Between cup and lip: from Terms Sheet to Share Sale Agreement – changes to definition leading to an uncommercial result – ambiguity – use of extrinsic materials to construe agreement – inducing breach of contract

This Keynote concerns the decision of the Court of Appeal of the Supreme Court of Victoria in Copper (Qld) Investments Pte Ltd (formerly EMR Capital Investment (NO. 6B) Pte Ltd) v Carl Hallion (as ‘agent’ of each ‘secured party’ under the Deed of Mortgage dated 17 September 2018) & Ors [2025] VSCA 805 (8 August 2025) upholding the appeal.

The decision is of particular interest as in large part, the appeal was upheld due to differences in approach to the extent to which extrinsic materials can be used to construe ambiguous contracts and respecting the weight to be given to an allegedly uncommercial outcome.

In addition, the tort of inducing breach of contract was put at trial. It was unsuccessful due to the complexity and lack of clarity regarding the terms of the contract and was not considered on appeal.

At trial, there was also consideration of the application of a reasonable foreseeability test respecting any obligation to provide replacement security.

This is a complex case both factually and legally so what follows is much simplified however I think that it captures the gist of the matter.

At a Glance!

• Australian Courts remain resolutely opposed to considering the parties’ subjective intention when construing a contract. The correct approach is to determine the parties’ rights and liabilities objectively by reference to text, context and purpose.
• Where there is ambiguity, the text of a contract alone does not tell the full story. Therefore, Courts will look at extrinsic material including drafts and accompanying correspondence between the parties however they do so to look for what, objectively, the parties were intending and their purpose, not for what one party may have believed. In this regard, often the review will be a negative one: does this material reveal anything that is contrary to the proposed interpretation?
• Where there is room for more than one interpretation but one is capricious, unreasonable and uncommercial, while that is not determinative of the outcome, it does provide support for some other interpretation that is open but does not have these characteristics. This is particularly the case where no commercial purpose can be identified for the construction in issue.

And for case nerds like me!

Background

The case concerned a share sale agreement (SSA) and associated share mortgage.  The underlying asset was the Capricorn Copper Mine in NW Queensland. Its holding company, Capricorn Copper Holdings Pty Ltd (CCH), was 96.5% owned by the first Plaintiff (EMR6B), an entity within the EMR Capital Group which specialised in managing and advising funds with mining investments.  The remaining 3.5% was held by the operators of the mine. Disputes arose regarding the operation of the mine which was having financial difficulties and ultimately it was agreed that the EMR entity would acquire the balance of the shares in CCH.

The nonbinding share sale terms sheet contemplated a straightforward arrangement with both fixed consideration (payable in 4 tranches) and an earnout, with all payments to be secured by way of a share mortgage. The earnout amount was fixed but payment was contingent upon exceeding an earnout threshold calculated by reference to the cash amount received by the CC Group upon the occurrence of a liquidity event or events (which included an IPO). However, if the earnout had not become due within 5 years, there was provision for an independent valuation, with the results to be subject to the same earnout threshold.

However, between the Terms Sheet and executed SSA, changes occurred to definitions and the language used to describe the earnout calculations:

• In the first draft, in the earnout calculation, reference was made to returns paid to the Buyer (which was then defined);
• then in the second draft, as an anti-avoidance measure, definitions for EMR Investors and EMR Shareholders were introduced and the reference to “Buyer” in the earnout calculation was replaced by references to returns to EMR Shareholders and their Affiliates although references to “Buyer” remained at other points including in the independent valuation procedure in an attachment to the contract;
• the definition of a Liquidity Event was expanded to include an IPO of the securities “of any member of the CC Group”; and
• the definition of CC Group was also expanded to include “any new holding company of CCH that may be established from time to time”.

There was also provision for replacement security in the event the shares given as collateral had to be released.  If at that time it was reasonably foreseeable that further secured payments would have to be made in the future, then a payment into escrow had to be made.

