Gate Gourmet Australia Pty Limited (in liquidation) Acn 089 347 562 v Gate Gourmet Holding Ag, Company Number Ch-020.3.003.945-1 and Ors [2004] NSWSC 149 (31 March 2004)

Last Updated: 5 April 2004

NEW SOUTH WALES SUPREME COURT

CITATION: Gate Gourmet Australia Pty Limited (in liquidation) ACN 089 347 562 v Gate Gourmet Holding AG, Company Number CH-020.3.003.945-1 & Ors [2004] NSWSC 149



CURRENT JURISDICTION: Equity Division
Commercial List

FILE NUMBER(S): 50180/01

HEARING DATE{S): 04/03/04, 05/03/04, 08/03/04, 09/03/04, 10/03/04

JUDGMENT DATE: 31/03/2004

PARTIES:
Gate Gourmet Australia Pty Limited (in liquidation) ACN 089 347 562 (Plaintiff)
Gate Gourmet Holding AG, Company Number CH-020.3.003.945-1 (First Defendant)
Gate Gourmet (Holdings) Pty Limited ACN 004 122 892 (Second Defendant)
Odd Gunnar Engebretsen (Third Defendant)
Lars Fredrik Larsen (Fourth Defendant)
Henning Boysen (Fifth Defendant)
Lucas Grolimund (Sixth Defendant)
Gate Gourmet Switzerland GMBH (Seventh Defendant)

JUDGMENT OF: Einstein J

LOWER COURT JURISDICTION: Not Applicable

LOWER COURT FILE NUMBER(S): Not Applicable

LOWER COURT JUDICIAL OFFICER: Not Applicable

COUNSEL:
Mr B Coles QC, Ms E Collins (Plaintiff)
Mr M Pembroke QC, Mr N Perram (Second, Fifth, Sixth and Seventh Defendants)
Mr J Stevenson SC, Mr L Menzies (Third and Fourth Defendants)

SOLICITORS:
Clayton Utz (Plaintiff)
Mallesons Stephen Jaques (Second, Fifth, Sixth and Seventh Defendants)
Gadens (Third and Fourth Defendants)


CATCHWORDS:
Contract
Letters of comfort/support
Whether creating legal obligations
Whether intent to contract
Australian trading arm of foreign owned group of companies operating under aegis of letters of comfort/support
Letter of support signed by ultimate overseas parent company
Letter confirming (1) that it would provide the financial support that may be necessary to enable its wholly owned Australian holding company and its controlled entities to meet financial commitments as and when they fall due and providing (2) that the letter would not be withdrawn before the Australian holding company and its controlled entities have sufficient means to meet their obligations without the support of the parent entity
Reliance upon letter of support for purpose of (1) directors' declaration recording that financial statements are prepared on a going concern basis on the assumption that parent entity will continue to provide the necessary financial support to enable the company to pay its debts as and when they become due and payable and (2) Australian trading company being committed to continue to trade at all
Whether intent to contract
Whether letter contained promissory undertaking
Construction of letter
Identification of promisee
Objectivity
Alternative claim that benefit of promise held by Australian holding company on trust for Australian trading company
Trade Practices Act
Misleading and deceptive conduct
Evidence
Admissibility of extrinsic evidence/surrounding circumstances
Admissibility of evidence on intent to contract issue
Admissibility of evidence on construction issue

ACTS CITED:
Corporations Act 2001 (Cth)
Corporations Law
Trade Practices Act 1974 (Cth)

DECISION:
Letter held to create binding contract. Short minutes of order to be brought in


JUDGMENT:


IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST


Einstein J

Wednesday 31 March 2004


50180/01 GATE GOURMET AUSTRALIA PTY LIMITED (IN LIQUIDATION) ACN 089 347 562 v GATE GOURMET HOLDING AG, COMPANY NUMBER CH-020.3.003.945-1 & ORS


JUDGMENT

1 These proceedings concern whether any, and if so which, contractual obligations arose in circumstances in which the Australian trading arm of a foreign owned group of companies is said to have operated under the aegis of what are commonly known as "letters of comfort" or "letters of support", which have been frequently employed in international commerce for many years. The proceedings were conducted on the basis that the phrases “letter of comfort” and “letter of support” are descriptive, rather than substantive and, accordingly, are interchangeable. This judgment proceeds on that basis.

2 The proceedings raise questions both as to intent to enter into legal relations and as to the proper construction of the instant letter.

3 An order was made pursuant to Part 31, rule 2 of the Supreme Court Rules that the quantification of the plaintiff’s damages, if any, be determined separately and after all other issues in the proceedings. The hearing with which this judgment is concerned proceeded accordingly.

4 The plaintiff, which became the Australian trading company of the Gate Gourmet group [“the group”], was not capitalised by any injection of equity or subscription for shares, the amount of the share subscription being purely nominal. The sole basis upon which the Australian trading company was permitted to operate was wholly dependent upon borrowings organised within the group, including external borrowings, always underpinned by arrangements made higher up the chain of group ownership.

5 The group was at material times the world's second-largest airline catering company. The whole of the enterprise leading to the incorporation of the Australian trading company was for the purpose of the acquisition, by the group, of Ansett catering services, through a suite of agreements. In early 1999, the group purchased a number of companies operating in the Australian catering market within the Cathay Pacific Catering services group. In September 1999, the group won a tender to provide Ansett with in-flight catering services.

6 Ansett went into liquidation relatively early in the life of the Australian companies which had been incorporated in late 1999. As Ansett’s pending demise became apparent, and under pressure from Westpac Banking Corporation Limited [“Westpac”], which had granted a major banking facility, the Australian director of the local companies pressed the ultimate overseas holding company to confirm that the relevant letter of support then in place would be honoured. This confirmation not forthcoming, the local companies themselves went into voluntary liquidation on the day after Ansett had gone into liquidation.

The parties

7 The plaintiff, Gate Gourmet Australia Pty Limited (in liquidation) [the “Australian trading company” or “GGA”] is a wholly owned subsidiary of the second defendant, Gate Gourmet (Holdings) Pty Limited [the “Australian holding company” or “GG Holdings”]. The Australian holding company, in turn, is a wholly owned subsidiary of the first defendant, Gate Gourmet Holding AG. Gate Gourmet Holding AG was a holding company for the group. The Australian holding company had previously been named Cathay Pacific Catering (Holdings) Pty Ltd but changed its name on 26 March 1999, and in November 1999 acquired the Australian trading company, not otherwise changing its principal activities. [Exhibit PX 1/443]

8 Messrs Engebretsen and Larsen, the third and fourth defendants, respectively, were at all material times directors of both the Australian trading company and the Australian holding company. Both resided in Bangkok. Towards the end of the hearing the proceedings against Messrs Engebretsen and Larsen were settled.

9 Messrs Boysen and Grolimund, the fifth and sixth defendants, respectively, are executives of Gate Gourmet Holding AG. Both resided in Switzerland.

10 There is a dispute between the parties as to the position of the first defendant, Gate Gourmet Holding AG:

· Gate Gourmet Switzerland GmbH asserts that under Swiss law it is the complete successor in title to both the rights and the liabilities of Gate Gourmet Holding AG pursuant to a merger agreement between Gate Gourmet Holding AG and Griffin Endeavour Switzerland GmbH, dated 20 December 2002 and that, as a matter of Swiss law, Gate Gourmet Holding AG no longer exists;

· the Australian trading company contends that as a matter of Swiss law, Gate Gourmet Holding AG does exist.


11 The parties have reached an arrangement documented as follows:

“The plaintiff agrees that, if it is unsuccessful in the various causes of action pleaded against Gate Gourmet Holding AG and its successor in title, it will not enter judgment against Gate Gourmet Holding AG or Gate Gourmet Switzerland GmbH. The plaintiff agrees that counsel and solicitors acting for Gate Gourmet Switzerland GmbH will not be personally liable for costs in relation to Gate Gourmet Holding AG. The legal representatives of Gate Gourmet Switzerland GmbH are entitled to make submissions in respect of the position of Gate Gourmet Holding AG in relation to the causes of action pleaded against that entity in the second further amended summons.”

12 In those circumstances, the convenient course is to refer to both Gate Gourmet Holding AG and Gate Gourmet Switzerland GmbH as "the Swiss parent" or as “GGAG”. The hearing was conducted accordingly.

13 A convenient chart of the inter-relationship between the different companies in the group [provided by -the document at Exhibit PX 1/190] is as follows:

GG Australia Group Structure

The letter of support

14 The pleadings raise, inter alia, the proper construction of the subject letter of support sent by the Swiss parent, addressed to the directors of the Australian holding company, dated 16 February 2001, which was signed by Messrs Boysen and Grolimund [the “Letter”].

15 The Australian trading company’s primary claim is that, upon its proper construction, the Letter amounted to an offer by the Swiss parent to the Australian trading company, or alternatively an offer by the Swiss parent to the Australian holding company as agent for its controlled entities, which offer achieved contractual effect when it was accepted by the Australian trading company.

16 The Australian trading company also pleads several alternatives, namely that:

· the Letter constitutes a contract between the Swiss parent and the Australian holding company, the promises within which are held on trust by the Australian holding company for the benefit of the Australian trading company; [the pleaded claims of a contract between the Swiss parent and Messrs Engebretsen and/or Larsen, were not pressed in final submissions]

· the Australian holding company unreasonably neglected and/or refused to enforce those promises for the benefit of the Australian trading company; [even before the settlement, the pleaded claims of breaches of duty in this regard by Messrs Engebretsen and Larsen were not pressed in final submissions]

· the Letter was misleading or deceptive or likely to mislead and deceive in contravention of section 52 of the Trade Practices Act 1974 (Cth) [“TPA”];

· by reason of the conduct of the Swiss parent, Messrs Boysen and Grolimund aided, abetted, counselled or procured the contravention by the Swiss parent of section 52 of the TPA and/or were knowingly concerned in, or party to, the contravention of section 52 of the TPA and/or are liable to a claim in damages pursuant to section 82 of the TPA;

· the Swiss parent is estopped from departing from the express terms of the Letter.

Dramatis personae

17 A short summary of several of the persons who came to be involved in material events is as follows:

· Mr Engebretsen was the President of the Asia-Pacific division of the group. He was a director of the Australian trading company, the Australian holding company and the other Australian group subsidiaries, being Gate Gourmet Services Pty Limited, Gate Gourmet Services (NSW) Pty Limited and Gate Gourmet Property Pty Limited. Both Mr Engebretsen and Mr Larsen, in the ordinary course of their employment with the Swiss parent, looked after, effectively, globally, the Asia and Pacific aspects of the Swiss parent business.

· Mr Grolimund was the former Executive Vice-President and Chief Financial Officer of the Swiss parent. He was a signatory to the Letter.

· Mr Larsen was the Vice-President of Finance for the Asia-Pacific division of the group, based in Bangkok, Thailand. He was a director of the Australian trading company, the Australian holding company and the other Australian group subsidiaries referred to above.

· Mr McIntyre was the Managing Director of the Australian trading company and former Australian director of all of the Australian group subsidiaries referred to above, based in Australia.

· Mr Nielsen was the Vice-President of Finance of the Swiss parent. He was the former Vice-President of Finance of Gate Gourmet International AG. He was responsible for the supervision of the plaintiff's financial performance on behalf of the Swiss parent and was based in Zurich, Switzerland.

· Mr Steininger was the Director of Finance and IT of the Australian trading company (although not a director of that company), on secondment from Zurich. He was the former Executive Vice-President and Chief Financial Officer of the Swiss parent and was Mr Grolimund's predecessor. He was a signatory to the first letter of support.

· Mr Boysen was a former Chief Executive Officer of GG AG and is the present Chief Executive Officer of the Swiss parent. A signatory to the Letter, he was based in Zurich, Switzerland.

18 The following dramatis [provided by the plaintiffs’ solicitor] identifies some other of the material persons and corporations referred to in the evidence:

Name	Role and description
Ansett Airlines	Former owner of 7 units acquired by the Plaintiff and the Plaintiff's largest customer.
Baker & McKenzie	Solicitors to the Gate Gourmet group in Australia. Former solicitors to the First, Second, Fifth and Sixth Defendants
Cuthell, Victor	Manager at PWC assigned to the Gate Gourmet audit in Australia
Fouse, Jackie	Senior executive officer of Swiss Air group.
Fuchs, Robert	Finance director of the Nuance group in Australia
Gate Gourmet (Holdings) Pty Limited ("GGH")	Second Defendant. Non trading holding company of GGA, Gate Gourmet Services, Gate Gourmet Services (NSW) and Gate Gourmet Property. Wholly owned subsidiary of Gate Gourmet Holding AG.
Gate Gourmet International AG	Member of the Gate Gourmet group and subsidiary of GG AG.
Gate Gourmet Property Pty Limited	Australian subsidiary of GGH formerly part of the Cathay Pacific catering group. Owner of land and buildings utilised by Gate Gourmet Services which did not otherwise trade.
Gate Gourmet Services (NSW) Pty Limited	Australian subsidiary of GGH formerly part of the Cathay Pacific catering group. Employment company for non-kitchen and head office staff.
Gate Gourmet Services Pty Limited	Australian subsidiary of GGH, formerly part of the Cathay Pacific catering group. Corporate vehicle for the purchase of Cathay Pacific's catering units in Darwin and Sydney.
Goggi, Joseph Carmel Mario	Company secretary of GGA and of all of the Australian Gate Gourmet group subsidiaries
Hastie, Barry	Audit partner at PWC and signing partner for the Gate Gourmet audit in Australia
Kershaw, Scott	Partner at KPMG retained briefly to assist in the proposed restructure of GGA and to liaise with Westpac
KPMG	Engaged briefly to assist in the proposed restructure of GGA and as replacement auditors for PWC
McFadden, Chris	General manager finance of the Nuance group in Australia.
Nuance Group	Sister group to Gate Gourmet and provider of airport retail services.
PricewaterhouseCoopers	Worldwide auditors to the Gate Gourmet group
Roos, Dominik	Former Treasurer of Gate Gourmet International AG and predecessor to Henrik Nielsen. Based in Zurich, Switzerland.
Shearman, Don	Senior manager at Westpac in charge of the Gate Gourmet and Nuance accounts.
Sherman, Steven	Former voluntary administrator and present liquidator of the Plaintiff.
Westpac Banking Corporation	Australian bankers to the Gate Gourmet group and the Nuance group.
Witter, Frank	Senior executive officer of Swiss Air group
Yuen, Gloria	Accountant at PWC assigned to Gate Gourmet audit in Australia

Financial year

19 It is convenient to note that the financial year for the relevant companies was from 1 January to 31 December.

The facts

20 Most of the primary facts were, in the main, not in issue [cf the plaintiff's amended chronology of main events] and were clearly made out or confirmed by the documentary material which went into evidence. Where particular matters were in issue this is dealt with below.

21 To the extent that the chronology deals with banking accommodation/funding arrangements it is convenient to include some detail – utilising a deal of the relevant evidence for the purpose.

1998

22 During 1998 the group had acquired the in-flight catering units of Cathay Pacific [Exhibit P5, paragraph 5]. Those parts of the group’s Australian catering business which formerly had been Cathay Pacific’s were operated by an entity called Gate Gourmet Services Pty Ltd.

February - March 1999

23 The group purchases the Cathay Pacific Catering Services Group.
[Goggi, paragraph 5]

2 September 1999

24 GGA is incorporated and registered for the purpose of acquiring Ansett's catering business. It was the corporate vehicle used by the group to purchase seven catering units from Ansett, GG Holdings being the holding company which, relevantly, did not trade at any material time.

25 GGA is a wholly owned subsidiary of GG Holdings. The original directors of GGA are Mr Engebretsen, Mr Larsen and Mr Stent-Torriani. [McIntyre, tab 3]

3 September 1999

26 First meeting of the directors of GGA resolves that the constitution of GGA be received and recorded by the company and that Mr Engebretsen, Mr Larsen and Mr Stent-Torriani be appointed directors of GGA. The meeting also resolves that Mr Goggi be appointed company secretary of GGA. [PX1 p2]

September 1999

27 The group wins a tender to provide Ansett with in-flight catering services. GGA purchases seven catering units from Ansett. [Goggi, paragraph 6]

14 September 1999

Base Year Contract

28 The Ansett Catering Services Agreement is executed (also known as the "Base Year Contract"). [McIntyre, paragraph 10 and tab 4]

29 Mr McIntyre has deposed, without challenge, that:

"(a) the contract commenced on 15 November 1999 for a duration of 8 years, subject to an extension of 2 years by GGA under certain circumstances;

(b) throughout the duration of the contract, GGA was to be the sole provider of catering services to Ansett;

(c) pricing for GGA's catering services was to be determined by reference to a formula defined in detail which was based on both an activity based costing method and certain other prescribed costings;

(d) throughout the year, GGA would invoice Ansett on a monthly basis with costs based on the historical cost of catering services during the previous year 1998 to 1999;

(e) at the end of the first period of operation, which ran from 15 November 1999 to 30 June 2000, there was to be a two month period during which a reconciliation would be carried out and agreed. If Ansett had exceeded their previous year's expenditure ("base year expenditure"), Ansett would pay GGA an additional amount to make up the difference. If Ansett had reduced their base year expenditure, GGA would reimburse Ansett the difference between the amount paid to it during the relevant period and the amount actually owing."

30 Further, Mr McIntyre, in cross-examination, said that:

· it took him and his team the best part of a year to start to come to grips with the Base Year Contract and understand how it worked (transcript, page 106, line 25);

· there were a number of costs under the Base Year Contract that were not budgeted for initially which caused the need for further funding as working capital (transcript, page 112, line 23).

25 October 1999

31 Mr McIntyre is appointed Managing Director of the group in Australia and the sole Australian director of all of the group companies in Australia. Mr Engebretsen and Mr Larsen are the other two directors of each company and Mr Goggi is company secretary. [Goggi, paragraph 10; McIntyre, paragraphs 7 - 8]

November 1999

32 On 15 November 1999, the plaintiff commences operations running the Ansett catering business.

33 Following that time the business of the group in Australia was conducted as follows:

· the domestic in-flight catering business was conducted by the plaintiff [Exhibit P5, paragraph 5, Exhibit PX1/190];

· the international in-flight catering business was provided using the kitchens which had formerly belonged to Cathay Pacific but were now operated by Gate Gourmet Services Pty Ltd [Exhibit P5, paragraph 8(a), Exhibit PX1/190];

· the land and buildings used for the international in-flight catering business was owned by Gate Gourmet Property Pty Ltd [Exhibit P5, paragraph 8(b), Exhibit PX1/190]; and

· the non-kitchen staff and head office staff in Australia were employed by Gate Gourmet Services Pty Ltd [Exhibit P5, paragraph 8(c), Exhibit PX1/190].

34 The directors' questionnaire submitted by Messrs McIntyre, Engebretsen and Larsen (PX 2074, 2097 and 2108) records the following facilities being used by GGA initially:

Date	Draw down from banking facility	Source	Westpac cumulative total	Standard Chartered cumulative total	Combined cumulative total
1 December 1999	$5 million	Westpac	$5 million		$5 million
7 January 2000	$25.311 million	Standard Chartered		$25.311 million	$30.311 million
1 June 2000	$2 million	Westpac	$7 million		$32.311 million
1 September 2000	$2.689 million	Standard Chartered		$28 million	$35 million
1 September 2000	$2 million	Standard Chartered		$30 million	$37 million
15 December 2000	$30 million	Westpac to repay Standard Chartered	$37 million	$0 million	$37 million

[The $5 million figure is further corroborated by the consolidated statutory accounts for GG Holdings which reveal that, as at the balance sheet date of 31 December 1999, the consolidated entity owed (PX1 455):

· $31,823,786 to related third parties;

· $14 million by way of bank loan, secured by a guarantee provided by a related entity;

· a further $15 million by way of an unsecured non-current liability to a related entity (PX1 456).

By comparison with the statutory accounts of Gate Gourmet Services Pty Ltd [PX1 482], it appears that $5 million of the bank loan was available for GGA].

