, is evident from the preceding paragraph, where the Independent Accountant explored what the trigger point was when consideration would necessarily turn from Schedule 11 clause 1.1(c) to clause 1.1(d) under which the reference was to preparation of the Accounts, or clause 1.1(e) where the reference point was to the Accounting Standards:

“The order of precedence gives weight to the “consistent application of the principles, policies and procedures used to prepare the trial balance.”  Only where a “consistent” trend cannot be established shall the Completion Accounts be prepared in a manner consistent with the principles, policies and procedures used to prepare the Accounts or in accordance with the Australian Accounting Standards.”

  1. [85]
    The phrase “As such” links the two findings (firstly, that the spare parts were consistently expensed before August and secondly, that the capitalisation was consistent with an existing accounting policy) to the assessment of matters before one reaches clauses 1.1(d) or 1.1(e).  At first instance Senior Counsel then appearing for Middlemount conceded that when the Independent Accountant considered the Management of Goods Holding policy he did so under clause 1.1(c).[24]

The reference to the 2015 Annual Report

  1. [86]
    The Independent Accountant found that the accounting treatment of the spare parts in the August 2016 trial balance was “also consistent” with the accounting policy applied in preparing the trial balance for the 2015 Annual Report.  That was a Special Purpose Financial Report as at December 2015.
  2. [87]
    That there were trial balances prepared for that report was not in issue before the Independent Accountant.  Middlemount’s submissions expressly referred to them:[25]

“The Vendors normal procedures are reflected in the monthly Trial Balances prepared by the Vendor in the eight months prior to completion and the 12 months to 31 December 2015 (attached at Annexure 5 showing the P & L expense account for rail charges – JV Ledger – 100%). In each month (excluding August 2016) the trial balance shows estimated charges are accrued at the beginning of the month and subsequently the accruals reversed, and the amount expensed at the end of the month.”

  1. [88]
    Anglo American accepted that there were trial balances in the 12 months to December 2015.[26]  Annexure 5 to Middlemount’s submissions to the Independent Accountant[27] consisted of the rail charges ledger postings extracted from the trial balances.  Annexure 3 to Middlemount’s submissions was directed at the spare parts issue and consisted of extracts from the spare parts ledger going back to December 2015.  However, as to the spare parts Middlemount also stated that:[28]

“The Purchasers review of the Company’s normal practices … with respect of spare parts is that parts are initially expensed, and any material items not used in the year may be booked to inventory at year end (i.e. 31 December balance date).”

  1. [89]
    Anglo American’s response included its Annexure F, which was said to demonstrate (amongst other things) that in December 2015 there was a credit to the expense account and a debit to the stores inventory account in the sum of $139,516.[29]  In other words, a capitalisation of the type in issue here, in the sum of $139,516.[30]
  2. [90]
    That, together with the note to the 2015 Annual Report listing capitalisation of stores as an important accounting policy,[31] explains the Independent Accountant’s remark.
  3. [91]
    However, the Independent Accountant’s critical finding did not depend upon the treatment in the 2015 Annual Report, nor the underlying trial balance.  Nor does my own conclusion.