After the SSA was executed, it was decided to roll together several mining assets owned by different entities within the EMR group, including the Capricorn Copper Mine, into a newco, 29Metals, and then conduct an IPO. This had the effect of adding another company, 29Metals, to those caught by the definition of the CC Group in the SSA.

There were disagreements between the parties regarding the likelihood that the earnout threshold would be met. Ultimately, upon deciding that there it was not reasonably foreseeable that this would occur, after paying the fixed consideration but without the consent of the Sellers, EMR6B released the CCH shares the subject of the share mortgage to enable transfer to   29Metals for the purposes of the IPO.  However, EMR6B did enter into a voluntary arrangement to hold its shares in 29Metals in escrow for a defined period.

The IPO was successful.

In consequence, certain non-CCH assets were transferred to 29Metals.

The Sellers then argued that the earnout calculations should include funds received for non-CCH assets. Further, they argued that when the shares were released, money should have been placed into escrow. The Sellers also appointed receivers to the EMR shares held in escrow.

Trial

Arguments

EMR6B then applied to the Court seeking various declarations regarding its conduct, an injunction and a declaration that the appointment of receivers was invalid.

The Sellers counterclaimed seeking a declaration that the earnout amount was due and payable because in breach of the SSA, when the shares were released from the share mortgage no escrow payment had been made, a breach that accelerated the earnout payment.

The general approach to construing commercial contracts is to determine the parties’ rights and liabilities objectively by reference to text, context and purpose.

In this case, a critical issue was what asset base should be used to do the earnout payment calculation given the references to returns received by the EMR shareholders and their Affiliates.

EMR6B argued that the calculations should refer only to returns relating to CCH.

However, the Sellers argued that in doing the earnout calculation, one should take account of funds received respecting   non-CCH assets held by 29Metals as they were Affiliates in terms of the definition and from the time of the IPO, were EMR investors also.

EMR6B countered that the definitions of Affiliate, EMR Investors and EMR Shareholders were included to protect the Sellers but there was no intention to provide the Sellers with a windfall should other assets be rolled into an IPO with CCH.

It submitted that it would make no commercial sense if, when the Sellers’ entitlement to the earnout payment came to be calculated, the Sellers were to benefit from the value contributed by other people’s assets.

The Sellers disagreed saying that the addition of terms in the agreement was done with the agreement of the parties and their lawyers.  They said that the possibility of a consolidation of assets was known at the time so the Court should be slow to conclude that the possibility of the earnout payment being calculated by reference to benefits obtained by other entities was uncommercial or absurd.

However, if the Sellers’ reading was accepted, other inconsistencies arose. However, the Sellers argued that these could be overcome by carefully construing the contract.

Therefore, for different reasons, the parties agreed that the SSA was ambiguous and unclear, so the usual doctrines of contractual construction came into play including the use of external sources as an aid to construction.

Construing the contract

The trial judge found in favour of the Sellers although he did not adopt all their arguments, favouring an interpretation that had not been put by the Sellers.

The judge found that the definitions required that funds paid into certain funds set up as part of the IPO had to be taken into account in conducting the earnout calculations. This had the effect of including non- CCH assets in the calculations. Therefore, when the shares were released from the share mortgage, as an earnout would have been reasonably in prospect, an escrow payment should have been made.

The judge took account of the terms sheet to assist in establishing the background and context of the contract but rejected arguments that he should take account of contractual negotiations. The judge said that to the extent they merely disclosed the subjective intentions of each party from time to time, he should not take account of them.

Further, the judge was not prepared to assume that the differences from the terms sheet had been unintended despite the argument that they led to an uncommercial result. This is because differences that arise through the drafting process could reflect the objective intention of the parties at that time. The words chosen by the parties had “had the objective consequence (unintended or otherwise) of expanding the returns from assets of other entities (beyond EMR6B) that could be considered in determining whether the Earnout Payment was payable” [228].