Subordinated loan

35 A subordinated parent company loan agreement is executed on 15 November 1999 by the Swiss parent (as lender) and GGA (as borrower) up to a maximum of $35 million. [McIntyre, tab 6]

36 The short position is that:

· the Australian trading company commenced as a $2 company that had just acquired the business of Ansett's catering units at a gross cost of $35,883,277 (PX1, page 453);

· the purchase monies were financed by bank borrowings, repaid by the Swiss parent, who then held a subordinated loan from the Australian trading company in the amount of $35 million [PX1 193);

· the subordinated loan was valid from 15 November 1999 until further notice and could not be cancelled by the Swiss parent "as long as it owns at least 51% of the Borrower's shares";

· this subordinated loan was renewed from time to time (for example, PX1 1163);

· the proof of debt submitted by the Swiss parent suggests that $25 million was drawn down;

· in addition, the directors' questionnaire provided by Messrs McIntyre, Engebretsen and Larsen to Ferrier Hodgson records the following debits and credits (PX 2074, 2097 and 2108):

Date	Draw down from the subordinated loan	Repayment to subordinated loan	Cumulative total
15 November 1999	$25.311 million		$25.311 million
15 November 1999	$5 million		$30.311 million
7 January 2000		$25.311 million - drawn down from Standard Chartered loan facility	$5 million
21 August 2001	$20 million		$25 million
TOTAL			$25 million

19 November 1999

37 A cash flow forecast was provided to Westpac on 19 November 1999 (PX1 194) by Mr Goggi. In doing so he commented that " Mr Dominik Roos, whom we will be meeting on the afternoon of Wednesday 23 November 1999 predicts that it could take up to 3 months before the Gate Gourmet Group's local funding requirements are finalised". In the meantime, GGA had a cash facility with Westpac, in the amount of $20 million, which had been supplemented by a further facility with Standard Chartered Bank, in the amount of $30 million, by 11 January 2000 (PX1 197).

January 2000

Standard Chartered Bank loan facility

38 GGA establishes a loan facility with Standard Chartered Bank in the amount of $30 million. [Goggi, paragraph 13(a) and tab 4; McIntyre, paragraph 11(c)].

Budget figures

39 Also in January 2000, Mr McIntyre, Mr Steininger and Mr Goggi began working on the "first version of an operational budget per unit" (PX1 195). It is clear from the budget figures set out by Mr Steininger that the figures inserted were rough, round numbered estimates rather than precise amounts, based on GGA's operational experience. Mr Goggi confirmed in cross-examination that, at the time the first budget was drawn up and the initial financial arrangements arranged, they were preliminary estimates and that he:

"would have expected it to increase from what it was because nobody knew at the time how big Gate Gourmet Australia was going to be and how much working capital was going to be required".
[transcript, page 62, line 28]

March 2000

Westpac facility

40 A facility was established with Westpac in the amount of $20 million as working capital for GGA and Gate Gourmet Services Pty Ltd. [Goggi, paragraph 13 and tabs 4 and 6; McIntyre, paragraph 11(c) and tab 7]

41 The minutes of a meeting in March 2000, attended by, amongst others, Mr McIntyre, Mr Smedegaard, Mr Engebretsen and Mr Larsen corroborate the "guestimate" nature of GGA's 2001 budget [PX1 203]. The minutes record Mr Steininger giving a financial presentation and both Mr Smedegaard and Mr Engebretsen emphasising the need for financial systems to be put in place to provide accurate reports in relation to GGA's performance and that head office would be approving and finalising the budgets produced by Mr McIntyre on a per unit basis.

9 March 2000

42 A meeting held on 9 March 2000, again attended by Mr Smedegaard, records head office as noting (PX1 216):

"Information from QVF
Presentation of S-Air Group strategy and past success history.
Observation Australia

· Huge challenge to build and shape future
· Good team in place
· Have the passion needed to perform

Recommendation Australia

· get the house in order
· reach budget 2000
· surprise the Australian airline catering market
· be a benchmark of division Asia”

April 2000

43 Mr Steininger, on secondment from the Swiss parent, commences his role with GGA, as Finance and IT Director, and other Australian companies within the group. [Steininger, paragraph 2]

April - May 2000

44 Mr Goggi telephones Mr Hastie of PriceWaterhouseCoopers [“PWC”], and asks if PWC will require a letter of comfort to be provided by the parent company. Mr Hastie replies yes and states that he will arrange for a draft letter to be sent to him. [Goggi, paragraph 15]

45 Mr Goggi telephones the group treasurer of Gate Gourmet International AG, Mr Roos, and informs him that the auditors have requested that a letter of comfort be provided to the group in Australia in order to sign off on the accounts. [Goggi, paragraph 16]

25 May 2000

46 Mr Steininger forwards an e-mail from PWC Manager, Mr Cuthell, to Mr Goggi, which notes that "Serge/Joe to provide Letter of Support from Gate Gourmet International AG confirming ongoing financial support (Gloria Yuen to provide format)." [Goggi, paragraph 17 and tab 8] [PX 1/221]

31 May 2000 – first letter of support

47 Mr Boysen (Chief Executive Officer of the Swiss parent) and Mr Smedegaard (Chief Financial Officer of the Swiss parent) provide the first letter of support which was in the following terms:

“TO WHOM IT MAY CONCERN

LETTER OF SUPPORT

This is to confirm that the parent entity, Gate Gourmet International AG, will provide the financial support that may be necessary to enable Gate Gourmet (Holdings) Pty Limited and its controlled entities to meet its financial commitments as and when they fall due. This guarantee will not be withdrawn before Gate Gourmet (Holdings) Pty Limited and its controlled entities have sufficient means to meet their obligations without the support of the parent entity.

Opfikon, 31.05.2000

Gate Gourmet International AG

(signed) Henning Boysen President and CEO

(signed) Niels Smedegaard Exec. Vice President and CFO”

Late May/early June 2000

48 Mr McIntyre signs the directors' declaration to the statutory accounts of GG Holdings and Gate Gourmet Services Pty Ltd, confirming that in his opinion there were reasonable grounds to believe that GG Holdings as a consolidated entity and Gate Gourmet Services Pty Ltd would be able to pay its debts as and when they became due and payable. A note to the statutory accounts records (at page 6) that they have been prepared on a going concern basis on the assumption that the parent entity will continue to provide the necessary financial support to enable the company to pay its debts as and when they become due and payable, and not to call for repayment of the amounts owing to it until, and then only to the extent to which, sufficient funds are available.

49 Mr McIntyre gave evidence that, as Gate Gourmet Services Pty Ltd and GG Holdings had recorded losses as at 31 December 1999, without the first letter of support provided by Gate Gourmet International AG, the declaration that the group could meet its debts as and when they fell due would have been false. [McIntyre, paragraph 15 and tab 9]

50 A 2 to 3 day seminar took place in Australia in June 2000 to work on GGA's budgetary requirements (PX 219, 224). In preparation for this seminar, GGA was provided with a large amount of budgetary material from Mr Larsen [PX 225 - 431]. I accept that this appears to demonstrate the tight monitoring that Zurich maintained in relation to its subsidiaries’ cash flow requirements. In cross-examination, Mr Larsen agreed that that finance manual provided as part of this material was an important document which he took seriously [transcript page 175, lines 37 - 47; transcript page 176, lines 5 - 7].

Financing policy

51 Under the heading " financing" the finance manual circulated by Mr Larsen (PX 236) records:

"Financing in case of cash shortage (investments, operating loses, working capital for expansion).

In general, SAirGroup will provide funding in case of cash shortage. In some countries, however tax restrictions will imply that an external bank is providing the finding. Please contact Dominik Roos in case of uncertainty."

52 Mr Larsen further agreed, in cross-examination, that this statement was borne out in practice, specifically, that in his experience of the group, the Swiss parent would make sure that its subsidiaries had funds [transcript page 178, line 4]. Mr Engebretsen also conceded this point.

53 The GGA budget and business plan workshop was attended by Mr Roos, the Swiss parent’s treasurer. [PX 434]

4 July 2000

54 Mr Goggi signs the financial statements and reports for GG Holdings to be lodged with ASIC. [McIntyre, tab 9]

55 The financial statements for GG Holdings and Gate Gourmet Services Pty Ltd were lodged with ASIC in July 2000. In light of the date of the commencement of the plaintiff’s operations, there was no requirement for it to lodge a separate financial statement at that time.

56 The directors’ report for GG Holdings noted that the net loss of the consolidated entity for the financial year, after income tax, was $2.161m, and that the company had a deficiency of assets over liabilities of $14.129m. Note 1 to the accounts recorded that the consolidated financial statements incorporated the assets and liabilities of all entities controlled by GG Holdings as at 31 December 1999 and the results of all controlled entities for the year then ended. It also noted that the financial statements have been prepared on a going concern basis on the assumption that the parent entity (GG Holdings) will continue to provide the necessary financial support to enable the company to pay its debts as and when they become due and payable, and not to call for repayment of the amounts owing to it until, and then only to the extent to which, sufficient funds are available. [Goggi, tab 7, page 6]

57 The Managing Director of the plaintiff and of GG Holdings, Mr McIntyre, certified that the accounts had been prepared in accordance with the Corporations Law and that there were reasonable grounds to believe that the company would be able to pay its debts as and when they become due and payable. [Goggi, tab 7, page 21]

August 2000

58 By 14 August 2000, GGA's 2001 budget was ready for circulation to Mr Engebretsen and Mr Larsen [PX 490], together with financial forecasts for 2000. The latter showed that in August 2000, GGA expected to make a total earnings before tax loss of $17.293 million [PX 495], being a loss of some $8.88 million greater than the budgeted loss of $8.405 million anticipated.

59 GGA, in its revenue forecast, expected to receive $80.091 million of its anticipated revenue of $103.076 million from Ansett in 2000 and $77.933 million of its anticipated revenue of $109.846 million from Ansett for 2001 [PX 496, 497].

22 August 2000

60 GGA board meeting where Mr Engebretsen directs that, as a result of the Australian companies' financial performance, all expenditure over $5,000 needs to be approved by him, that there is to be a freeze on the employment of all full time staff and that there are to be no new engagements of full time consultants. [PX p500-502]

September - November 2000

5 September 2000

61 Mr Engebretsen requests the regional divisions of the group in the Asia-Pacific region to study their financial performance and to come up with suggestions on how to reduce costs for the rest of the year 2000. [PX 561]

Budget for 2001 and business plans for 2001 - 2003

62 GGA prepares a budget for 2001 and business plans for the years 2001-2003, inclusive. A copy is provided to GG Holdings, and was presented to the Swiss parent at a conference in Zurich in September 2000.

63 Mr McIntyre gave evidence that it was Mr Larsen's practice to fly to Australia to commence the preparation of the budget. Mr McIntyre and Mr Steininger would then draw up a budget that would be approved by Mr Engebretsen and Mr Larsen before being presented to the Swiss parent in Zurich.

64 Mr Larsen [paragraphs 7 and 8] and Mr Engebretsen [paragraphs 8 and 9] gave evidence that they had little involvement in the day to day running of GGA and no involvement in the preparation of the statutory accounts.

Draw-downs as at 1 November 2000

65 As at 1 November 2000, the Australian group had drawn down $49 million on its existing banking facilities of $50 million with Westpac [a consolidation of the previous Westpac and Standard Chartered Bank facilities following a transfer of Standard Chartered Bank’s corporate business to Westpac - PX 693]. Mr Goggi sent Mr Rohrer an e-mail on that date commenting:

"After discussions with Serge Steininger, Finance and IT Directors for Gate Gourmet Australia in Australia, it has been estimated that the GG group in Australia will require a facility of AUD70M over the next year for both working capital as well as anticipated capital expenditure. During recent discussions with Westpac, they indicated that they would prefer to have the one facility (rather than the current two) [being facilities for each of Gate Gourmet and Nuance]. " [emphasis added]

66 Further e-mails were exchanged between Westpac and GGA on 20 November 2000 which clarified [PX 705A] that Gate Gourmet/SAir Relation was requesting, on behalf of its subsidiaries:

· a loan facility for the group of $70 million with an overdraft of $10 million, of which $60 million would be used by GGA and $20 million by Gate Gourmet Services Pty Ltd ;

· a loan facility of $10 million for the Nuance group with an overdraft of $3 million.

67 Accordingly, the net effect of the Westpac facility was to provide only additional 'new' cash of $10 million for the 2001 year for GGA, since $50 million had already been drawn down [PX 692, e-mail 3 November 2001 from Mr Goggi].

68 The table below sets out the additional draw-downs made on that facility during the course of 2000-2001, according to the directors' questionnaires (PX 2074, 2097 and 2108):

Date	Amount	Total
15 December 2000	$3 million	$3 million
15 January 2001	$2 million	$5 million
28 February 2001	$1 million	$6 million
30 March 2001	$3 million	$9 million
30 April 2001	$2 million	$11 million
8 May 2001	$3 million	$14 million
3 September 2001	$2 million	$16 million

GGA’s 2001 budget

69 In September 2000, Mr McIntyre presented GGA's 2001 budget to head office in Zurich [PX 507], having first obtained approval from Mr Engebretsen and Mr Larsen [P6, paragraph 8]. The very first page of the budget (PX 507) records:

"Gate Gourmet Australia came into being through the acquisition of Cathay Pacific and Ansett Kitchens in Australia. Both businesses were in poor shape in terms of being capital starved for many years, poor human resources in terms of skill and the Ansett kitchens were notable for their hostile industrial environments.

This Business Plan is the first to be based on a view of the business from those in the country, and to attempt to make sense of the key financial assumptions made during the acquisition. The resolution of the Ansett base year pricing (late 2000) is necessary in order to reach any firm conclusions regarding financial performance and forecasting." [emphasis added]

70 The management summary noted that the performance for 2000 was nearly 100% worse than budget and that GGA would still be making a loss into 2003 [PX 507]. In addition, I accept as correct the plaintiff’s submissions that:

· the comments in the introductory section were a further red flag to Zurich that the Base Year Contract had been agreed against a set of financial assumptions that were proving hard, if not impossible, to reconcile with the reality of the business being faced by those on the ground;

· one of the difficulties was the lack of investment and capital in the business they had acquired [a position being exacerbated by Mr Engebretsen's freeze of only 2 weeks earlier on capital investments over $5000];

· Ansett was undergoing turbulent changes and that "the resolution of the base year contract is potentially threatened unless Air New Zealand understand and stick to AN's obligations" (PX1 514).

71 These and other issues were repeatedly emphasised throughout the 2001 budget [see, for example: "Main Focus for 2001" at PX 508; "the First 11 months" at PX 511; "Head office costs" at PX 512; the " loss reconciliation" provided at PX 519; " Business Risk and Opportunity Management" at PX 531]. In addition, at PX 533, GGA attempted to analyse the impact of some of these difficulties on the 2001 forecast, including a provision for a $10 million loss if Ansett did not honour the Base Year Contract.

72 On 8 September 2000, Mr Roos sent an e-mail to Mr Larsen and Mr Engebretsen which stated [PX 563]:

" Henning and I had discussed your proposal and would like you to focus on the following issue when preparing for the meeting on 15 Sept:

Turnaround Australia: One key question is why it is so hard to return to a profitable operation. Do we have a problem with the Ansett pricing formula, is it more an efficiency problem (incl. new overhead) or did our assumptions during the due diligence completely fail?"

73 As the plaintiff contends, the presentation given by Mr McIntyre on 15 September 2000 in Zurich [PX 564] pulled no punches in responding to these enquiries [see, for example, PX 565, 566, 568, 570, 573, 592, 595]. [A copy of that presentation contains additional pages identifying $13.055 million of costs not included in the 2000 budget that GGA's management had identified as missing from the Base Year Contract [PX 609, 610, 618, 638, 682].

In principle approval of budget

74 The budget was approved, in principle, on 9 November 2000 [PX 701]. The plaintiff contends, and I accept, that in the light of the warnings of large losses, emanating from the budget presentation given to Zurich on 15 September 2000, above and beyond those budgeted for, which included:

· a possible loss of $10 million arising from the Base Year Contract [PX 533] ;

· the fact that the acquisition assumption in relation to Ansett was ill-founded and that there was approximately $13.055 million in costs that had not been accounted for [PX 609];

· there was a desperate need for tangible and intangible investment into GGA's infrastructure and management [PX 567, 631]; and

· Ansett, GGA's main customer, was in a considerable state of flux [PX 514],

it must have been apparent to all concerned that the budget was a document subject to large variations and which did not represent anything more than a "best endeavours" attempt to identify the cash flow requirements of GGA in the short term.

75 The plaintiff contends, and I accept, that coupled with this realisation, Zurich must have understood that there was a real and palpable risk that significant funds, in addition to the Westpac facility, would be required from Zurich during the course of 2001 and that GGA would be relying fully on financial support from its parent to meet its debts as and when they fell due. The known inaccuracies inherent in GGA's budget made the need for parental support a greater reality and make the perception of the need for a legally binding commitment for such support from GGA's directors more credible.

27 November 2000

76 At a GGA board meeting, Mr Engebretsen confirms that the freeze on capital expenditure, consultants and permanent staff is to continue. [PX1 p708-709]

4 December 2000

77 The Swiss parent informs Westpac that they are not in a position to obtain an S Air Relations guarantee, although sometimes a letter of comfort is issued by the Swiss parent. Due to the relatively weak balance sheet of the group in Australia, the Swiss parent is willing to grant a guarantee instead of a letter of comfort, as requested. [McIntyre, paragraph 17 and PX1 p716-721]

8 December 2000 - $70 million bill acceptance and discount facility

78 A bill acceptance and discount facility in an amount of $70 million is offered by Westpac to GGA and Gate Gourmet Services Pty Ltd, which is accepted on 13 December 2000 and replaces both of the previous facilities offered by Standard Chartered Bank and Westpac. The facility is to be secured by guarantees and cross-guarantees. Cross-guarantees were to be provided by each of the plaintiff, GG Holdings, Gate Gourmet Services Pty Ltd and Gate Gourmet Property Pty Limited, and a guarantee was to be provided by the Swiss parent. [Goggi, paragraph 20 and tabs 10-13; McIntyre, paragraph 16 and tabs 10-14] [Exhibit P1, paragraph 20 and PX p706-707, 724-746, 747-764, 768-769; Exhibit P5, paragraph 16 and PX p706-707, 724-746, 747-764, 768-769, 711-714]

79 The terms and conditions of the facility, and the guarantee and indemnity, were accepted on behalf of the Australian companies by Mr McIntyre and Mr Goggi. Mr Steininger witnessed that acceptance. [McIntyre, tab 11]

13 December 2000

80 The Swiss parent provides a guarantee to Westpac which guarantees the obligation of GG Holdings and each of its wholly owned subsidiaries to a limit of $70 million. [McIntyre, paragraph 18 and tab 16; Goggi, paragraph 20 and tab 13] [Exhibit P5, paragraph 18 and PX p767-769; Exhibit P1, paragraph 20 and PX p768 - 769]

81 It is clear from the evidence that the negotiations with Westpac were handled on the Swiss parent’s behalf by the Vice-President Finance of Gate Gourmet International AG, Mr Nielsen. The guarantee was signed on behalf of the Swiss parent by the fifth defendant, Mr Boysen and the Executive Vice-President, Mr Dankelman.