Conclusion

  1. [92]
    Therefore, in my view, there was no error on the part of the Independent Accountant or the learned primary judge.
  2. [93]
    I would dismiss the appeal, with costs.
  3. [94]
    LYONS SJA:  I have had the advantage of reading in draft form the reasons for judgment of the Chief Justice, and those of Morrison JA.  I agree with the Chief Justice.
  4. [95]
    I wish specifically to record my view that the finding of the Independent Accountant in relation to the treatment of spare parts in the trial balances prior to August 2016 is a finding that this treatment amounted to a use of a principle, policy or procedure for the purposes of cl 1(1)(c) of Schedule 11 the SPA.  It follows that this item was one covered by this clause; and that cl 1(1)(d) and cl 1(1)(e) did not fall for consideration.
  5. [96]
    I have reached a different view to Morrison JA about the positions of the parties in relation to the question whether trial balances, for the purposes of cl 1(1)(c), included the trial balance for August 2016.  It is clear that Middlemount asserted that this trial balance was not to be considered when applying cl 1(1)(c).  Anglo American did not positively assert the contrary.  In the pleadings, Anglo American alleged that the term “trial balance” as used in the clause was not a reference to Schedule 12 B, but to the monthly trial balances prepared by it.  That was the allegation admitted by Middlemount in its Reply, clarified by its amendment of 18 October to exclude the trial balance of August 2016.  In its submissions of 26 October 2018 Anglo American addressed the meaning of this term[32], again contending that it did not refer to the trial balance in Schedule 12B; and recording an assumption, said to be common to the parties in their submissions to the Independent Expert, that the term “referred generally to trial balances prepared by the Vendor”.  The submission then referred to submissions of Middlemount, which referred to trial balances prepared by Anglo American, at one point described as “for FY 13 to FY 15 and into FY 16”; and at another as “40 months of precedent prior to April 2016”.  Anglo American’s submission also expressly relied upon the paragraph of Middlemount’s Reply of 18 October 2018, which denied that the expression referred to the August 2016 trial balance[33].  Anglo American’s submission gave no indication that it disagreed with the limitation placed by Middlemount on the effect of the term.  So far as it goes, Anglo American’s submission indicates that it agreed with that limitation.
  6. [97]
    Nor would I be prepared to disregard the position taken by Senior Counsel for Anglo American on the hearing of this appeal.  Had he taken a different position, Middlemount may have sought to advance further submissions, for example, on the basis of the conduct of the hearing at first instance; or by reference to the fact that the contract was entered into in April of 2016, and the treatment of spare parts in the August 2016 trial balance was a significant departure from their treatment in previous trial balances.
  7. [98]
    I therefore agree with the orders proposed by the Chief Justice.

Footnotes

[1] Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 at 335.

[2] Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367 [75].

[3] McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589.

[4]  To which I will refer as Middlemount.

[5]  To which I will refer as Anglo American.

[6]  Paragraph 70, Appeal Book (AB) 117.

[7]  Paragraph 28 of the amended Reply, AB 156.

[8]  AB 176, paragraph 74.

[9]  AB 199, paragraph 33(c).

[10]  AB 200, paragraph 34; this was a reference to the Reply before it was amended to exclude the August trial balance.

[11]  Appeal transcript T1-7 lines 15-36.

[12]  AB 215-224, paragraphs 93-122.

[13]  An affidavit filed in these proceedings on 14 August 2018, more than a month after the Independent Accountant’s determination, said that the August trial balance was provided subsequent to completion: AB 271 paragraph 16.  But that was not before the Independent Accountant.

[14]  AB 816, paragraph 7.

[15]  AB 661, paragraph 50; AB 784, paragraphs 53-54.

[16]  AB 769, Annexure 3.

[17]  AB 758.

[18]  Reasons below at [78]-[80].

[19] Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd & Anor [2019] QSC 211 at [76].

[20] McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589.

[21]  AB 831.

[22]  The Management of Goods Holding policy “should have been applied” earlier than August.

[23]  AB 831; emphasis added.

[24]  AB 1328 line 45 to AB 1329 line 8.

[25]  AB 760; emphasis added.

[26]  AB 787-788, paragraph 78.

[27]  AB 773.

[28]  AB 758; emphasis added.

[29]  AB 785, paragraph 61.

[30]  The response hyperlinked Annexure F and therefore one can infer it was before the Independent Accountant.  However, it is not in the Appeal Book.

[31]  Note 1(f), AB 724.

[32]  See AB pp 199-200.

[33]  See AB p156, para 28.

Close

Editorial Notes

  • Published Case Name:

    Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd & Anor

  • Shortened Case Name:

    Middlemount South Pty Ltd v Anglo American Metallurgical Coal Assets Pty Ltd

  • MNC:

    [2020] QCA 132

  • Court:

    QCA

  • Judge(s):

    Holmes CJ, Morrison JA, Lyons SJA

  • Date:

    16 Jun 2020

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.
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