The judge continued that there were limits to a court’s ability to alter the objective meaning of a contract to avoid an asserted uncommercial outcome. The judge repeated that while the objective intent of the terms sheet was clear, it was not clear that the parties still intended that outcome given the new definitions and other changes that had been made by the parties with the assistance of their lawyers.

Was there a breach of the escrow provision?

Evidence was given regarding how the determination was made that no escrow payment was required.  A considerable amount of work was done to come to a view on whether it was reasonably foreseeable that the earnout threshold would be reached.  This step occurred before the IPO, so had to take account of the prospect that it may fail. Different scenarios were considered but given the mine’s parlous financial state, none lifted the earnout calculation over the defined threshold.

The judge did not criticise the process adopted or analysis undertaken by the executive who had undertaken this task. However, as the wrong interpretation of the calculation of the earnout trigger had been applied, there had been a breach because the shares should not have been released without an escrow payment being made.

Inducing breach of contract

The Sellers also alleged that the newco, 29Metals, was liable for inducing breach of contract by reason of its participation in the arrangements that led to the CCH shares being held by it, which the Sellers alleged, was in breach of the share mortgage.

The judge rejected this claim noting that the terms of the share mortgage and SSA were complex and far from clear. This was not a standard contract where the existence of some clause could be inferred without knowing the detail. Here there was no evidence that 26Metals was aware of the construction of the SSA that the judge had found (which had not been put by the Sellers); nor was there evidence that 29Metals had turned a blind eye or was recklessly indifferent to the nature of the breaches the judge had found which flowed from his interpretation of the contract.

The circumstance that 29Metals was aware that there was a dispute regarding any necessity for an escrow payment does not put it on notice of a construction that no one had put.

There was also no evidence that 29Metals had induced or procured the breach. It had been incorporated at the behest of EMR6B, not the other way around.

Appeal

EMR6B, by then re-named, was successful on appeal.

The lead judgment was delivered by Walker JA, with which Beach and Kenny JJA agreed.

Walker JA noted that when contracts are ambiguous, their texts will not provide the answer. Therefore, resort can be had to extrinsic materials as a construction aid however Walker JA differed from the trial judge in concluding that it was permissible not only to look at the terms sheet but also the drafts and email exchanges between the solicitors. These materials could assist in identifying the genesis of the transaction, background and context of the contract but should not be used to identify subjective intent.

Further, the drafting history can be used to ascertain whether a construction being advanced by a party had been rejected by the parties in the course of drafting their contract.

In addition, the Court of Appeal also placed more weight on the inconsistencies consequential upon the Sellers’ interpretation and other provisions of the contract. One consequential inconsistency appeared in an attachment to the contract containing the valuation procedure. Another appeared in a timing provision. Walker JA said that the presence of these inconsistences should not be discounted merely because they existed in an attachment or a so-called timing provision. They were all part of the contract and were textual ambiguities that needed to be resolved. Where such consequential ambiguities arise, that may tell against a suggested interpretation.

The Court was also prepared to look more closely at the significance of the alleged uncommerciality noting that the Sellers could not point to any commercial purpose for their interpretation. As Walker JA said: “But that simply begs the question as to why, in a commercial transaction for the sale of the [Sellers’] shares, a party would agree to pay a price of this kind” [151].

For Walker JA, the commercial justification for the original change in definition was clear: it was an anti-avoidance provision and acceptance of this term did not mean that the parties had departed from their original objective intention regarding the assessment of payment.

Walker JA concluded that the earnout calculation should be read to limit it to returns received by EMR investors who had invested in CCH, excluding the non-CCH investors, which avoided any uncommercial consequences and “is not contradicted by the drafting history” [164].

It followed from this that it was not reasonably foreseeable that an earnout payment would be made so there had been no breach of the escrow provisions and the earnout payment had not become immediately due and payable.

Inducing breach of contract

The inducing breach of contract claim was not considered on appeal.