7 February 2001 – sample letter of support

82 Ms Gloria Yuen (PWC) e-mails a sample letter of support from GG International AG, noting that the format of the letter is the same as the letter PWC obtained last year. Ms Yuen requests that the letter be signed and returned to PWC. [Goggi, paragraphs 22 - 3 and tabs 14 - 15] [Exhibit P1, paragraphs 22 - 23 and PX p806 and 807]

8 February 2001

83 Mr Goggi forwards Ms Yuen’s e-mail of 7 February 2001 to Mr Nielsen, and copies his e-mail to Mr Larsen. [Goggi, paragraph 24 and tabs 14 – 15; Larsen, paragraph 10] [Exhibit P1, paragraph 24 and PX p806 and 807; Exhibit D3, paragraph 10]

14 February 2001

84 Mr Nielsen e-mails Mr Goggi informing him that they wish to address the second letter of support to PWC, and requests Mr Goggi’s response. He attaches an amended version of the second letter of support and asks Mr Goggi to confirm that the address he has inserted for PWC is correct. In addition, Mr Nielsen deletes the word " guarantee" from the body of the letter and replaces it with the words " letter of support". [Goggi, paragraph 25 and tab 16 (e-mail); Goggi in reply, paragraph 17] [Exhibit P1, paragraph 25 and PX p822; Exhibit P2, paragraph 17]

85 Mr Goggi replies to Mr Nielsen informing him that the letter should be addressed to the directors of GG Holdings. Mr Goggi attaches a further draft of the letter, in which the addressee has been changed from PWC to the directors of GG Holdings. Mr Goggi says that he did not notice the other changes that Mr Nielsen had made to the text of the letter. [Goggi, paragraph 26 and tabs 16 & 17; Goggi in reply, paragraph 17] [Exhibit P1, paragraph 26 and PX1 p824 and 824a; Exhibit P2, paragraph 17]

15 February 2001

86 Mr Nielsen sends a further e-mail to Mr Goggi asking: "Why not PWC? I assume they are the one requesting the Support Letter in order for them to sign off on the Australian trading company financial statements as of 31 December 2000. I think this is the normal way to do it. Please get back to me". [Goggi, paragraph 27 and tab 18] [Exhibit P1, paragraph 27 and PX1 p830 - 831]

16 February 2001

87 Mr Goggi sends an e-mail to Mr Nielsen (copied to Mr Larsen) saying:

" NO !!!

The guarantee needs to be provided to the Directors of the company so that they can carry on the business within Australian statutory legislation.

PWC only require proof (copy) that a "Letter of comfort” exists."

Mr Larsen says that after receiving this e-mail, he heard nothing more in relation to the matter. [Goggi, paragraphs 28-30 and tab 18; Larsen, paragraph 10]

88 Mr Nielsen responds: “Fine, I will get the Letter signed”. [Goggi, tab 19]

89 Mr Goggi gave evidence, which is accepted as reliable, that if it had been suggested to him that the Swiss parent did not intend to provide financial assistance to GGA or that the officers of the Swiss parent considered that they were under no obligation to honour the terms of the Letter, he would have been extremely alarmed by this suggestion as GGA would have been trading whilst insolvent. Also, he did not view the provision of the Letter as merely a procedural exercise to permit PWC to sign-off on GGA’s statutory accounts. [Exhibit P1]

90 Mr McIntyre gave evidence, which is accepted as reliable, that he was never told by any of the officers of the Swiss parent that they did not consider themselves bound by the Letter. His evidence was that, if he had been aware that the Swiss parent did not intent to honour the Letter, he would have called a board meeting of GGA to discuss the matter with Mr Engebretsen and Mr Larsen and would have placed the company in to voluntary administration. [Exhibit P6 paragraphs 17 and 16]

Second letter of support

91 The Letter is signed by Mr Boysen and Mr Grolimund. It reads:

“GATE GOURMET (letterhead)

The Directors Gate Gourmet Holdings Pty Limited	Gate Gourmet Holdings AG QVF
263-273 King Street Mascot NSW 2020	Flughofstrasse 54 CH-8058 Zurich Airport
Australia	Phone: + 41 1 812 42 20 Fax: + 41 1 812 91 23
	[e-mail]

16 February 2001

Letter of Support

This is to confirm that the parent entity, Gate Gourmet Holding AG, will provide the financial support that may be necessary to enable Gate Gourmet Holdings Pty Ltd and its controlled entities to meet its financial commitments as and when they fall due.

This Letter of Support will not be withdrawn before Gate Gourmet Holdings Pty Ltd and its controlled entities have sufficient means to meet their obligations without the support of the parent entity.

Gate Gourmet Holding AG

[signed]	[signed]
Henning Boysen	Lucas Grolimund
President & CEO	Executive Vice President & CFO

an SAirRelations Company.”

19 February 2001

92 Mr Nielsen informs Mr Goggi that the Letter has been signed and sent by mail. On 20 February 2001, Mr Goggi requests that it be sent by fax “so PWC can sign off”. [Goggi, paragraph 31 and tab 19] [Exhibit P1, paragraph 31 and PX p835 - 836]

93 Following a request from Mr Larsen on 19 February 2001 [PX 834], GGA began in 2001 to provide "flash" financial reports to Zurich and Bangkok. In addition, Mr Goggi gave evidence that he provided monthly profit and loss accounts and monthly balance sheets to Mr Larsen, Mr Engebretsen and Zurich [P2, paragraph 4].

21 - 23 February 2001 – McIntyre tells Boysen of his concern about Ansett’s survival

94 Mr McIntyre attends the annual conference of the International Flight Catering Association in Barcelona. Mr McIntyre tells Mr Boysen that he is concerned about Ansett’s survival, and that the Swiss parent should seek to sell GGA or seek to merge the business with Qantas Flight Catering Limited. Mr Boysen agrees and indicates that he will travel to Australia to talk to Qantas. [McIntyre, paragraphs 25 and 26]

22 February 2001

95 Mr Nielsen faxes Mr Goggi a copy of the Letter. [Goggi, paragraph 31 and tab 20]

23 February 2001

96 Mr Goggi sends the Letter to PWC. [Goggi, paragraph 32 and tab 20]

27 February 2001

97 A GGA board meeting is held in Bangkok and attended by Mr McIntyre, Mr Engebretsen and Mr Larsen. The minutes record a resolution that Mr McIntyre sign the financial statements and the directors' declaration. [PX1 p839 - 840]

21 March 2001

98 Mr Goggi sends an e-mail to Mr Engebretsen, Mr Larsen and Mr McIntyre stating that the statutory accounts are nearly ready for signing. [Goggi, paragraph 33 and tabs 21-2]

End of first quarter – dramatic weakening of Ansett in domestic market

99 By the end of the first quarter, Mr McIntyre was pointing up the fact that GGA was struggling to meet its budget, due in part to a dramatic weakening of Ansett in the domestic market (PX1 889).

April 2001 - September 2001

100 In the period between April 2001 and September 2001 the plaintiff continued to trade. The evidence establishes that the plaintiff’s main source of income continued to be the Base Year Contract, but that the plaintiff continued to trade at a loss.

2 April 2001 - signing of GGA’s accounts

101 Mr McIntyre signs GGA's statutory accounts for the financial year ended 31 December 2000. Mr McIntyre states that he relied upon the Letter in doing so. GGA's financial reports record that the net loss for the 16-month period from 2 September 1999 to 31 December 2000 was $16.53 million (page 1). The balance sheet records total assets of $70.076 million and total liabilities of $86.606 million. Note 1 to the accounts records that "the financial statements have been prepared on a going concern basis on the assumption that the related entities will continue to provide the necessary financial support to enable the company to pay its debts as and when they become due and payable, and not to call for repayment of the amounts owing to it until, and then only to the extent to which, sufficient funds are available" (page 7). The directors declare that there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable (p 16). [Goggi, paragraph 34 and tab 23; McIntyre, paragraphs 21 - 22 and tab 19]

Directors’ declaration signed

102 Mr McIntyre signs the directors’ declaration to the consolidated accounts of GG Holdings, which records that the financial statements have been prepared on a going concern basis on the assumption that the parent entity will continue to provide the necessary financial support to enable the company to pay its debts as and when they become due and payable, and not to call for repayment of the amounts owing to it until, and then only to the extent to which, sufficient funds are available. [McIntyre, paragraph 24 and tab 20]

April 2001

103 Meeting between Qantas representatives (including the Chief Executive Officer, Mr Dixon), Mr Boysen and Mr McIntyre in which the creation of a joint-venture between Gate Gourmet and Qantas is discussed. [McIntyre, paragraphs 27 - 28]

104 By 17 April 2001, Ansett's position had deteriorated to the extent that Mr McIntyre thought it necessary to seek formal advice from Baker & McKenzie in relation to GGA's position should Ansett either be restructured, sold in whole or in part or cease operations [PX1 957].

105 On 27 April 2001, Mr Larsen sent a memorandum to Mr Steininger, copied to Mr McIntyre and Mr Engebretsen [PX1 1031] commenting on the poor operating results which commented:

"If this trend continues we could face a year end deviation of TAUD 10.113 on these costs alone compared to forecast pr. March that was sent to Zurich."

1 May 2001 – Westpac facility nearly fully drawn

106 GGA's continuing losses impacted on its Westpac facility and by 1 May 2001, the $70 million facility was nearly fully drawn. On that date, Mr Goggi sent an e-mail to Mr Nielsen, copied to Mr Larsen and Mr Steininger [PX1 1088], commenting that the facility was drawn to $64 million and that it was clear "that the AUD70M Bills Facility will not be adequate”.

107 Mr Nielsen responded to Mr Goggi in relation to the Westpac facility, enquiring how much additional funding was required and for what purpose. [Goggi, paragraph 35 and tabs 24 - 5] [PX 1087]

108 Mr Goggi answered this request on 2 May 2001 [PX1 1115] as follows:

"Additional requirements are:

AUD 2.0M Ansett Guarantee due 1 July 2001 (Actual)
AUD 2.5 M Completion of the Perth unit refurbishment (Estimate)
AUD 3.5M Settlement of 1999/2000 Management Fees to Zurich(Actual)
AUD 3.0M Settlement of 2001 Management Fees to Zurich (Estimate)
AUD 2.0M Purchase of 4 Hilift Trucks (Estimate)
AUD 7.0M Working capital (Estimate including Ansett's Base Year retrospective payments)
AUD 20.0M TOTAL

Please note that this additional requirement estimated at 20.0M depends largely on Ansett making their payments on time" [emphasis added].

109 On 1 May 2001, Mr Steininger sent a memorandum to Mr Larsen, copied to Mr McIntyre and Mr Engebretsen, responding to his queries about GGA's performance for March 2001 [PX 1095]. The memorandum commented:

"I fully appreciate your concerns about the year-end forecast compared to year-end budget however, at this point in time, extending 3 months results to the full year does not result in a realistic forecast due to the uncertainty of the Ansett Base Year negotiations and present market volatility. During Henning's visit, he agreed it was ineffective to compare our performance with that of traditional methods until base year is resolved. It is very difficult to analyse deviation in % or $ when we do not know the top line. Henning understood this fully."

110 Mr Goggi e-mails Mr Nielsen stating that the reason why he sent advance notice of the current financial position of the Australian group was that it is his responsibility/obligation to ensure that they remain liquid. Mr Goggi notes that additional funding of $20 million is required, although that figure depends largely on Ansett making their payments on time. [Goggi, paragraph 36 and tab 26] Those e-mails were copied to Mr Grolimund, Mr Larsen and Mr Steininger.

12 May 2001 - Nielsen reviews annual reports

111 Mr Nielsen reviews the annual reports for the Australian companies for the year ended 31 December 2000 and sends an e-mail to Mr Steininger and Mr Grolimund seeking answers to various questions. [PX1 p1144 - 1145]

14 May 2001

112 Mr Steininger forwards Mr Goggi an e-mail from Mr Nielsen which notes that certain companies within the Australian group had negative equity in 1999 and in 2000, and asks if they are legally allowed to continue having a negative equity. [Goggi, paragraph 37 and tab 27]


Nielsen is reminded of letter of support

113 Mr Goggi responds by e-mail to Mr Steininger and Mr Nielsen noting that:

“One of the requirements at the end of the financial year is the “Letter of Support” which is provided by Gate Gourmet Holdings Pty Limited (sic) to the directors of Gate Gourmet Holdings Pty Limited in Australia. This certifies that GGH AG “will provide the financial support...”. On this basis business can carry on as normal notwithstanding any thin capitalisation rules.” [Goggi, paragraph 38 and tab 27]

May 2001 – Westpac’s nervousness

114 Mr McIntyre states that Westpac begins to get nervous about its exposure to the SwissAir group (the ultimate parent of the group) where it was a lender as part of a syndicated US$500,000,000 multi-currency revolving facility. [McIntyre, paragraph 31 and tabs 24 - 5]

115 In late May, SwissAir's internal auditors visited Australia. Following that visit, Mr Larsen prepared a memorandum to Mr Grolimund, copied to Mr Engebretsen, Mr McIntyre and Mr Steininger commenting on their report [PX1 1190]. At PX1 1192, Mr Larsen commented that there had been " a lot of turmoil in the Australian airline market the last 12 months and can expect more the next 6-12 months also".

14 June 2001

116 Westpac writes to the Chief Financial Officer of the SwissAir group, Mr Schroderet, noting that GGA’s operations are under-capitalised and that Westpac is not prepared to fund the ongoing operating losses of GGA and thus will not extend GGA's facilities beyond the 15 December 2001 maturity date. Westpac requires a $50 million capital injection, the granting of a fixed and floating charge, for the Australian entities to agree not to remit funds to any SwissAir group company without Westpac’s prior written consent and the continuation of the existing guarantee from the Swiss parent. [McIntyre, paragraph 32 and tab 2]

22 - 23 June 2001

117 Mr Larsen travels to Australia to begin the process of preparing GGA's budget for 2002 - 2003. [McIntyre in reply, paragraph 8]

2 July 2001

118 Meeting between Mr Shearman, Mr Parker and Mr Morgan of Westpac and Mr McIntyre and Mr Steininger. Mr McIntyre subsequently e-mails Mr Boysen, Mr Grolimund, Mr Nielsen, Mr Engebretsen and Mr Larsen informing them that Westpac are satisfied that GGA is in technical breach of the facility, and that the situation needs urgent action. [McIntyre, paragraph 34 and tab 27]

4/5 July 2001

119 Mr McIntyre retains Mr Kershaw [KPMG] to assist in the proposed capital injection into GGA required by Westpac and to assist in negotiations. [McIntyre in reply, paragraphs 22 and 23, tabs 27 and 28]

5 July 2001

120 Mr McIntyre e-mails Baker & McKenzie seeking advice about the appointment of an administrator. Mr McIntyre states that the purpose of his e-mail was to seek an understanding of the legal ramifications if the Swiss parent chose not to support GGA, either by reducing the facility or not standing by the Letter and his obligations as the sole Australian director. [McIntyre, paragraph 37 and tab 30]

6 July 2001

121 Mr McIntyre e-mails Mr Boysen, Mr Grolimund, Mr Engebretsen and Mr Larsen updating them on the position with Westpac and attaching the advice he has received from Baker & McKenzie setting out directors’ responsibilities. [McIntyre, paragraph 38 and tab 31]

19 July 2001

122 On 19 July 2001, Mr McIntyre prepared a discussion document for GGA [PX1 1235]. Under “main findings” he commented:

"We are achieving results that are close to what can be expected, but this will not cover the "structural" costs of the Ansett contract. The GG Australia Group has structural costs arising from the Ansett deal of approximately $15.8 million of total Ansett revenue. This can only be saved through efficiencies to get the Ansett business to break-even...

Capital investment has not happened, making further efficiency savings difficult to achieve. The savings anticipated in the "Project Taz" proposal and AN due diligence (refer Section 4.3) are based on a significant capital expenditure programmed of $33m on Scenario 1 and $23m on Scenario 2."

123 Mr McIntyre e-mailed this document to Mr Larsen, Mr Engebretsen, Mr Boysen, Mr Grolimund and Mr Nielsen.

31 July 2001 – Ansett sent invoice of $15.534 million

124 GGA sends an invoice to Ansett in the amount of $15.534 million, which comprised a billing shortfall under the Base Year Contract of $12.477 million and an estimated claim for accounts receivable of $3.057 million.
[McIntyre, paragraph 29]

13 August 2001 – Ansett offer of $8 million rejected

125 Mr McIntyre writes to Ansett rejecting an offer of $8 million that Ansett had made towards GGA’s outstanding invoices. [McIntyre, paragraph 30 and tab 21]

17 August 2001 - variation proposed by Westpac to the $70m facility, which required a reduction in the commitment from $70m to $35m by 22 August 2001

126 Mr McIntyre and Mr Goggi sign an amended facility agreement with Westpac, which includes an acknowledgement that GGA is solvent. Mr McIntyre gave evidence, which is accepted as reliable, that in signing this acknowledgement he had in mind that the Swiss parent had agreed to pay a substantial sum to reduce the facility and that the Letter was in place [paragraph 40]. Mr Goggi gave evidence, which is accepted as reliable, that he would not have signed the declaration of solvency had he known that the Swiss parent did not intend to continue to provide financial support. [McIntyre, paragraph 40 and tab 33; Goggi in reply, paragraph 16]

August 2001

127 Mr McIntyre gives a power point presentation in Perth at a meeting attended by Mr Engebretsen and Mr Larsen, which includes an adjusted forecast loss for GGA for 2001 of $16.505 million, a $9.5 million variance from GGA's budget. Mr McIntyre set out a budgeted loss of $14.551 million for GGA for 2002 [PX 1413] and emphasised yet again that the Base Year Contract was extremely difficult to make profitable due to $15 million in unaccounted for costs [PX 1411] [McIntyre in reply, paragraph 14 and tab 22]

22 August 2001

128 On 22 August 2001, a further $15 million was provided by the Swiss parent to GGA [PX8]. It is unclear whether this amount was provided by additional draw-down on the subordinated loan. The Swiss parent has only submitted a proof of debt for $25 million in respect of the subordinated loan.

31 August 2001 – plaintiff’s financial position - $19.559 million deficiency

129 The financial position of the plaintiff as at 31 August 2001 is summarised in a table [PX 5/844 - 5], which records that the plaintiff’s deficiency of assets over liabilities was $19.559 million, up from $19.036 million as at February 2001; its debtors were $24.171 million, up from $12.704 million in February 2001; and its liability for employee entitlements was $7.858 million, up from $7.276 million in February 2001.

January to August 2001 – monthly profit and loss reports – losses against budget

130 The monthly profit and loss reports, which were provided to Bangkok and to Zurich, reveal the following losses by GGA against budget in the period January to August 2001:

Month	Actual Loss (EBT) '000	Budgeted Loss (EBT) '000	Variance	PX1 ref	Cumulative loss '000
January 2001	($1.428)	($1.327)	($101)	770	($1.428)
February 2001	($1.647)	($1.111)	($536)	892	($3.075)
March 2001	($382)	($997)	$615	854	($3.457)
April 2001	($1.889)	($819)	($1.070)	927	($5.346)
May 2001	($1.411)	($868)	($543)	1034	($6.757)
June 2001	$4.463	($444)	$4.019	1175	($2.294)
July 2001	($1.196)	($402)	($794)	1206	($3.490)
August 2001	($2.171)	($457)	($1.714)	1368	($5.661)

Figures not indicative of cash flow

131 As the plaintiff points out, in cross-examination, Mr Goggi explained that the figures set out above included "a substantial provision which was started in January 2001 to allow for the anticipated additional sales to Ansett for the base year pricing and that is why the results look so good. It was no indication of cash flow” [transcript, page 75, line 15] [emphasis added]. Hence, the losses being experienced by GGA, pending receipt of payment by Ansett, were much worse that those contained in those profit and loss statements, a state of affairs that was known both to GGA and Zurich by reason of the commentaries provided with the statements [transcript, page 75, line 13].

11 September 2001

132 There is no need to chronicle the 9/11 events which did, however, close down a large part of the group’s operation in Europe and North America for about a week [transcript 161]. Ansett’s demise cannot be sheeted home to those events.

12 September 2001 – Ansett placed into voluntary administration

133 Ansett is placed into voluntary administration. Mr McIntyre seeks advice from Baker & McKenzie in relation to GGA’s legal position should Ansett go into receivership or liquidation. Ms Cox of Baker & McKenzie sends Mr McIntyre two e-mails, the first of which says:

"The attached document sets out precisely what you need to ask Zurich for. If you do not get the confirmation then you should seriously consider the administration procedure"

The attachment states:

"The directors of Gate Gourmet Australia Pty Limited ("GGA") seek confirmation that:

1. Gate Gourmet Holding will continue to provide sufficient financial support to GGA to ensure that it will be in a position to pay its debts as and when they fall due; and

2. Gate Gourmet Holding AG will not withdraw such financial support without first giving GGA 30 days written notice of its intention to withdraw such support"

134 Mr McIntyre telephones one of Ansett’s administrators and is informed that no guarantee of payment can be given.

135 Mr McIntyre then telephones Mr Boysen. Mr McIntyre’s evidence on the conversation is accepted as reliable. He updates Mr Boysen on the Ansett situation, and then informs him that he does not think there is any chance of getting any money under the Base Year Contract, which means GGA is in real trouble. Mr McIntyre informs Mr Boysen that he is not prepared to let GGA trade on unless Westpac is paid off and Mr Boysen confirms that he is prepared to stand by the Letter and support GGA financially going forward until it can support itself. Mr Boysen tells Mr McIntyre that they can pay off Westpac but the Swiss parent does not have the money for anything else. Mr McIntyre tells Mr Boysen that he has no choice but to call a board meeting and to recommend that a voluntary administrator is appointed to GGA. [McIntyre, paragraph 48]

136 Mr McIntyre subsequently telephoned Mr Engebretsen and informed him that he would be calling a board meeting on the next day.

13 September 2001

137 Mr Engebretsen gave evidence that he spoke to Mr Boysen by telephone when he asked whether the necessary funding was available to allow GGA to continue to trade. Mr Engebretsen says that Mr Boysen said that the Swiss parent did not have the requisite funds and that he (Mr Engebretsen) should do whatever he thought was right. [Exhibit D2, paragraph 13]

138 A meeting took place in Mr McIntyre’s office between Mr McIntyre, Mr Goggi, Mr Michael Smyth, (Baker & McKenzie), Mr Steininger and possibly also Mr Bishop (GGA’s general commercial manager). Mr McIntyre informs the meeting that Mr Boysen has told him that the Swiss parent will pay out Westpac but there is no money for anyone else. Mr McIntyre notes that he is attempting to contact the Ansett administrator, but that if he does not hear from them by midday he will call a board meeting with Mr Engebretsen and Mr Larsen to see what they are going to do. [Goggi, paragraphs 41-2; McIntyre, paragraph 50]

139 Telephone conference between Mr McIntyre and Mr Goggi in Sydney and Mr Engebretsen and Mr Larsen in Bangkok. Mr Goggi states that Mr McIntyre informed the meeting that Mr Boysen had told him that the Swiss parent would pay Westpac but no one else, and that they had no choice but to place GGA into voluntary administration. Mr McIntyre gave evidence by statement that he told the meeting that Mr Boysen had said that the Swiss parent would not stand by the Letter. Mr Engebretsen and Mr Larsen agree to place GGA into voluntary administration and Mr Sherman of Ferrier Hodgson is appointed administrator. [Goggi, paragraphs 43 - 4 and tab 29; McIntyre, paragraph 50]

140 Mr Engebretsen denies that Mr McIntyre referred to or mentioned the existence of a letter of support during the telephone calls on 13 September 2001, contrary to paragraph 50 of Mr McIntyre’s statement. Mr Engebretsen claims that at that time he was unaware of the existence of any letter of support. [Mr Engebretsen claims he only became aware of the existence of the Letter when he received the Ferrier Hodgson questionnaire from Mr McIntyre, which he eventually signed on 5 October 2001]. Mr Larsen also denies that Mr McIntyre referred to the existence of any letter of support during the telephone calls on 13 September 2001. [Engebretsen, paragraphs 16 & 18; Larsen, paragraph 15]

141 Mr McIntyre had said in his statement in reply that he is sure that he mentioned the Letter either during this meeting or during his earlier telephone call with Mr Engebretsen. [McIntyre in reply, paragraph 18].

142 Mr McIntyre had said in his statement in reply that shortly after GGA was placed into voluntary administration, he asked Mr Goggi to provide a copy of the Letter to Mr Engebretsen and Mr Larsen [McIntyre in reply, paragraph 20] and that his reason for doing so was that he realised the relevance of the Letter to any questions Mr Sherman might have about why GGA had been allowed to trade [paragraph 21].

143 Mr Goggi recalls Mr McIntyre asking him to provide Mr Engebretsen and Mr Larsen with a copy [Goggi in reply, paragraphs 6 and 9] either by fax, or in person, when Mr Engebretsen and Mr Larsen travelled to Australia shortly after GGA was placed into voluntary administration.

144 Specific findings in relation to this meeting and to the earlier conversation[s] between Mr McIntyre and Mr Engebretsen are given below.

20 September 2001

145 Westpac lodges a proof of debt in the amount of $35.135 million, but notes that the Swiss parent has remitted an amount of $35 million which is being held in a suspense account pending clarification of the terms on which the payment has been made. Proof of debt withdrawn by Westpac on 13 November 2001. [Sherman, paragraph 9 and tabs 11-12]

146 The Swiss parent lodges a proof of debt with the administrator of GGA in a total amount of $58 million. Gate Gourmet IP AG lodges a proof of debt in the total amount of $3.719 million. Gate Gourmet Services Pty Limited lodges a proof of debt in the total amount of $334,592.87. [Sherman, paragraph 16 and tab 17 - 19]

5 October 2001

147 Mr Engebretsen and Mr Larsen complete and sign a Ferrier Hodgson directors' questionnaire. Both state that the questionnaire had already been completed (in part) on receipt by them. Mr Engebretsen says that this is the first time he became aware of the existence of the Letter. Mr Larsen says this is the first time he became aware of a signed letter of support. [Sherman, tab 2; Engebretsen, paragraphs 17 and 18; Larsen, paragraphs 18 - 19]

7 November 2001

148 Clayton Utz write to Baker & McKenzie requesting formal confirmation that the Swiss parent will honour its obligations pursuant to the Letter. [Sherman, paragraph 6 and tab 8]

13 November 2001

149 Baker & McKenzie reply to Clayton Utz and deny that any binding obligations arise out of the Letter. [Sherman, paragraph 7 and tab 9]

15 November 2001

150 GGA is placed into liquidation with Mr Sherman as the liquidator. [Sherman, paragraph 8 and tab 10 ]

19 November 2001

151 Report as to affairs lodged with ASIC. [Sherman, paragraph 11 and tab 13]

10 December 2001

152 Mr Sherman writes to Mr Engebretsen and Mr Larsen requesting that they take steps to enforce the Letter. In accordance with advice received from Baker & McKenzie, Mr Engebretsen and Mr Larsen do not respond. [Engebretsen, paragraph 19; Larsen, paragraph 20 and annexure B]

14 December 2001

153 These proceedings commenced.

Plaintiff’s financial position on liquidation

154 The financial position of the plaintiff on liquidation is dealt with in the liquidator’s statement in these proceedings. Its debts amount to approximately $97 million, of which general unsecured creditors amount to $75 million, including employee statutory entitlements of $23 million [Sherman, paras 12 and 13]. In the Report as to Affairs filed with ASIC in November 2001, Mr Sherman disclosed that there were some hundreds of employees with an unsatisfied entitlement to severance benefits [Sherman, tab 13] and also that approximately $30 million of the plaintiff’s assets, namely, its debtors, related to companies associated with Ansett, which was at that time in administration. Although the plaintiff has lodged a proof of debt in the administration of Ansett, it is unlikely that any dividend will be paid to it.

Evidentiary conflicts

155 It is convenient to next give findings where necessary insofar as particular evidentiary conflicts require resolution.

156 One may commence with the evidence given by Mr McIntyre. The Court accepts that he carried out his best endeavours to accurately recall what he now believes then occurred. In some instances his evidence was departed from during cross-examination or seems to be reflective of improbabilities. But that is not for a moment to suggest that his evidence was unreliable in relation to other matters. It is necessary in dealing with his evidence to look closely at the contemporaneous documentation, where relevant, and to compare his evidence to the evidence given by those who may have contradicted it. It is also necessary to take into account the whole of his cross-examination and any concessions or uncertainties which it revealed.

157 I accept as reliable the entirety of the evidence given by Mr McIntyre in each of his statements:

· where dealing with his reliance upon the Letter in signing the directors’ declaration, which to his mind, operated as a fully enforceable inter-company guarantee;

· that if he had been aware that the Swiss parent did not intend to honour that guarantee, he would not have signed the declaration under any circumstances;

· that he would not have signed the declaration had the Letter not been provided at all;

· that had he been aware that the Swiss parent did not intend to honour the Letter he would have considered that the Australian trading company was “trading insolvent” and would have called a board meeting to discuss the position with Mr Engebretsen and Mr Larsen and taken steps to appoint a voluntary administrator and would not have permitted the Australian trading company to continue to trade and incur liabilities.

158 These evidentiary findings take into account Mr McIntyre's evidence, under cross-examination, as to his state of mind as at July 2001. This evidence was that he made the assumption that the Letter was in place, it being so obvious that “it went without saying”: these being the reasons why, albeit perhaps being ‘commercially naïve’, he did not put to the persons with whom he was dealing in Zurich, that the Swiss parent was contractually obliged to assist the Australian trading company.

159 These findings are corroborated by Mr McIntyre’s evidence that in signing the solvency acknowledgment [part of the 17 August 2001 amended Westpac facility agreement], he had in mind that the Letter was in place.

160 Nor does anything in the other conduct of Mr McIntyre following the signing of the Letter remove the basis for the above finding. His own understanding as to the form of any further support from the Swiss parent, in terms of formal facilities being negotiated and the like and then documented in a legally binding form, does not erode or displace or replace his sworn reliance [earlier referred to in this judgment] upon the Letter having been in place as foundational to his preparedness to sign the directors’ declaration and to permit the Australian trading company to continue to trade and to incur debts.

161 An area of difficulty for Mr McIntyre concerns the suggested internal inconsistencies as between his statements, his evidence-in-chief and his cross-examination on the topic of whether or not and if so when, and in what terms, he, on the evening of 12 September 2001, or the next day at a telephone board meeting [at which were present Mr Goggi, Mr Steininger, Mr Bishop, Mr Smyth, Mr Engebretsen and Mr Larsen, the last two participants by telephone from Bangkok] referred to the Letter. The matter runs as follows:

· in his first statement Mr McIntyre gave evidence that on hearing [on the evening of 12 September 2001] that Ansett was placed into voluntary administration and then speaking to one of the administrators, he telephoned Mr Boysen in Switzerland, the conversation being to the following effect:

Mr McIntyre: "Henning, Ansett has gone into administration. I have spoken to one of the administrators who says that it's chaos. He hasn't been able to locate any cash at all. His unconfirmed view is that the company has been stripped of assets. They want to try and fly a normal schedule but there is no guarantee of anything at this stage. He wants catering to continue but he can't guarantee to me that we will get paid. I think either Ansett is going to fold or it will end up a low-cost airline. I don't think there's any chance of us getting any money now under the base year contract, which we were relying upon to pay down the Westpac facility. So that means GGA is in real trouble. The banking situation is a problem and as far as I can see, it means we won't be able to pay our debts. I'm telling you as a director of GGA that I am not prepared to let GGA trade on unless you pay off Westpac and you confirm that you are prepared to stand by the letter of comfort and support us financially going forward until we can support ourselves."

Mr Boysen: "That is impossible. We can pay off Westpac but GG AG doesn't have the money for anything else.”

Mr McIntyre: "Surely GG AG has assets to borrow against and the ability to raise the money we need? Aren't you prepared to do that?"

Mr Boysen: "No."

Mr McIntyre: "If that's the position, I have no choice but to call a board meeting and to recommend that a voluntary administrator is appointed to GGA."

Mr Boysen: "You have to do what you have to do. It's up to you to make that decision.”
[emphasis added]

· he proceeded in his first statement to give evidence that following this conversation he telephoned Mr Engebretsen in Thailand, relaying his conversation with Mr Boysen and stating that he was going to call a board meeting on the following day. On his recollection, Mr Engebretsen had said that he would speak to Mr Boysen himself;

· Mr McIntyre further said in his first statement that during the board meeting telephone conference call he himself had said that Mr Boysen had said that the Swiss parent would not stand by the Letter;

· then in his second statement Mr McIntyre said that he was sure that he had made reference to the Letter either during his telephone call with Mr Engebretsen on the evening before the board meeting or at the board meeting itself;

· under cross-examination he said that he recalled clearly mentioning the Letter to Mr Engebretsen prior to the board meeting [when they had a conversation in which Mr Engebretsen had related to him the answer given by Mr Boysen to Mr Engebretsen which was more or less identical to the answer which Mr Boysen had given to Mr McIntyre];

· still under cross-examination, Mr McIntyre agreed with the proposition that he had not mentioned to the directors at the board meeting that he had consulted Baker & McKenzie about the Letter and he accepted that he at no time suggested to his fellow directors of the Australian trading company that they should take any steps to enforce the Letter.

He was asked and answered the following questions:

Q. “You didn't tell your fellow directors that the day before this meeting you had sought legal advice from Baker and McKenzie about the letter of support, nor of the advice that you were given?
A. The telephone conversation prior to the board meeting that I had had with Mr Engebretsen we discussed the letter of support and we had both received the same answer from Hennie Boysen, so basically that was as far as I was concerned we discussed that issue but no, I can't recall that.

Q. Is that a rather long way of agreeing with my suggestion that you didn't mention to your directors the fact that you had consulted Baker and McKenzie about the letter of support?
A. That's correct.”
[Transcript 137]

162 On the basis of such discrepancies/inconsistencies as these versions of events display, the defendants have put forward the proposition that Mr McIntyre’s evidence was unreliable, that his recollection was faulty and that the court could not be satisfied that the Letter was mentioned during the board meeting or in his conversation[s] with Mr Engebretsen. The matter is dealt with below.

163 It is convenient to return to the role of Mr Engebretsen and Mr Larsen. Mr McIntyre’s evidence that, prior to signing-off on annual financial accounts, he discussed them with Mr Larsen and Mr Engebretsen, who said that they approved that they be signed, is accepted as reliable [transcript 108].

164 The evidence of both Mr Engebretsen as well as Mr Larsen was that [subject only to the fact that Mr Larsen had been copied in on, but not consulted about, two e-mails in February 2001 (in which the possibility of the Letter was mooted)], the first which either of them knew in terms of a letter of support having been signed was when they saw reference to it in the directors questionnaires signed by them in October 2001, where the answer was in identical terms:

“Q. Did the auditors ever draw your attention to the company's financial position?
A. Yes.

Q. What action did you take following this?
A. A letter of comfort was put in place between Gate Holdings Pty Ltd and Gate Gourmet Holding AG."

165 In terms of the forensic approach taken by the cross-examiner, it is fair to say that:

· it was not put to Mr Engebretsen that Mr McIntyre had mentioned the Letter in the telephone conversation before the 13 September 2001 board meeting. Rather, it was positively put to Mr Engebretsen that the Letter was mentioned during the meeting [transcript 165.32]. Mr Engebretsen’s evidence was that Mr McIntyre had not referred to the Letter [transcript 165.32-43];

· insofar as the answers given by Mr Engebretsen and Mr Larsen to question 15 in the questionnaire may suggest that either of them was involved in the preparation of the Letter, such a suggestion is contrary to their evidence and to their denial of such involvement. The contrary was not put to them. No challenge was made to Mr Engebretsen’s or Mr Larsen’s evidence that the reference to the Letter in the questionnaire was already included when they received it from Mr McIntyre [Ex D-3 paragraph 18; Ex D-3(i) paragraph 19].

166 Ultimately, I find it difficult to accept that Mr McIntyre's credit is significantly undermined in the above circumstances. The matter was of far more moment in terms of the plaintiff’s cases against Mr Engebretsen and Mr Larsen which were settled on the last day of the hearing, for the reason that the whole of those cases would have had to fail if the evidence of these defendants that they had not seen the Letter had been accepted. In those circumstances it may well be unnecessary, as a matter of weight, for the Court to hand down a finding as to whether or not Mr McIntyre mentioned the Letter to Mr Engebretsen in the telephone conversation of the previous evening [as he seemed to recall whilst in the witness box] or as to whether, on the balance of probabilities, he only mentioned it during the telephone board meeting or whether he never mentioned it on either occasion. The issue of course involves the Court weighing the reliability of the evidence given by Mr Larsen and by Mr Engebretsen.

167 My own view is that in the circumstances of haste/extremis which obtained [on the day in question and on the previous evening], on the balance of probabilities the matter of the Letter is likely to have been mentioned in the conversation[s] with Mr Engebretsen and may or may not have been mentioned in the board meeting. The matter remains inchoate and is ultimately not finally determinative at all of the issues which still separate the plaintiff from the remaining defendants. However, I do not see that there is a Brown v Dunn point which can be taken because Mr McIntyre clearly, in his second statement [18], referred to having made reference to the Letter, either when discussing the position with Mr Engebretsen prior to the board meeting or at the meeting itself.

168 The simple fact is that Mr Larsen and Mr Engebretsen did sign to the questionnaire and although now disowning any intellectual input into the relevant answer, have some difficulty in that regard. Mr Larsen had been copied with the above-mentioned two e-mails in February 2001. I do not suggest that the present recollections of Mr Larsen and Mr Engebretsen are contrived or otherwise than their best now attempt to recall the position. But their recollections may easily be flawed. The matter is inchoate.

Evidentiary issues

169 A number of evidentiary admissibility issues arose and in a limited number of cases rulings were reserved, principally because of difficulties which concern the pressing of a number of disparate causes of action so that a particular conversation or document may be admissible on one but not on another of those causes of action. The parties accepted that the efficient course was to reserve those rulings and to permit the parties to address on these matters as part of final address.

The general principles

170 In Brambles Holdings Ltd v Bathurst City Council [2001] NSWCA 61; (2001) 53 NSWLR 153, Heydon JA set out succinctly the relevant conventional and accepted principles of the law of contract [at 164-165]:

“The first relevant principle of law is that pre-contractual conduct is only admissible on questions of construction if the contract is ambiguous and if the pre-contractual conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term: Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 347-352.

The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed: Howard Smith & Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68 at 77; Barrier Wharfs Ltd v W Scott Fell & Co Ltd [1908] HCA 88; (1908) 5 CLR 647 at 668, 669 and 672; B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 at 9149 and 9154-9156; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9255.

The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed. As explained by Priestley JA (Meagher JA agreeing) in Hide & Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 326-330, the status of the relevant High Court authorities is unclear: hence unless it is demonstrated that the later decisions of the Victorian Full Court and Court of Appeal against admissibility, Ryan v Textile Clothing & Footwear Union of Australia [1996] VicRp 67; [1996] 2 VR 235 and FAI Traders Insurance Co Ltd v Savoy Plaza Pty Ltd [1993] VicRp 76; [1993] 2 VR 343, are clearly wrong or they are overruled, they should be followed in New South Wales. No attempt was made to demonstrate that they are clearly wrong.

The fourth relevant principle is that the construction of a contract is an objective question for the court, and the subjective beliefs of the parties are generally irrelevant in the absence of any argument that a decree of rectification should be ordered or an estoppel by convention found.”

171 Barrier Wharfs Ltd v W Scott Fell & Co Ltd [1908] HCA 88; (1908) 5 CLR 647; Howard Smith & Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68; Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548-549; Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551; Anaconda Nickel Holdings Pty Ltd, Re [2003] WASC 19; Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422 at 429 per Mason ACJ, Murphy and Deane JJ; Liquorland (Australia) Pty Ltd v GYG Holdings Pty Ltd (unreported, 28 October 1994, NSWCA, per Kirby P); Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2003] NSWCA 75; (2003) 56 NSWLR 662 at 675 per Bryson J (paragraph 97) and Banque Brussels Lambert SA v Australian National Industries Ltd (1989) 21 NSWLR 502 at 524.D – E are also authorities supporting the proposition that in ascertaining the relevant intention, that is the intention to contract, relevant circumstances may include prior negotiation and subsequent conduct.

Formation of the agreement

172 Hence, in determining the circumstances surrounding the formation of an agreement, the matrix of facts, it is the objective intent that is paramount. Whether any relevant individual representative thought that an agreement existed or that it did not exist, is irrelevant to the exercise unless there exists an argument concerning estoppel. As Lord Wilberforce has said:

“When one speaks of the intention of the parties to the contract one speaks objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties.”
[Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 996]

173 In the words of Bryson J in Toll (FGCT) (with whom Sheller JA agreed) [at 675]:

“Courts decide whether parties intended to form a contract by considering what is objectively indicated by the parties’ acts and conduct, including statements they made and documents they signed or dealt with. Courts do not act on what were subjectively the actual states of the parties’ minds. This objective approach is deeply entrenched...”

174 A fundamental question falling for consideration is whether the conduct of the parties, viewed in the light of surrounding circumstances, shows or is indicative of an agreement having come into existence.

175 In Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (unreported, 23 December 1988, NSWCA), McHugh JA stated that [at [18]]:

“...in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties’ subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed.”
[See also Raguz v Sullivan [2000] NSWCA 240; (2000) 50 NSWLR 236 at 251 per Spigelman CJ and Mason P]

176 Questions of the relevance and probative value of evidence, in circumstances in which the issue concerned whether or not an enforceable contract had been entered into, were also before the court in Film Bars Pty Ltd v Pacific Film Laboratories (1979) 1 BPR 9251. As McLelland J put it, such questions cannot properly be considered independently of a consideration of the relevant issue, namely, what it is in point of fact that constitutes the making of a contract in circumstances such as here obtained. As his Honour points out, such a contract is made [at 9254]:

"...by the mutual communication between the parties of their respective assents to being bound by identifiable terms otherwise capable of having contractual force, the mutual communication typically taking the form of offer and acceptance".

177 As his Honour points out [citing Williston on Contracts, 3rd ed, Vol 1 paragraph 21 [at 9254]], one is not concerned with the subjective thing known as meeting of the minds, but the objective thing, the manifestation of mutual assents which is essential to the making of a contract.

178 Film Bars is also authority for the proposition that [at 9255]:

“In determining whether the communications between the parties constitute a contract the court is not confined to a consideration of the terms or manner in which the communications were made: they must be interpreted by reference to the subject matter and the surrounding circumstances including, inter alia, the nature of, and the relationship between, the parties, and previous communications between them, as well as to standards of reasonable conduct in the known circumstances."
[emphasis added]

179 I approach the evidentiary issues reserved for decision in the final judgment in precisely the way in which McLelland J approached the issues in Film Bars. In short, subsequent communications may have probative value depending upon the light they throw on the proper interpretation of earlier communications alleged to constitute the contract. Post-contractual conduct is not, however, admissible on the question of what a contract means as distinct from the question of whether it was formed.

Contractual construction

180 It is convenient to examine in a little more depth the principles concerning contractual construction and the extent to which extrinsic evidence is admissible in relation to the construction exercise.

Objectivity

181 The general test of objectivity is pervasive in the law of contract. As Gleeson CJ said in Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549, two passages from speeches of Lord Diplock illustrate the point:

· in Gissing v Gissing [1970] UKHL 3; [1971] AC 886, his Lordship said [at 906]:

“As in so many branches of English Law in which legal rights and obligations depend upon the intentions of the parties to a transaction, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party’s words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party.” [emphasis added]

· in Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441, his Lordship said [at 502]:

“In each of the instant appeals the dispute is as to what the seller promised to the buyer by the words which he used in the contract itself and by his conduct in the course of the negotiations which led up to the contract. What he promised is determined by ascertaining what his words and his conduct would have led the buyer reasonably to believe that he was promising. That is what is meant in the English Law of contract by the common intention of the parties. The test is impersonal. It does not depend upon what the seller himself thought he was promising, if the words and conduct by which he communicated his intention to the seller would have led a reasonable man in the position of the buyer to a different belief as to the promise; nor does it depend upon the actual belief of the buyer himself as to what the seller’s promise was, unless that belief would have been shared by a reasonable man in the position of the buyer. The result of the application of this test to the words themselves used in the contract is still “the construction of the contract”.” [emphasis added]

Extrinsic evidence/surrounding circumstances

182 Five propositions which are unexceptional may be put as follows:

· Proposition 1

Evidence of the surrounding circumstances in which a contract was made, including evidence of mutually known or notorious facts and evidence of the common commercial objectives or the genesis of a transaction is admissible to resolve an ambiguity in the language of the written document: Prenn v Simmonds [1971] 1 WLR 1381 at 1384 – 1385 per Lord Wilberforce; Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995 – 996 per Lord Wilberforce; Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 at 350 per Mason J.

· Proposition 2

An ambiguity may be taken to arise when a word or words in a document, read in context and with the knowledge of an ordinary, intelligent reader, raise two or more plausible meanings where the context of the words in the document is taken into account in light of the knowledge any ordinary intelligent reader of the document would bring to the reading of it: Burns Philp Hardware Pty Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 at 657 per Priestley JA. Thus stated, the test for ambiguity is an undemanding one: Manufacturers’ Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas 60-853 at 75, 343 per McHugh JA.

· Proposition 3

Extrinsic evidence is admissible to show that a particular contractual interpretation or a particular implied term which might otherwise arise was specifically considered and rejected by the parties: Heimann v Commonwealth of Australia [1938] NSWStRp 47; (1938) 38 SR (NSW) 691 at 695 per Jordan CJ; Jasam (AMC) Pty Ltd v The Australis Marketing Corporation (Int) Pty Ltd (unreported, 23 February 1995, Supreme Court of Victoria, per Hayne J); Codelfa Construction at 352 - 353 per Mason J. Conversely, extrinsic evidence is admissible to show that the parties by agreement or common assumption adopted a particular interpretation of a word or words in a written document: Partenreederei M/S Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s Rep 708 at 712 per Kerr J.

· Proposition 4

Extrinsic evidence is admissible to establish the subject matter with which the contract is concerned and the contracting parties when those matters are ambiguous having regard to the written contract: Macdonald v Longbottom [1859] EngR 635; (1859) 1 El & El 977; 120 ER 1177; Rankin v Scott Fell & Co [1904] HCA 42; (1904) 2 CLR 164 at 172 per Griffith CJ; Life Insurance Co of Australia Ltd v Phillips [1925] HCA 18; (1925) 36 CLR 60 at 79 per Isaacs J. Hence, evidence of mutually known facts may be admitted to identify the meaning of a descriptive term: Prenn at 1384 per Lord Wilberforce, citing Macdonald v Longbottom.

· Proposition 5

Extrinsic evidence is admissible to give meanings to trade or technical terms which have no common English meaning: Shore v Wilson (1839) 9 Cl & Fin 355; 8 ER 450 at 354 per Lord Wenslydale; R W Cameron and Co v L Slutzkin Pty Ltd [1923] HCA 20; (1923) 32 CLR 81 at 86 per Knox CJ; Max Cooper & Sons Pty Ltd v Sydney City Council (1980) 54 ALJR 234. Similarly, extrinsic evidence is admissible to show that words which have one common English meaning were used in a sense peculiar to a particular trade, locality, business or industry: Hodgson & Hodgson v Morella Pastoral Co Pty Ltd (1975) 13 SASR 51 at 52 per Bray CJ, at 62 per Zelling J.

183 Extracts from the authorities supporting proposition 1 include:

· Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989

- “No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as ‘the surrounding circumstances’ but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”

- “It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively-the parties cannot themselves give direct evidence of what their intention was-and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties. It is in this sense and not in the sense of constructive notice or of estopping fact that judges are found using words like 'knew or must be taken to have known' (see, for example, ... Brett L.J. in Lewis v Great Western Railway Co (1877) 3 QBD 195)...

Particularly interesting are the speeches in Charrington and Co Limited v Wooder [1914] AC 71, the question being what was meant by 'fair market price'. Viscount Haldane L.C. uses once more the expression 'circumstances which the parties must be taken to have had in view' (p 77). Lord Kinnear, after explaining that the term had no fixed meaning, said at page 80 'Words of this kind must vary in their signification with the particular objects to which the language is directed' and continued, 80:

'... it may be necessary to prove the relation of the document to facts; and I take to be sound doctrine that for this purpose evidence may be given to prove any fact to which it refers, or may probably refer....'

And Lord Dunedin, at page 82:

'... in order to construe a contract the court is always entitled to be so far instructed by evidence as to be able to place itself in thought in the same position as the parties to the contract were placed, in fact, when they made it -or, as it is sometimes phrased, to be informed as to the surrounding circumstances'.”

- “....what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed.”
[Reardon Smith at 995-997 per Lord Wilberforce-I note that the extracts which are emphasised were cited by Mason J in Codelfa at 350-351 with approval]

· Prenn v Simmonds [1971] 1 WLR 1381

- “The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations....We must...inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances which the person using them had in view. Moreover..it has been clear enough that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term.”

- "... evidence of negotiations, or of the parties intentions... ought not to be received, and evidence should be restricted to evidence of the factual background known to the parties at or before the date of contract, including evidence of the ‘genesis’ and objectively the ‘aim’ of the transaction.

As to the circumstances, and the object of the parties, there is no controversy in the present case. The agreement itself on its face, almost supplies enough, without the necessity to supplement it by outside evidence."
[Prenn at 1383-1385 per Lord Wilberforce]

I note that the first extract from Prenn above was cited by Mason J in Codelfa at 348-349 with approval.

I further note that the whole of the second extract from Prenn was cited with approval by Mason J in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 606. That part of that extract which is emphasised was cited with approval by Mason J in Codelfa at 348 having earlier been also cited with approval by Mason, Stephen and Jacobs JJ in DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 429, the full passage from DTR being:

“A Court may admit evidence of surrounding circumstances in the form of ‘mutually known facts’ ‘to identify the meaning of a descriptive term’ and it may admit evidence of the ‘genesis’ and objectively the ‘aim ‘ of a transaction to show that the attribution of a strict legal meaning would ‘make the transaction futile...”

· BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266

- “As Lord Wilberforce said in Prenn v Simmonds...’In order for the agreement to be understood, it must be placed in its context. The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations’. Such a consideration of the matrix of an agreement is particularly called for when it is sought to imply in it a crucial term which the parties have not expressed. In the instant case consideration of the context of the agreement is, in their Lordships opinion, essential”.
[BP at 272 per Lord Simon of Glaisdale delivering the majority judgment of the Privy Council - emphasis added]

· Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337

- "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.. "
[Codelfa at 352 per Mason J]

184 In relation to proposition 2, it is convenient to note the following passage taken from the judgment of Priestley JA in Burns Philp at 645-646:

"It was submitted that, where a term is inherently ambiguous, evidence of the meaning which the parties adopted should be admitted. Thus, as Prenn v Simmonds... shows, the term 'profits' is inherently ambiguous in the sense that in the ordinary or accepted meaning it may indicate one of several different things. What it means in the context will depend upon what it is intended to convey in relation to, e.g., what deductions are to be made from gross profits in determining what are, for the particular purpose, 'profits'. Similarly, when used in general and without a governing context, 'market rent' has been said to be inherently ambiguous: see Australian Mutual Provident Society v Overseas Telecommunications Commission (Australia) [1972] 2 NSWLR 807 at 815.

Where a term is inherently ambiguous in this sense, the ambiguity may be removed by the context of its use in the document and the surrounding circumstances to which, in accordance with the Codelfa case, reference legitimately may be made. But I think it remains to be finally determined whether, where a term which is inherently ambiguous in the sense to which I have referred and is not made unambiguous by its context or the surrounding circumstances, evidence may be admitted to show in which of the alternative ordinary meanings of the term it was used in the particular document and the kind of evidence which may be adduced for that purpose".

Dealing with the matter

Letters of comfort/support

185 One may commence with a short discussion of letters of comfort/support as a general matter.

186 Letters of support such as the Letter have been frequently employed in international commerce over at least the last 20 years. Whether a particular letter of support imposes legal obligations on the parties ultimately turns on its terms: Banque Brussels at 520-1 per Rogers CJ, Comm D.

187 The leading authority in Australia is the decision of Rogers CJ, Comm D in Banque Brussels, supra. In that case the defendant provided a letter to the bank in which it stated, inter alia, that “it would not be our intention to reduce our shareholding in Spedley Holdings Limited....during the currency of this facility”; “we would, however, provide your Bank with 90 days notice of any subsequent decisions taken by us to dispose of this shareholding”, and “we take this opportunity to confirm that it is our practice to ensure that our affiliate Spedley Securities Limited will at all times be in a position to meet its financial obligations as they fall due.” [at 504]

188 Rogers CJ considered evidence of correspondence between the parties leading up to the sending of the letter, which included an initial request by the bank for a guarantee [at 507.C]. He held that the claim turned on the existence or otherwise of an intention to create legal obligations, and whether the terms of the letter were of a sufficiently promissory nature to be held to be contractual [521.C]. His Honour found that, consistently with the decision of Megaw J in Edwards v Skyways Ltd [1964] 1 WLR 349 at 355, there is a prima facie presumption that in commercial transactions there is an intention to create legal relations, and the onus of proving the absence of such intention, which is a heavy one, rests with the party asserting that matter [at 521.E].

189 In holding that the letter had contractual force, his Honour observed that [at 523.B]:

“There should be no room in the proper flow of commerce for some purgatory where statements made by business men, after hard bargaining and made to induce another business person to enter into a business transaction would, without any express statement to that effect, reside in a twilight zone of merely honourable engagement. The whole thrust of the law today is to attempt to give proper effect to commercial transactions....If the statements are appropriately promissory in character, courts should enforce them when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable.”

190 Rogers CJ distinguished the decision of the English Court of Appeal in Kleinwort Benson Ltd v Malaysia Mining Corporation Berhad [1989] 1 WLR 379, which had earlier held that a statement in a letter of support involved no enforceable legal obligation. The letter in that case provided, relevantly, that “[I]t is our policy to ensure that the business of [the subsidiary] ...is at all times in a position to meet its liabilities.” [at 381]. The Court of Appeal held that the presumption of intention only became significant when the words of the agreement were clearly promissory, and that the letter before them contained a statement of the defendant’s policy, not a promise that such policy would be continued in the future [at 388 per Ralph Gibson J].

191 There are a number of other authorities which deal with letters of comfort. As always, each authority has to be carefully examined in terms of the precise facts there before the Court. The authorities include Commonwealth Bank of Australia v TLI Management Pty Ltd [1990] VicRp 45; [1990] VR 510 and Australian European Finance Corp Ltd v Sheahan (1993) 60 SASR 187.

192 In Commonwealth Bank, the relevant letter of comfort read as follows [at 512-13]:

“We hereby acknowledge that the Commonwealth Bank of Australia has agreed to make temporary credit facilities totalling two hundred and fifty thousand Australian dollars $A250,000 available to Hovertravel Australia Pty Ltd which represents payments for ongoing operating costs and salaries.

We confirm that the company will complete takeover arrangements (subject to shareholders' approval) of Hovertravel Ltd as soon as legally possible. These arrangements include the injection of sufficient capital to repay the temporary facility as mentioned above to takeover date or within 30 days of this date. “

193 For Tadgell J, the basal issue was "whether, by the letter, the defendant undertook a promissory obligation to the plaintiff" [at 514], a question ultimately answered by His Honour in the negative. In reaching this conclusion, Tadgell J emphasised that the words used in the comfort letter were representational rather than promissory [at 515]:

“[I] n the circumstances the draft did not, in my judgment, contain words conveying to the defendant the idea that, by having it engrossed and signed, the defendant would be undertaking a contractual obligation. It would have been very simple, if that had been intended, to have used words of promise, such as “we agree”, “we undertake”, or even “we promise”. The words “we confirm that we will . . .” were, in the circumstances, at least ambiguous. What was stated in the remainder of the sentence beginning with those words was in essence a statement of no more than was already known or believed by the plaintiff to be the defendant’s intention ... “

194 His Honour further held that many of the other words contained in the letter were vague and uncertain [at 516]:

“The difficulty is accentuated by the relative vagueness of many of the words - for example, “complete”, “takeover arrangements” and “as soon as legally possible”. What would constitute a breach of such an undertaking? The second sentence adds to the imprecision of the first. If the “arrangements” include “the injection of sufficient capital” etc., what are the other arrangements? What is “sufficient capital to repay the temporary facility as mentioned above”? And what is meant by “injection”? It is far from clear that what is meant is the deposit of money to the bank account.”

195 Accordingly, Tadgell J held that the legal status of the letter was merely that of a "serious acknowledgment by the defendant of its understanding of the commercial position between the plaintiff and its customer, and a serious statement confirming the defendant's intention with respect to the parent of the customer..." [at 516 – 17]

196 In Australian European Finance, the relevant letter of comfort read as follows [at 205 – 206]:

“RE DUKE PACIFIC FINANCE LIMITED

This company which is 100% owned by The Duke Group Limited will continue to be supported by this company so long as necessary.

In the event that any subordinated loans are required to ensure the company's requirements under the necessary legislation or licensing requirements, these will be provided.

I confirm that such support as is necessary will be given to this company and its subsidiaries. “

197 After referring to certain academic works and authorities, including Kleinwort Benson, Banque Brussels and Commonwealth Bank, Matheson J concluded as follows [at 206]:

“...I am not persuaded that the vague words of the first and third sentences contain a contractual promise. Support can mean many different things, and I do not know what support "so long as is necessary" or "as is necessary" means. They are "woolly" expressions to say the least. The second sentence is even more ambiguous, and the evidence contained no attempt to explain it. I construe it as mere padding, as is the addition of the words "and its subsidiaries" at the end of the third sentence.

I am not persuaded that the parties intended that the letter would amount to a legally enforceable security. At most it contains a non-promissory statement of intention.”

198 Mr Pembroke QC, also referred the Court to the unreported interlocutory judgment of Justice Hunter in Thiess Contractors Pty Ltd v Montgomery Watson Australia Pty Ltd (unreported, 15 March 1996, NSWSC), which suffers from the absence of the weight which may be afforded to a considered final judgment. [His Honour expressly noting that it was unnecessary to pass any final judgment on the matter]

Standing back from the detail to focus on the central and centrally significant considerations

199 The plaintiff's case has a structural cohesion of particular simplicity. It is quite simply that upon a detailed examination of:

· the commercial purpose of the Letter discerned from the circumstances in which the words to be found in the Letter were used: in particular drawn from the admissible evidence as to the mutually known matrix of facts in which the Letter came to be written; and

· the words which were used in the Letter,

it succeeds on both the intent to contract issue and on the related, albeit not identical, proper construction of the Letter issue.

200 The central proposition is that the plaintiff succeeds on each of these issues once the Court takes into account the following matters:

· that the Corporations Law as it applied in 2001 included provisions imposing statutory duties of directors to prevent insolvent trading, and identifying the offences committed for breach of those duties: sections 588G (1), (2) and (3);

· that the Corporations Law as it applied in 2001 included section 295 which was in the following terms:

“SECTION 295 CONTENTS OF ANNUAL FINANCIAL REPORT
295(1) Basic contents. The financial report for a financial year consists of:
(a) the financial statements for the year; and
(b) the notes to the financial statements; and
(c) the directors’ declaration about the statements and notes.
295(2) Financial statements. The financial statements for the year are:
(a) a profit and loss statement for the year; and
(b) a balance sheet as at the end of the year; and
(c) a statement of cash flows for the year; and
(d) if required by the accounting standards – a consolidated profit and loss statement, balance sheet and statement of cash flows.
295(3) Notes to financial statements. The notes to the financial statements are:
(a) disclosures required by the regulations; and
(b) notes required by the accounting standards; and
(c) any other information necessary to give a true and fair view (see section 297)
295(4) Directors’ declaration. The directors’ declaration is a declaration by the directors:
(a) that the financial statements; and the notes referred to in paragraph (3)(b), comply with the accounting standards; and
(b) that the financial statements and notes give a true and fair view (see section 297); and
(c) whether, in the directors’ opinion, there are reasonable grounds to believe that the company, registered scheme or disclosing entity will be able to pay its debts as and when they become due and payable; and
(d) whether, in the directors’ opinion, the financial statement and notes are in accordance with this law, including:
(i) section 296 (compliance with accounting standards); and
(ii) section 297 (true and fair view).
295(5) [Requirements] The declaration must:
(a) be made in accordance with a resolution of the directors; and
(b) specify the date on which the declaration is made; and
(c) be signed by a director.”
[emphasis added]

· that, in terms of the ultimate analysis of the background facts, it is clear that the mutually known and understood circumstance was that each of the letters of support was required to enable the directors of the Australian trading company to be able to discharge their responsibilities and to allow that company to continue trading in order, if it was in fact unable to pay its debts, to avoid the severe sanctions of doing so. This is said to supply a very powerful and mutually known, understood and commonly accepted surrounding circumstance against which each of the letters of support and, in particular, the Letter, fall to be construed. It is put that of particular significance in this regard is the awareness of the Australian trading company's senior management of its financial position and of their professional obligations.

201 Whilst there are a number of disparate submissions put by the defendants in seeking to erode what I regard as the commonsense of the above reasoning, an emphasis was placed by them upon one matter. This is that a careful examination of the circumstances in which the first letter of support, and then the Letter, came into existence, is said to disclose almost no or at least only the very slightest of interest/involvement in the whole of the exercise on the part of the three common directors of the Australian holding company and the Swiss parent. The proposition is that all material communications were to or from Mr Goggi whose position was that of company secretary. Indeed, it is put that as to the Letter, the proper findings on the evidence are that:

· neither Mr Engebretsen nor Mr Larsen had ever been made aware of its existence;

· Mr McIntyre gave evidence that he had not seen it in February 2001 and although his evidence was that he had become aware of it by September 2001, there was just no evidence at all of how he became aware of it.

202 The defendants seize upon this central foundation in support of the proposition that this simply points up the difficulty in the Court inferring that the Swiss parent and the Australian trading company/ the Australian holding company had the necessary intent to enter legal relations. The defendants seek to add certain detail going back to the inception of the first of the letters of support by way of material said to confirm that there simply was no such intent to enter legal relations. In that regard, the defendants emphasise the findings which they seek from what they put as the evidence:

· that the need for the first letter of support arose as a result of Mr Goggi's own assumption that it was necessary;

· that his assumption was based on some undisclosed past experience of his with the Cathay Pacific group;

· that he is said never to have asked any of the three directors nor his superior, Mr Steininger, if they required such a letter. [transcript 61-62]

203 The submission is that it was Mr Goggi who first raised with the auditors of the plaintiff, PWC, the topic of a letter of support: the proposition being that, on his evidence, at the time that he raised the letter of support with PWC, Mr Goggi had no expectation that the existing banking facilities and the subordinated parent loan would not be maintained. Mr Goggi’s evidence therefore, so it is submitted, leaves open no conclusion but that his motivation for obtaining the first letter of comfort was his prior experience with the Cathay Pacific auditors and not any personally held belief that the plaintiff required the letter by reason of its financial position.

204 Other matters sought to be relied upon by the defendants include:

· a close focus upon examples of the particular support given by the Swiss parent to the Australian trading company, including the loans earlier referred to and the giving of guarantees in support of the Westpac facilities;

· the fact that by 31 December 1999 the plaintiff had only been trading for the 6 weeks commencing on 14 November 1999 (when the purchase of the Ansett catering business was completed) and for that reason did not complete formal accounts for the 1999 year. However, the Australian holding company did complete formal accounts which were prepared on a going concern basis. This is said to have meant that there was a reasonable expectation that the current loan facility and the subordinated parent loan would remain in place and that they would be sufficient to meet the anticipated working capital and other requirements of the company;

· a very detailed focus put by the second defendant upon each and every aspect of the manner in which both the first and then the later letter of support came to be conceived and were in due course produced.

205 The plaintiff, on the other hand, highlights the defendants’ failure to tackle the clear evidence given by Mr McIntyre as follows:

· “On 2 April 2001, I signed the director's declaration to the statutory accounts of GGA (tab 19). The statutory accounts recorded that GGA suffered a net loss after income tax of $16,530,184 for the financial year ended 31 December 2000. In addition, the consolidated statutory accounts for GGH recorded a net loss after tax of $20,483,527 and those of Gate Gourmet Services a net loss after tax of $5,542,890.

The existence of the Second letter of comfort was crucial to GGA's ability to be able to pay its debts as and when they fell due.

I therefore relied upon the Second letter of comfort in signing the director's declaration, which in my mind operated as a fully enforceable inter-company guarantee. If I had been aware that GG AG did not intend to honour that guarantee, I would not have signed the director's declaration under any circumstances. Furthermore, I would not have signed the declaration had the Second letter of comfort not been provided at all.

As I have stated, myself, Mr Engebretsen and Mr Larsen were directors of both GGH, GGA and the other companies within the Australian Gate Gourmet group. In my mind, the Second letter of comfort was therefore intended to and did promise to provide financial assistance to just not GGH but all of the companies in the group, including GGA. As GGH was essentially a non-trading company which only prepared statutory accounts on a consolidated basis, any other interpretation would not have made any sense at all.”
[Statement 1, paragraphs 21-23] [emphasis added]

· “As I have already deposed in my first witness statement, the provision of the First and Second letter of comfort was crucial to GGA's ability to be able to pay its debts as and when they fell due. I was aware at the time that Mr Goggi and Mr Henrik had been corresponding by email with Mr Larsen and Mr Grolimund on 1 and 2 May 2001 (tab 23) in relation to the fact that as at that date GGA had almost exhausted the entirety of the facility of $70 million advanced by Westpac;

GGA required an additional $20 million in funding over the next few months to cover completion of the Perth unit, purchase of plant, payment of management fees and other matters;
that if Ansett did not make their payments under the Base Year contract on time the amount of funding required of $20 million would increase.

Following the reduction of the Westpac facility to $35 million, GG AG's support was even more crucial. If I had been aware that GG AG did not intend to honour the Second letter of comfort I would have considered that GGA was trading insolvent and would have:
called a board meeting to discuss the position with Mr Engebretsen and Mr Larsen; taken steps to appoint a voluntary administrator and would not have permitted GGA to continue to trade and incur liabilities.”
[Statement 2, paragraphs 15 and 16] [emphasis added]

206 Likewise, under cross-examination in relation to his detailed report to the Swiss parent of 2 July 2001 [PX 1250] concerning his meeting with Westpac [who had made it plain that the situation had become critical with a warning that the facility rollover at the end of the month would not be renewed absent real action being taken by the group], it was put to Mr McIntyre that nowhere in his report did he mention the Letter. His evidence included:

“Q. Now, what I want to point out to you is that nowhere in this document do you mention the letter of support?
A. Yes, that's right.

Q. And can I suggest to you that the reason for that is that you didn't regard that document as being relevant to the issues that you were seeking to raise in this memorandum?
A. Throughout the process I made the assumption that the letter of support was there and the only reason it is not mentioned is just I was working on the assumption that that was in place.

Q. If you had thought that it was a legally enforceable document, you would have said, surely, to your superiors in Zurich, "Don't argue with me about this. You are contractually advised to assist this company"?
A. If I was a lawyer, probably, but if I was commercially naive in this instance, then maybe I am, but I made the assumption that we all knew that that was in place.

Q. You thought it was so obvious it went without saying?
A. Yes.”
[transcript 121]

Finding as to Mr McIntyre’s awareness that the letters were in place

207 The Court's finding is that Mr McIntyre was at all material times aware that both the first letter of support and then later the Letter was in place and was so aware at or about the time, or very soon after, those letters came to be signed. It was never put to Mr McIntyre that he had not been aware of the letters of support. Under cross-examination in relation to the Letter, he gave evidence that he had asked to see it and had discussed it with Mr Steininger [transcript 141]. It seems to me plain as day that acceptance of his evidence earlier set out carries with it the proposition that his evidence under cross-examination be accepted as reliable in that, as he said, he worked on the assumption that each of the letters when signed and duly received was in place and, [I interpolate], to be taken at face value.

Finding on intent to enter legal relations

208 Ultimately, the Court’s finding is that the circumstances examined objectively, do throw up an intent to enter legal relations. The very terms of the Letter itself are a strong indicator in this regard, utilising, as it does, phrases and concepts having very clear technical legal significance. I refer here to the references to "it's controlled entities" and "[ability] to meet its financial commitments as and when they fall due" [emphasis added]. Likewise, the second paragraph of the Letter making plain that it would not be withdrawn before the Australian holding company and it's controlled entities had sufficient means to meet their obligations without the support of the parent entity, seems to me to clearly indicate a promissory intent to be bound in terms of legal relations.

209 As recently as 12 March 2004, the New South Wales Court of Appeal has had occasion to emphasise the significance of the text in any construction issue. In Optus Vision Pty Ltd v Australian Rugby Football Pty Ltd [2004] NSWCA 61, Santow JA [with whose reasons for judgment Meagher JA and Stein AJA agreed] put the matter as follows [at [24]]:

“But resort to extrinsic evidence, here documentary, must not detract from the axiomatic proposition that the starting point when considering a point of interpretation must be the text itself. As Lord Steyn [a reference to the extra-judicial observation by his Lordship: “The Intractable Problem of the Interpretation of Legal Texts” (2003) SLR 1 at 7] observes:

“The mandated point of departure must be the text itself. The primacy of the text is the first rule of legal interpretation for the judge considering a point of interpretation. Extrinsic materials are therefore subordinate to the text itself.””

210 Whilst of course the present issues at threshold require determination in terms of objectively discerned intent to contract [as opposed to the construction issue], the significance of the actual terms of the document put forward form an obvious integer proper to be taken into account, together with the other admissible evidence, going to intent to contract.

211 But at the end of the day it is the whole of the admissible evidence which is taken into account in terms of the finding as to an intent to enter legal relations. One only integer in that regard of course concerns precisely what, looking at the matter objectively, the parties to the Letter saw as its purpose insofar as the underlying reason for the directors’ declaration as part of the financial reports for the particular year and the notes to the financial statements are concerned. Whilst it is certainly true that it is not necessary in order for directors to satisfy their statutory obligation [to have had reasonable grounds to expect that a company was solvent], that they be able to show that they took into account a legally binding promise to provide monies or financial assistance [Dunn v Shapowloff (1978) 2 NSWLR 235 at 244 per Mahoney JA], this is only one parameter of the matters which fall for current consideration. Here the directors were entitled to take the Letter into account for the purpose of permitting the Australian trading company to continue trading into the future. Regardless of what banking or other facilities may have been underwritten by the Swiss parent, the Australian trading company was entitled to anticipate a regular and formal compliance by the Swiss parent with the whole of the Letter and, in particular, with the terms of the important second paragraph of the Letter which, in terms, contained the promise/covenant that the Letter would not be withdrawn before the Australian holding company and its controlled entities had sufficient means to meet their obligations without the support of the parent entity.

212 The passage of 15 years since the handing down of the decision of Rogers CJ in Banque Brussels has not provided any basis for eroding the significance of giving proper effect to commercial transactions. If anything, the intervening years have served to underline that significance. Whilst there is of course an obvious need to follow the route of a principled examination of each particular fact and circumstance arising for curial determination [including close attention to the objective determination of intent to contract], where statements are appropriately promissory in character they should be enforced "when they are uttered in the course of business and there is no clear indication that they are not intended to be legally enforceable” [at 523.B]

213 In Banque Brussels, Rogers CJ adopted the approach that in commercial transactions there is a presumption of an intention to create legal relations and that the onus of proving the absence of such intention rests with the party asserting that matter [Edwards v Skyways Ltd [1964] 1 WLR 349 at 355 per Megaw J]. My own view is that this is not necessarily properly regarded as a matter of presumption. Rather, the court is simply looking in terms of the objective approach, to identify whether or not there was the requisite intent to contract in any given context. The context in a matter of a commercial communication is materially different to the context, for example, in a matter of a domestic communication. Applying the objective approach the high probability is that a commercial communication will generally be seen to have been intended to be regarded as a relatively formal matter both by the sender as well as by the recipient.

214 However, if and to the extent that the matter is properly to be approached upon the basis of a presumption of an intention to create legal relations, then that approach yields the same finding as to objective intent to contract in this case.

What was the obligation?

215 The defendants contended that the Letter was simply too imprecise to throw up a binding legal obligation. In support of this contention, the submission was that the Letter fails to identify the form of financial support the subject of the promise. The defendants, inter alia, put the following rhetorical questions:

· were the promisees entitled to a loan?

· if so, on what terms was the loan to be made?

· were the promisees entitled to compel the Swiss parent to subscribe for capital?

216 This is not the first time a court has been required to construe and reflect upon the context of a contract providing for alternative methods of performance. There is authority for the proposition that in that circumstance the law is not bound to adopt the fiction that a defendant would have adopted one method of performance rather than another. The principle appears to be that the court should infer that the defendant would have performed such a contract in the way least advantageous to the plaintiff and most advantageous to the defendant [cf discussion in TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 150, 153, 154 per Hope JA]. For present purposes, the relevance of this line of general authority is to make plain that the mere fact that a contract may include a promise capable of being performed by alternative methods of performance does not necessarily render that contract void for uncertainty or for incompleteness.

217 As indicated above, the strong and plain terms of the Letter point up no conclusion but that the terms of the Letter are promissory.

218 In my view, properly construed, the Letter entitled the Australian trading company to be indemnified by the Swiss parent against its financial commitments, as and when they fell due, and to be so indemnified up to the point in time when the Australian trading company had sufficient means to meet those commitments without the support of the Swiss parent.

Related questions

219 As already made plain the enforcement of the Letter is put by the Australian trading company on two bases:

· First, it is said that it constitutes a contract between it and the Swiss parent;

· Second, it is said that if it constitutes a contract between the Swiss parent and the Australian holding company, then the Australian holding company holds the benefit of the contractual promise on trust for the Australian trading company.

Submissions of the second defendant

220 The parties for whom Mr Pembroke QC appears advanced a number of submissions with respect to the first claim, including:

· the Letter is not addressed to the plaintiff, which was not a party;

· even assuming the Letter constitutes a contract, the parties to it could only be the directors of the Australian holding company (to whom it is addressed) or, possibly, the Australian holding company itself (assuming that the directors received it on its behalf);

· the view that the parties to the Letter are who they appear to be is consistent with the e-mail exchanges between Mr Goggi and Mr Nielsen of 14, 15 and 16 February 2001, where the issue of the identity of the persons to whom the Letter was to be addressed was considered expressly and in detail;

· that material is consistent with no conclusion but that the persons intended to be parties to a contract constituted by the Letter were the Swiss parent and the directors of the Australian holding company. The suggestion that the plaintiff was a party to such a contract contradicts:

- the express words of the Letter;

- the obvious commercial intent of the Letter (i.e., to allow the Australian holding company’s directors to sign the Australian holding company’s accounts); and

- the e-mail exchanges of 14, 15 and 16 February 2001 between Messrs Goggi and Nielsen.

· in those circumstances, the plaintiff’s case based on the suggestion that it was a party to any such contract ought be dismissed.

Dealing with the issue

221 In what follows a number of the submissions of the plaintiff are accepted and generally adopted.

Identity of promisees

222 The question as to whom was/were the intended promisee[s] in relation to a written promise is of course no more and no less than a question of construction of the document in question [cf Carter & Harland, Contract Law in Australia, 4th ed, pp 46 – 47, citing, inter alia, Carter v Hyde [1923] HCA 36; (1923) 33 CLR 115]. The instant circumstances, of course, involved an offer to supply financial support in consideration for what was, in effect, to be the incurring of the continued risks of trading. In that sense, plainly the Australian trading company [and no doubt the other relevant controlled entities] is seen to have accepted that offer: that acceptance is seen to have been effected by their undertaking trading activities without which support the directors would have been criminally liable.

223 As already indicated, the language of the Letter is certainly promissory. This is in essence a matter of impression.

224 The question which arises is as to the identity of the promisee[s] or offeree[s]: that is not necessarily the same as the “addressee”.

225 Construed against the objective framework which produced it, the Letter strongly indicates that the promisees are each of “Gate Gourmet Holdings Pty Limited and its controlled entities”. The factors which support this conclusion are:

· since the Swiss parent was the ultimate beneficial owner of all of the companies in the Australian group, it would be sensible to suppose that it intended all of those companies to take the benefit of its promise;

· the “support” promised is to meet the respective “financial commitments as and when they fall due” – thus indicating an obligation of a recurrent and continuing kind;

· there would be no practical purpose in limiting the promise to the nominal “addressee”, since the Australian holding company did not trade, and would not be seen as needing support for its ongoing financial commitments;

· the nominal addressees were identified as “the directors Gate Gourmet Holdings Pty Limited”, and the postal address given was the address of other companies in the group, including the plaintiff. The three directors were the same for all the companies in the Australian group, and those persons would reasonably be expected to require evidence of support for all of the companies concerned;

· in this context, it is of some significance that the text of the Letter is not prefaced by any words of address or salutation. Nor is the Letter marked for the attention of any particular person. The words of the document do not exhibit any particular intention to confine the text of the Letter to the postal addressee or addressees.

226 In February 2001, the Letter replaced the earlier May 2000 letter of support [PX 223], which was addressed in general terms (“To Whom it May Concern”), and under which there could not have been any doubt as to the identity of the intended promisee, including the Australian trading company. It would, I accept, be quite artificial to regard the parties as having fixed upon a much more narrow operation for the Letter in the 2001 year (ie, by restricting it to the Australian holding company only), especially when it would have been apparent that the Australian holding company itself would be producing separate accounts for the 2000 financial year, and the Letter would be expected to have its part to play in the performance by its directors and auditors of their respective duties in connection with those separate accounts.

227 The communications preceding the issue of the Letter show objectively that its operation was not mutually understood as being restricted to the Australian holding company. In this respect:

· the Letter was sought at the outset in order to “provide financial support to Aust. GG Holding Group” [PX 806];

· in further communications between Mr Goggi and Mr Nielsen [collected at PX 835-836], it was made clear by Mr Goggi that “the guarantee needs to be provided to the Directors of the company so they can carry on the business within the Australian statutory legislation” [emphasis added];

· these communications, I accept, demonstrate that the parties were anxious to ensure that the Letter inured for the Australian trading company’s benefit, and that such support was not to be restricted or limited by the Letter’s being addressed to PWC only. If anything, the specific focus of the communications was directed to the question of to whom the Letter should NOT be addressed.

228 Thus, given its background, the fact that the Letter was ultimately addressed to the directors of the Australian holding company can be seen to be no more than a matter of convenience, the sole purpose for which was the need to ensure that the ambit of the relevant financial commitment was not to be restricted by reason of its being addressed to PWC. There was no objective basis for supposing the parties intended to restrict the operation of the Letter to the Australian holding company. Such a conclusion would, I accept, be wholly artificial. The parties were not involved in a process of working towards achieving some limitation on the operation of the Letter.

229 The submission that the Australian trading company was not a party to the contract flies in the face of the obvious commercial intent of the Letter, which was to allow the directors to sign the accounts and, most particularly, to permit Mr McIntyre to sign the Australian trading company's statutory accounts for the financial year ended 31 December 2000. Mr McIntyre relied upon the Letter in doing so. On the courts findings, the intent to so rely was clearly something which, looking at the matter objectively, was at all material times common ground as between the Swiss parent and the Australian trading company [and for that matter the Australian holding company].

230 It will be recalled that the Australian trading company's financial reports record that the net loss for the 16-month period from 2 September 1999 to 31 December 2000 was $16.53 million [page 1].

231 The fact that the Australian trading company, apparently more than any other company in the Australian group, had sustained exceptional trading loses in the 2000 financial year [PX 965], and the course of trading throughout that year, must have made it abundantly obvious by at least February 2001 that the Australian trading company was an entity for whose benefit continued financial support would be likely to be necessary. The extent of such financial support would be difficult to specify [see for example Mr Goggi’s observation at transcript page 62.35]. In this context, a construction of the Letter which excluded the plaintiff as a promisee of that support would really have made little commercial sense.

232 The balance sheet records total assets of $70.076 million and total liabilities of $86.606 million. Note 1 to the accounts records that "the financial statements have been prepared on a going concern basis on the assumption that the related entities will continue to provide the necessary financial support to enable the company to pay its debts as and when they become due and payable, and not to call for repayment of the amounts owing to it until, and then only to the extent to which, sufficient funds are available" [page 7]. The directors declared that there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable [p16].

233 Mr Pembroke's submission that the obvious commercial intent of the Letter may be seen as no more than to allow the Australian holding company’s directors to sign its accounts fails to recognise the substance of what was occurring. What was being accomplished was not simply a matter of compliance with the Corporations Law requirements for completion of financial statements, notes and the directors’ declaration about those statements and notes. What was being accomplished by the production of the Letter was the underpinning for:

· the directors being in a position to form, and to declare that they had formed, the opinion that there were reasonable grounds to believe that the Australian trading company would be able to pay its debts as and when they became due and payable;

· the directors being in a position to declare an acceptable basis on which the financial statements had been able to be prepared on a going concern basis;

· the Australian trading company, in the circumstances which prevailed, to be permitted to continue to trade at all.

234 The very words of note 1 to the accounts in terms of the assumption upon which the financial statements had been prepared, namely that the related entities would continue to provide the necessary financial support to enable the company to pay its debts as and when they became due and payable, tell the story.

235 The close submissions addressed by Mr Pembroke concerning the proposition that, on the evidence, it was Mr Goggi who is shown to have generally raised the issue at its inception and who engaged in the relevant communications with the Swiss parent and acted as intermediary with PWC [and the accompanying submission that these activities of Mr Goggi are not shown to have been known at material times to any of the three directors of the Australian holding company/the Australian trading company], are rejected on the evidence and, when necessary, by inferences drawn from the evidence. Certainly, there is no doubt but that Mr Goggi was the one who first raised with PWC the topic of a letter of support as appears from his own evidence. Further, all of the e-mails and relevant communications are self-explanatory as to his very detailed involvement in the receipt and sending of these communications. But, what cannot be lost sight of is:

· that, in the ordinary course of events, it is appropriate for the Court to infer that, as company secretary [here also “day to day” financial controller: statement paragraph 12], in most matters of significance in relation to the affairs of a company in terms of regularity of office procedure and function, Mr Goggi would be expected to communicate with the relevant directors, here Mr McIntyre, who was the sole Australian director and the managing director and who worked in the same building. The inference that he so communicated on this topic is drawn;

· precisely what Mr Goggi may have had in his mind in relation to the need for each of the letters of support (or for that matter Mr McIntyre's cross-examination about what he understood or expected the form of financial support would take), likely fall outside the parameter of evidence which is admissible on either

- the question of intent to contract ; or

- the question of construction of the agreement.

This is because, as previously indicated, the construction of a contract is an objective question for the Court, in respect of which, generally, the subjective beliefs of the parties are irrelevant and because, in terms of the intention to contract issue, the court is concerned with the objective manifestation of mutual assents and not with the subjective meeting of minds.

236 The Court's finding is that Mr McIntyre generally gave reliable evidence that is certainly to be accepted in terms of his evidence that he was aware that the Letter was in place [transcript 106]. His evidence that he recalled discussing the Letter at some time after his 12 September call to Mr Boysen, is accepted as reliable [transcript 132]. There is no particular assistance gained by the defendants in terms of the fact that the plaintiff has not been able to establish that Mr McIntyre can now recall ever actually reading the document. What is established is his awareness that it was being negotiated and was ultimately put into place, and his reliance upon the existence of the Letter at the material times for the reasons stated in his evidence recited above.

237 Nor should it be overlooked that the Gate Gourmet Australia Budget and Business Plan 2001 – 2003, issued in September 2000 [Exhibit PX 2/504 et seq], included very real concerns on a number of parameters in the Internal Analysis section 2 [PX 528-535].

238 It is reasonably important to note that, at about the very time when the Letter was being received in Australia, Mr McIntyre was away attending the IFCA Barcelona conference. His evidence is accepted to the effect that at this conference he had a conversation with Mr Boysen to the following effect:

Mr McIntyre: "Henning, I'm growing very concerned about Ansett. We've been watching the passenger numbers on our system and I don't think they're being honest about their market share in the numbers they're publishing. On my calculation, their market share is down to less than 30%. If I'm right, then they must be losing about $1 million to $1.5 million a week, and have probably been doing that for nearly 6 months now. I think there's a definite risk that Ansett will not survive in its current form. I'm very concerned that it's going to cause us real problems with the base year contract. I'm also concerned that GG AG's investment in Australia will be at risk. I may be talking myself out of a job here, but I really believe that GG AG should give some serious consideration to its position. I think you have to think about one of two options: either sell GGA or seek to merge the business with QFCL."

Mr Boysen: "What do you recommend we do? I really don't want to sell the business. We've only just got it up and running."

Mr McIntyre: "I think we should go and talk to Qantas. I've heard on the grapevine that they've briefed a merchant bank to value the catering business and they're thinking about selling it. The timing could be good for us".

Mr Boysen: "OK. Please can you see if you can set up a meeting with them. I'll come over to Australia to talk to them". [Statement 1, paragraph 26] [emphasis added]

239 Mr McIntyre's further evidence given in-chief as follows is accepted as reliable:

“Q. And you go on to refer to a conversation you had with Mr Boysen whilst you were at that conference.
A. Yes.

Q. Firstly, can I just ask you this: Did the matter that you record yourself as having conveyed to Mr Boysen arise from facts you had indeed observed in the way you have described?
A. In terms of my calculations of Ansett's liability, that was my back of the envelope calculations based on my experience with Qantas and knowing the passenger numbers because we were recording them at Gate Gourmet. My - and I guess where I say I don't think that Ansett can survive on its current form, in the back of my mind I was thinking they may become a low cost airline as one possible outcome. I don't think it is fair to say that in any way, shape or form I am claiming hindsight and anticipating that Ansett would collapse and I don't think that's fair that anybody at any stage could have anticipated that.

Q. All I wanted to ask you, Mr McIntyre, was: When was it prior to February 2001 - prior indeed to the time when you attended the conference in Barcelona in February 2001, that you first began to have the concerns and apprehensions that you conveyed to Mr Boysen?
A. Probably about two or three months before that. Until towards the end of 2000, to be honest I was too focussed on what we had to do with our business and what was going on and it took at least 12 months to try and get on top strategically of what was happening in the market, as well as to get on top of what the actual true impact of our base year contract was on our costs.

Q. Now, you know I think that about the middle of February 2001 a document described as a letter of support was supplied from Switzerland, don't you?
A. Yes.

Q. And that document had been - had that document been received by you or come to your attention by the time you went to the conference in Barcelona?
A. I was aware of it but I don't - to be honest, I don't even know whether I had actually seen the document but I was aware that it was in place.”
[transcript 106]

240 Hence, it was likely in approximately November/December 2000 that the apprehensions about Ansett's likely difficulties in measuring up with its own financial obligations were a real concern to Mr McIntyre, and it was also in December 2000 that the Westpac facility was put in place. Particular significance should be attached to the fact that, notwithstanding that facility having been put into place, at the very time that the e-mails relating to the Letter are reaching their culmination, Mr McIntyre is in Barcelona voicing to Mr Boysen his concern that the Swiss parent’s investment in Australia will be at risk.

241 The point of going to this evidence is the artificiality in any suggestion that in February 2001 it could have been predicted with any comfort or certainty that the then facilities which were in place were, without further inquiry, sufficient. That very point, albeit in relation to the earlier year, was the subject of the following evidence given by Mr Goggi:

“Q. At the time that you spoke to the auditor about whether he required a comfort letter, there was to your knowledge no reason expectation at that point in time that the existing banking facilities and the subordinated parent loan would not be maintained, was there?
A. I have no doubt at all, but I would have expected it to increase from what it was because nobody knew at the time how big Gate Gourmet Australia was going to be and how much working capital was going to be required.

Q. Well, you are anticipating my next question, so take heed of the judge's warning. Is it also correct to say that at that time, that is when you made the inquiry of the auditor, based upon your then estimate of the anticipated requirements for the group companies, that you were satisfied that the facilities available were sufficient, or if not sufficient would be re-negotiated?
A. They would have been sufficient in the short-term.”
[transcript 62] [emphasis added]

242 There is no doubt but that the surrounding circumstances in which the first and then the critical second letter came into existence critically concerned, as each letter in fact in terms acknowledges, the subject matter of the financial support which may be necessary to enable the Australian holding company and its controlled subsidiary to meet their financial commitments as and when they fell due. The acquisition of Ansett catering services was an entirely new initiative carrying with it, not only the prospects of real success, but also the risks associated with any such new major enterprise. Regardless of the change in wording [where the word "guarantee" was replaced in the second sentence with the words "letter of support"], the crystal clarity of the second sentence treated with the topic of the point in time when the Australian holding company and its controlled entities would have sufficient means to meet their obligations without the support of the Swiss parent. Up until that point in time arrived, the Swiss parent would not withdraw the Letter. The circumstances disclosed by the evidence, considered in terms of standards of reasonable conduct in the known circumstances, make very plain that the intention which reasonable people would have had if placed in the situation of the parties was that the Letter would give rise to legal rights and duties being intended to have contractual force.

243 The finding is that the Australian trading company was a promisee.

Agency

244 The above analysis and findings make it unnecessary to deal with the case put in terms of agency. Arguably, the same result may be capable of being achieved under the rubric of the claimed agency.

Loss and damage

245 It is beyond dispute that, on the evidence, the terms of the Letter were ultimately not honoured by the Swiss parent. I did not understand the defendants to contend to the contrary.

246 The plaintiff, having succeeded in establishing the existence of the contract upon which it sues, the facts clearly establish breaches of the express and clear terms of that contract.

247 The plaintiff has established a prima facie case of loss and damage, the current hearing not dealing with the issue otherwise than in principle.

248 As earlier indicated, the ambit of the hearing with which this judgment deals did not extend to embrace quantum, and it suffices for present purposes to note that a quantum hearing will follow when the parties have been able to prepare for that hearing and when the Court is able to provide Court time for that exercise.

Benefit of the promise

249 In the event that the conclusion that the Australian trading company was a promisee be incorrect, it would be necessary to consider the benefit of the promise case. In deference to the detailed submissions which were advanced in this regard, I propose to consider this alternative claim pursued by the Australian trading company.

250 The claim arises if, on the true construction of the Letter, the only promisee/offeree is the Australian holding company. In that event, the Australian trading company contends that it is nevertheless entitled, in the particular circumstances of the case, to enforce the promise made for its own benefit. As before, the plaintiff’s submissions are generally accepted as correct.

251 It is, of course, well settled that in the ordinary case a person who is not a party to a contract is not entitled to sue upon it so as directly to enforce the obligations it contains, even if for the party’s own benefit [see, for example, Coulls v Bagot’s Executor & Trustee Co Ltd [1967] HCA 3; (1967) 119 CLR 460 at 478, 487, 494].

252 To this general rule, however, there are certain “exceptions”. One such exception was identified in Trident General Insurance Co Limited v McNiece Bros Proprietary Limited (1987) 8 NSWLR 270; affirmed [1988] HCA 44; (1988) 165 CLR 107. For a number of reasons, both the judgments in the Court of Appeal, and in the High Court, are of importance.

253 In Trident, the Court of Appeal held that in the case of a policy of indemnity against a liability in damages at common law, a non-party beneficiary may sue directly on the policy without having to prove that the promise of indemnity was held in trust for it by the promisee party [at 288]. The High Court dismissed an appeal from the decision, although the reasons of the members of the Court differed. According to Mason CJ and Wilson J [at 123 – 124] and Toohey J [at 172], in general, a non-party beneficiary may sue directly on a policy of insurance without having to prove that the promise of indemnity was held in trust for it by the promisee party where:

· it is the common intention of the parties that the non-party beneficiary benefit under the policy; and

· the non-party beneficiary can be expected to order its affairs accordingly.

254 In the present case, the following factors justify a similar conclusion:

· as indicated earlier in this judgment:

- it is clear from the language of the Letter, and the circumstances surrounding it, that the Swiss parent and the Australian holding company intended that the Australian trading company obtain the benefit of the promises contained in the Letter;

- on the faith of the Letter, the Australian trading company continued to trade;

· the present case is an example of a contract of indemnity intended to benefit the controlled entities. Indeed, in one sense the present case is a clearer case than Trident, because the controlled entities were all in existence and ascertainable at the date of making of the contract;

· while the contract in the present case is not a contract of insurance simpliciter, the features which distinguish this contract from that sort of contract of indemnity provide no valid point of distinction on any matter of principle relevant to the reasoning in Trident;

· even if that is not so, the policy considerations applicable with respect to groups of companies in a commercial context are the same as those that were thought relevant in the specific sphere of liability insurance in Trident. The observations of the judges, both in the Court of Appeal and in the High Court, in connection with the need for some judicially inspired law reform, and the history of critical judicial opinion recounted in the Trident decisions [see, for example, at 8 NSWLR 284 ff, 165 CLR 113-122] remain matters of significance at the present time.

255 Thus, even if distinguishable on the basis that the contract of indemnity in the present case is not in all respects identical to that under consideration in Trident, the same considerations justify the relatively modest incremental step of declaring the now recognised exception to the privity rule as applicable in the present case.

256 Alternatively, if this be impermissible, resort may be had to the more traditional “exception” to the privity rule, where the named promisee holds the benefit of the promise on trust for the parties intended to benefit thereby.

257 In Wilson v Darling Island Stevedoring and Lighterage Co Ltd [1956] HCA 8; (1956) 95 CLR 43, Fullager J [at 67] observed that “it was difficult to understand the reluctance which courts have sometimes shown to infer a trust in such cases” [referring to contracts whereby a benefit is promised to a third party]. In relation to this observation, the High Court said in Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604 at 618 – 619:

“If the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to the intention, then there is no reason why in a given case an intention to create a trust should not be inferred.”

258 In Trident, the observations of Mason CJ and Wilson J [at 121], Deane J [at 146 – 148] and Dawson J [at 156 – 157] appear to have disavowed any necessity for inhibition in recognising that the benefit of a promise may be held on trust in appropriate circumstances. In this regard, Mason CJ and Wilson J observed as follows [at 121]:

“...the courts will recognize the existence of a trust when it appears from the language of the parties, construed in its context, including the matrix of circumstances, that the parties so intended. We are speaking of express trusts, the existence of which depends on intention. In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention...”

259 Similarly, Deane J stated that [at 147]:

“...the requisite intention [to create a trust of a contractual promise to benefit a third party] should be inferred if it clearly appears that it was the intention of the promisee that the third party should himself be entitled to insist upon performance of the promise and receipt of the benefit and if trust is, in the circumstances, the appropriate legal mechanism for giving effect to that intention. A fortiori, equity’s requirement of an intention to create a trust will be at least prima facie satisfied if the terms of the contract expressly or impliedly manifest that intention as the joint intention of both promisor and promisee.”

260 In Trident, a trust could not be identified, principally because the relevant “beneficiary” was not in existence at the time when the necessary intention had to be formed, and also because no such claim had been pleaded. Absent those considerations, there appears to have been every prospect that a trust would have been identified.

261 As the judgments referred to above point out, the relevant intention necessary to establish a trust must be the intention of the promisee. In the present case, as indicated above, it is clear from the language of the Letter, and the circumstances surrounding it, that the Australian holding company intended that the Australian trading company and the other trading entities obtain the benefit of the promises contained in the Letter. The relevant inference of intention can readily be drawn and I draw it.

262 Accordingly, if it be correct that the Australian holding company was the only promisee, it obtained the benefit of the promises in the Letter with the intention that they should subsist for the actual benefit of the Australian trading company and the other trading entities that were to incur the anticipated financial commitments.

263 It is fair to say that a close analysis of the pleadings may not permit the plaintiff to maintain a case that it is entitled to sue directly on any contract between the Swiss parent and the Australian holding company [as opposed to being entitled to sue as beneficiary of a promise held by the Australian holding company on trust for it].

264 The plaintiff did put this case in submissions and no point was taken by the defendants that this submission went outside the pleaded case. To my mind, the matter having been litigated accordingly, the plaintiff had an entitlement to put this case.

The Trade Practices Act causes of action

General propositions

265 The following propositions appear to be clearly established:

· whether particular conduct is misleading or deceptive is a question of fact to be determined in the context of the evidence as to the alleged conduct and as to the whole of the complex of relevant surrounding facts and circumstances;

· effect should be given to the ordinary meaning of the words used which should not be qualified or (if it be possible) expanded by reference to established common law principles of liability: Brown v Jam Factory Pty Ltd (1981) ATPR 40-213 at 42,928 per Fox J;

· “misleading” is a word which is capable of expressing various shades of meaning. Its meaning is apt to be decisively influenced by the context in which it is found: R v The Credit Tribunal; Ex parte General Motors Acceptance Corp, Australia [1977] HCA 34; (1977) 137 CLR 545 at 561 per Mason J;

· the words "likely to mislead or deceive" make clear that it is unnecessary to prove that the conduct in question actually deceived or misled anyone. Conduct is likely to mislead or to deceive if there is a real or not remote chance or possibility regardless of whether it is less or more than 50%: Global Sportsman Pty Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 2 FCR 82 at 87;

· the question of whether conduct is misleading or deceptive or likely to mislead or deceive is an objective question and is a matter for determination by the court for itself. Evidence that particular persons have been misled, although admissible and commonly likely to be very persuasive, will not be determinative of the issue;

· an essential issue in determining whether a person’s conduct has contravened section 52(1) is determining “what is to be taken from that conduct”: Wright v TNT Management Pty Ltd (1989) 15 NSWLR 679 at 683 per Mahoney JA – cited with approval by Mason P in Sydney Harbour Casino Properties Pty Ltd v Coluzzi [2002] NSWCA 74 at [51];

· the intent of the defendant is not relevant under section 52;

· it is necessary to inquire why any misconception has arisen for the reason that it is only by such an inquiry that the evidence of those shown to have been led into error can be evaluated to determine whether they were confused by misleading conduct of the defendant: Taco Company of Australia Inc v Taco Bell Pty Ltd [1982] FCA 136; (1982) 42 ALR 177.

Causation and Reliance

266 Section 82(1) of the TPA provides:

"A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention." [emphasis added]

267 In Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 509-510, McHugh, Hayne and Callinan JJ pointed out that the power of the court to make orders under section 87(1) was predicated upon the court finding "that a person who is a party to the proceeding has suffered, or is likely to suffer, loss or damage by conduct of another" engaged in the contravention of Part IV, IVA or V and that, relevantly, “section 87 (1A) was also predicated upon the applicant being "a person who has suffered, or is likely to suffer, loss or damage by conduct of another”” engaged in the contravention of, relevantly, Part V. [emphasis added]

268 In the same joint judgment their Honours said [at 512]:

“The question presented by s82...is what loss or damage has been caused by the conduct contravening the Act.”

269 It follows, then, that a comparison must be made between the position in which the party that allegedly has suffered loss or damage is in and the position in which that party would have been but for the contravening conduct [cf Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd, (unreported, 8 February 1999, NSWSC) at [60] et seq.]. And even this inquiry may not conclude the question. As McHugh, Hayne and Callinan JJ pointed out [at 512-513]:

“Analysing the question of causation only by reference to what is, in essence, a "but for" test has been found wanting in other contexts and it may well be that it is not an exclusive test of causation in this area either. But that is not a question which we need to consider in this case. For the moment it is enough to say that s82 requires identification of a causal link between loss or damage and conduct done in contravention of the Act."

270 In Henville v Walker [2001] HCA 52, the High Court again addressed the issue of causation. A convenient summary of the facts is given in an article entitled 'Monetary Remedies under the Trade Practices Act' [David Wright, (2002) 22 Australian Bar Review 39] in the following terms [at 41]:

“By the time that Henville v Walker reached the High Court it was not in issue that Walker had made a series of representations to Henville which breached s 52 of the TPA. The first of the representations was that there was a market for luxury, top of the range units in Albany, Western Australia. The second was that Walker had represented that the sale of these luxury units would be for between $250,000 and $280,000 each. Nor was it an issue that Henville bought the land that the units were to be built on for $190,000 and he constructed three units on this land. But as the representations were inaccurate, Henville sold the units for a joint amount of only $545,000. In total, including building costs, his loss on the project was $319,846.51. Before buying the land Henville had prepared a feasibility study, but with regard to the revenue side of it the figure that was employed was that supplied by Walker’s misrepresentation. With regard to cost, Henville estimated $551,000. However, both the revenue side of it and the cost side of the feasibility study were greatly inaccurate (the revenue side over-estimated the revenue, while the cost side greatly underestimated the cost). Henville brought an action against Walker in the Supreme Court of Western Australia for breach of s 52 and sought recovery of his loss under s 82. At first instance, Henville received most of the money he was seeking, but was not able to recover a certain amount because his own actions were the cause of that part of the overall loss. On appeal to the Full Court of the Supreme Court of Western Australia, Henville was not able to recover any of the loss as his own action, that is by preparing the feasibility study, broke the chain of causation. The question in the appeal was the amount of the recoverable loss under the action. All five members of the High Court allowed the appeal but their Honours wrote separate judgments, except for Gummow J who agreed with both McHugh and Hayne JJ.”

271 In Henville, Gleeson CJ said [at [14]]:

“For there to be the necessary causal relationship between a contravention of s 52, and loss or damage, so as to satisfy the requirements of s 82(1), it is not essential that the contravention be the sole cause of the loss or damage. As Brennan J pointed out in Poseidon Ltd & Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 356-357, where the making of a false representation induces a person to act in a certain manner, loss or damage may flow directly from the act and only indirectly from the making of the representation; but in such a case the act “is a link – not a break – in the chain of causation”.

272 Gaudron J cited the “common-sense” approach articulated by the High Court in March v E & MH Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506, holding [at [61]]:

"...that common-sense approach requires no more than that the act or event in question should have materially contributed to the loss or injury suffered. And there is nothing in the Act to suggest that any different approach should be taken in the case of a misrepresentation that constitutes a contravention of s52(1).”

273 McHugh J said [at [106]]:

“If the defendant’s breach has “materially contributed” (Bonnington Castings Ltd v Wardlaw [1956] UKHL 1; [1956] AC 613 at 620, per Lord Reid) to the loss or damage suffered, it will be regarded as a cause of the loss or damage, despite other factors or conditions having played an even more significant role in producing the loss or damage. As long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage.”

At [132], his Honour said:

“In this case, the most appropriate approach is to identify what Mr Henville has suffered by way of prejudice or disadvantage in consequence of altering his position by reason of the breach of the Act (Toteff v Antonas [1952] HCA 16; (1952) 87 CLR 647at 650, referred to, inter alia in Wardley Australia Ltd v State of Western Australia [1992] HCA 55; (1992) 175 CLR 514 at 526, Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 512 [41]). The measure of that loss is not determined by reference to what he would have received if Mr Walker’s representations had been true. As the New Zealand Court of Appeal pointed out in Cox & Coxon Ltd v Leipst [1998] NZCA 202; [1999] 2 NZLR 15, a case concerned with s 43(1) of the Fair Trading Act 1986 (NZ), a representation can give rise to a claim for a lost benefit or loss of expectation only where there is an obligation to perform the representation. The Court of Appeal held that s 43(1) was directed against the making of a false representation, as opposed to the failure to perform it. Similarly, the wrong which s 52 of the Act prohibits is the making of, not the failure to honour, the false representation. By entering upon the project, Mr Henville has lost $319,846.51. If Mr Walker had not made representations in breach of the Act, none of this loss would have occurred. The loss suffered is therefore directly attributable to a contravention of the Act even though other factors played their part in bring about the loss.”

274 Hayne J put the matter as follows [at [162]]:

“The conclusion that the appellants suffered loss requires comparison between the position in which the appellants found themselves after the project was finished, and the position in which they would have been if, instead of relying on what they were told by the respondents, they had not undertaken the project. It does not invite attention to what would have been their position if an accurate estimate of selling price had been given by the respondents (Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 514-515 [48]- [52]). Moreover, the conclusion that the appellants suffered loss neither requires nor permits consideration of some third or intermediate position in which the appellants undertook some project or transaction other than the one they did. It is, therefore, not relevant to consider what the loss might have been if the costs had been estimated properly.”

275 In order to establish an entitlement to damages flowing from a breach of s52, a plaintiff need only show that the contravening conduct was one of the causes of its loss, not that it was the sole, or principal cause: Henville, at [109] per McHugh J and [163] per Hayne J, Gummow J agreeing; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41, at [57] per Gaudron, Gummow and Hayne JJ.

Section 51A

276 Section 51A(2) of the TPA provides that a corporation shall, unless it adduces evidence to the contrary, be deemed not to have had reasonable grounds for making a representation as to a future matter. Section 51A(1) provides that where the corporation does not have reasonable grounds for making the representation, the representation shall be taken to be misleading.

277 Section 51A is of course an evidentiary, rather than a substantive, provision: Bowler v Hilda Pty Ltd (1998) 80 FCR 191 at 206 per Heerey J.

278 Clearly, section 51A does not prove that a representation as to a future matter was relied upon by the other contracting party [cf Concrete Constructions Group v Litevale Pty Ltd [2002] NSWSC 670 at [166] per Mason P]. Nor does it address whether, at the time of the representation as to the future matter, it was reasonable for the maker of the representation to have made it. The onus of proof having shifted, the representor must show objectively that it had reasonable grounds for making the representation: Futuretronics International Pty Ltd v Gadzhis [1992] VicRp 63; [1992] 2 VR 217 at 240, per Ormiston J, referred to with approval by Lockhart and Gummow JJ in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470 at 506. Clearly also, the plaintiff has an onus of showing demonstrable loss which flowed from any reliance by the plaintiff upon the defendants section 51A deemed misleading conduct: Concrete Constructions at [160] per Mason P.

279 The section has recently been examined by the New South Wales Court of Appeal in Digi-Tech (Australia) Ltd v Brand; Digi-Tech (Australia) Ltd v Kelliher; Kalifair Pty Ltd v Digi-Tech (Australia) Ltd; McLean Tecnic Pty Ltd v Digi-Tech (Australia) Ltd [2004] NSWCA 58, where the Court cited with approval the following passage from the dissenting judgment of McHugh JA in Wright v TNT Management Pty Limited (1989) 15 NSWLR 679 at 688ff [at [29]]:

“The common law drew a distinction between a representation as to an existing fact and a promise to do something in the future. At common law, a promise as to a future intention or event was actionable in contract. But a representation as to a future event was not actionable. A representation was actionable only when it concerned an existing or past fact. Moreover, statute apart, a non-contractual promise that something was to be done in the future did not constitute a representation of an existing fact ‘unless out of it can be spelt a representation as to the present existence of an intention, belief or state of knowledge on the part of the promisor’”.

His Honour described the effect of s 51A in the following terms (at 690):

“... for the purposes of Part V, s 51A must be taken to have abolished the distinction between a promise and a representation with respect to a future event. A promise to do something in the future is to be regarded as a representation that it will be performed. It will be deemed misleading, therefore, unless the corporation proves that it had reasonable grounds for making the promise.”

280 The following propositions are supported by Cummings v Lewis (1993) 41 FCR 559 at 565-566 per Sheppard and Neaves JJ [applied by Mason P in City of Botany Bay Council v Jazabas Pty Ltd [2002] ANZ ConvR 300 at 308] :

· the section is concerned with whether there were reasonable grounds for a belief;

· the section does not deal with genuine or honest belief:

· the fact that a person may honestly believe in a particular state of affairs does not necessarily mean that he has reasonable grounds for his belief that the statement he makes is correct;

· evidence of reasonable grounds may be established by evidence other than that of the persons who are alleged to have made particular representations as to a future matter. Hence, a court may find "the overall probabilities to which the circumstances of a given case give rise, the background to it and the conduct of parties prior to conversations taking place as providing better guides as to whether or not they had particular states of mind or whether particular factors existed which would establish evidence of something such as reasonable grounds".

281 The law is clear that a representation may be a representation with respect to a future matter even if it is also, impliedly, a representation as to the existing state of mind of the maker: Ting v Blanche [1993] FCA 524; (1993) 118 ALR 543 at 553 per Hill J, cited in Sykes v Reserve Bank of Australia (1998) 88 FCR 511 at 514-515 per Heerey J.

282 The applicability of section 51A is to be ascertained by a proper characterisation of the representation made in each case. In determining the proper characterisation of the representation, the material in question requires to be construed and understood in the light of the background facts and the context in which they arise: Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193 at 242 per Gummow J.

Continuing representations and the circumstances in which they may be regarded as having lapsed or become spent

283 The proposition summarised by Romer LJ in With v O’Flanagan [1936] Ch 575 at 583 is plainly correct:

“If A with a view to inducing B to enter into a contract makes a representation as to a material fact, then if at a later date and before the contract is actually entered into, owing to a change in circumstances, the representation then made would be to the knowledge of B untrue, and B subsequently enters into the contract in ignorance of that change in circumstances and relying upon that representation, A cannot hold B to the bargain.”

284 In short a representation may, depending always upon the precise circumstances in which it was made and upon later circumstances, have a continuing effect during the period of time following the date upon which the representation was made. The relevant period of time dealt with in the authorities is, for obvious reasons, invariably the period between the point in time when the representation was made and the point in time when it is acted upon by the representee, often by concluding a contract. Hence the springing up of the suggested duty upon the representor not to leave the representee under an error when the representation requires to be corrected, failing which correction, the representee continues ignorant of the intervening change of circumstances, and goes on by relying upon the representation as having continuing effect.

285 In Smith v Kay [1859] EngR 38; (1859) 7 HL Cas 750, Lord Cranworth said [at 769]:

“The representation does not end, for ever when the representation is once made, it continues on.”


It is clear that a representation may, depending upon the circumstances which occur following the date upon which the representation was made, become spent. A representation may become spent for different reasons.

The case as pleaded

286 The case as pleaded alleges as follows:

The alleged representation

287 The Letter is said to have been a representation made by the Swiss parent, in Australia, in the course of trade and commerce, that:

· the Swiss parent would provide the financial support that might be necessary to enable the Australian holding company and its controlled entities to meet their financial commitments as and when they fell due [said to be an express representation];

· the Swiss parent would not withdraw its financial support before the Australian holding company and its controlled entities had sufficient means to meet their obligations without the support of the Swiss parent [said to be an express representation];

· the Swiss parent had a present intention of honouring the express terms of the Letter in the future, and had the capacity to do so [said to be an implied representation];

· the Swiss parent believed that there were reasonable grounds for making the express statements referred to above, and that there was no reason to qualify those statements in any way [said to be an implied representation].

Inducement

288 PWC, as auditors of the plaintiff, are said to have given an unqualified audit for the year ended 31 December 2000.

289 The directors of the plaintiff are said to have provided a directors' declaration and opinion pursuant to section 295(4) of the Corporations Law that the financial statements and notes of the plaintiff , inter alia:

· complied with the accounting standards;

· gave a true and fair view of the company's financial position as at 31 December 2000;

· were in accordance with the Corporations Law and that there were reasonable grounds to believe that the company would be able to pay its debts as and when they became due and payable.

290 The plaintiff is said to have continued to trade and incur debts in circumstances where the company's financial position was such that, absent the Letter, the company would have ceased trading.

Letter misleading and deceptive

291 The Letter is said to have been misleading or deceptive or likely to mislead and deceive in contravention of section 52 of the TPA in that the Swiss parent had no intention:

· of providing the financial support that might be necessary to enable the plaintiff to meet its financial commitments as and when they fell due;

· of maintaining its financial support until the plaintiff had sufficient means to meet its obligations without the support of the Swiss parent; or alternatively

· the Swiss parent is said not to have given any consideration to whether it would honour the express terms of the Letter in the future, to whether there were reasonable grounds for making the express statements set out therein, and/or to whether the Letter should be qualified in any way.

Future matters

292 Further, insofar as the Letter relates to future matters, the claim made is that at the time it was written the Swiss parent had no reasonable grounds for making the representations contained therein.

Dealing with the issue

293 The case is pressed:

· first, on the basis of the express representations contained within the Letter, namely, that the Swiss parent would provide the financial support that may be necessary to enable the Australian holding company and its controlled entities to meet their financial commitments as and when they fell due, and would not withdraw its financial support before the Australian holding company and its controlled entities had sufficient means to meet their obligations without the support of the Swiss parent;

· second, on the basis of two implied representations, namely, that the Swiss parent had a present intention of honouring the express terms of the Letter in the future, and had the capacity to do so, and that the Swiss parent believed that there were reasonable grounds for making the express representations contained in the Letter and that there was no reason to qualify those statements in any way.

Findings – the representations

294 It seems to me beyond doubt that the Letter contains the pleaded [express as well as implied] representations set out above. The terms of the Letter are clear and unequivocal. It provides that the Swiss parent will provide the financial support that may be necessary to enable the Australian holding company and its controlled entities to meet their financial commitments as and when they fall due, and that the Letter will not be withdrawn before the Australian holding company and its controlled entities have sufficient means to meet their obligations without the support of the Swiss parent. Those statements are unqualified. Nor can any qualification be discerned by reference to the circumstances surrounding the making of the representations: see the chain of e-mails between Mr Nielsen and Mr Goggi at TB 2/822-3, 835-6.

295 The representations contained in the Letter are properly characterised as representations “with respect to a future matter”, namely, the provision in the future of financial support, and the maintenance of that position until the Australian holding company and its controlled entities could in essence ‘stand on their own feet’. The terms of section 51A provide that a representation with respect to any future matter includes the doing of, or the refusing to do, any act: section 51A(1).

Does the evidence establish that the Swiss parent had reasonable grounds for making the representations as to the future matters?

296 As already observed in Cummings, it is clear that a court faced with a lack of evidence of the persons alleged to have made particular representations as to a future matter may nonetheless find that the overall probabilities to which the circumstances of a given case give rise, the background to it and the conduct of parties prior to conversations taking place, provide better guides as to whether or not those persons had particular states of mind [or whether particular factors existed which would establish evidence of something such as reasonable grounds].

297 The Court does not here have the benefit of any oral evidence given on behalf of the Swiss parent.

298 It is true that the Swiss parent has tendered materials proving that it did provide considerable support for the Australian trading company. The submission is that it has thereby established that it had reasonable grounds for making the representations.

299 In my view the submission should be rejected. The point in time at which this inquiry is focused concerns the state of affairs at the time when the representations were made. The Court is in the dark as to what circumstances, if any, gave reasonable grounds for the making of the implied representations. That void is not here capable of being filled by inference. At the least, the e-mail exchange between Mr Goggi and Mr Nielsen in February 2001, the apparently broad terms of the Letter, and the unequivocal departure, without notice, from the terms of the Letter on 13 September 2001, required an explanation from the relevant officers of the Swiss parent. That explanation should have addressed, at a minimum, the state of affairs at the time the Swiss parent made the representations, and the reasons why it decided in September 2001 to depart from their express terms.

300 Outside altogether of any need to invoke the rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298, the matter simply stands by operation of section 51A of the TPA, whereby the Swiss parent is deemed not to have reasonable grounds for making the representations, and the representations are taken to be misleading. The failure of the Swiss parent to call any evidence as to the matters the Swiss parent actually relied upon in making the representations in the Letter has the result that they have not discharged the onus of proof in section 51A(2).

301 During final address, Mr Pembroke submitted that the Letter represented a genuine statement of commercial intent at the time it was made, the central purport of his oral submissions being the proposition that the evidence established that there were reasonable grounds for making the statement. [transcript 267, 270]

302 The short position is that the evidence simply does not go this distance. It was not that unequivocal. Mr Engebretsen’s evidence was that “the Australian companies would normally get money from Switzerland” [transcript 160.40] [emphasis added]. Mr Larsen’s evidence was that “it was normal practice that the Swiss company would make sure that the [subsidiary] had funds” [transcript 178.1] [emphasis added]. This evidence does not unequivocally establish that which had to be established. No doubt there are cases where a cushion of evidence comes forward from which the court is able, on the balance of probabilities, to infer that there were reasonable grounds for a particular belief being held, where representations as to a future matter have been made. This is not one of those cases. The raw requirement posed by the section has not been fulfilled.

303 The Australian trading company seeks to also rely upon the rule in Jones v Dunkel, the submission being that the failure by the defendants to adduce evidence from the signatories to the Letter, Messrs Boysen and Grolimund, and the person who conducted the negotiations with the plaintiff over its terms, Mr Nielsen, gives rise to an inference that their evidence would not have helped the defendants’ case.

304 It is important to recall the principles laid down in Jones v Dunkel. The following extracts clarify the position in this regard:

· "The unexplained failure by a party to give evidence, to call witnesses, or tender documents may - not must - in appropriate circumstances lead to an inference that the uncalled evidence would not have assisted that party's case. The appropriate circumstances exist where it was within the power of the party to tender the evidence which was not tendered." [JD Heydon, Cross on Evidence, 6th ed, Butterworths, Sydney, 2000 at [1215]]

· "This instance of a Jones v Dunkel inference..., also available where there is unexplained failure by the party to call a witness or tender documentary evidence, can entitle the judge or jury more readily to accept the evidence of the opposite party which might have been contradicted, or more readily to draw any inference fairly available from the evidence called by the other party. A Jones v Dunkel inference cannot fill gaps in the evidence, or convert conjecture and suspicion into inference, but unless it is to be empty of content the inference if drawn may weigh the scales, however slightly, in favour of the opposing party." [Adler v Australian Securities and Investments Commission [2003] NSWCA 131 at [649] per Giles JA, Mason P and Beazley JA agreeing]

· "[T]he rule [in Jones v Dunkel] only applies where a party is "required to explain or contradict" something. What a party is required to explain or contradict depends on the issues as thrown up in the pleadings and by the course of evidence in the case. No inference can be drawn unless evidence is given of facts "requiring an answer".
[Cross on Evidence, Butterworths, [6th Ed], D Byrne, JD Heydon, vol 1 at [1215]]
[Passage quoted with approval in the joint judgment of Gleeson CJ and McHugh J in Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 170 ALR 594 at 609]

305 The proper inference is that the failure of Messrs Boysen, Grolimund and Nielsen to give evidence on these matters suggests that the evidence they would have given would not have helped the Swiss parent defendants’ case; they were “facts which required an answer”: Jones v Dunkel; Schellenberg, supra.

306 The holding is that the Swiss parent has not established that it had reasonable grounds for making the representations as to the future matters.

Inducement

307 The finding is that the representations were, in the circumstances, a real inducement to the Australian trading company continuing to trade. The plaintiff has established on the balance of probabilities that, in reliance upon the Letter, the unqualified audit for the year ended 31 December 2000 came forward, the plaintiff’s directors provided the relevant directors’ declaration and opinion and the Australian trading company continued to trade and incur debts in circumstances where its financial position was such that, absent the Letter, the company would have ceased trading.

308 Mr McIntyre’s evidence was that the existence of the Letter was crucial to the plaintiff’s ability to be able to pay its debts as and when they fell due [paragraph 22, Exhibit P5]. Further, if he had been aware that the Swiss parent did not intend to honour the Letter, he would have considered that the plaintiff was trading insolvent and would have called a board meeting and taken steps to appoint a voluntary administrator [paragraph 16, Exhibit P6].

309 The case which is established is that, in the absence of the provision of the Letter, trading would not have been permitted. The Court's finding is that without that document the company would have gone into administration.

310 The Court is entitled to proceed upon the bases that:

· if a representation is of such a nature as to be likely to induce a representee to act upon it, the inference may be drawn, if the representee does act, that the representee has acted in reliance on the representations;

· recovery under section 52 is founded by the plaintiff’s actual reliance upon the misleading or deceptive conduct of the defendants, although that conduct was not the only factor in the plaintiff’s decision.

311 Clearly enough, the very text of the Letter makes it plain that the entities to which it expressly referred, namely, the Australian holding company and its controlled entities, could reasonably be anticipated to rely on it: see Campomar Sociedad, Limitada v Nike International Ltd [2000] HCA 12 at [103 -105]; Spencer, Bower, Turner and Handley, Actionable Misrepresentation, Fourth Edition, Chapter 9.

312 There is no substance in the proposition put by the defendants that there could only be reliance or causation if the plaintiff continued to trade after exhausting its existing facilities, relying upon the general assurance of support in the Letter. This misconceives the true issue. This case concerns the making of a representation shown to have been misleading or deceptive which induced the Australian trading company to act by continuing to trade. The subject representation materially contributed to the loss and damage sustained by the Australian trading company.

313 In relation to this cause of action, the plaintiff has also established a prima facie case of loss and damage.

The cases against Mr Boysen and Mr Grolimund

314 The plaintiff also further claims that, if the Court finds that the Swiss parent contravened section 52 of the TPA, then by reason of that conduct Messrs Boysen and Grolimund:

· aided, abetted, counselled or procured that contravention;

· were knowingly concerned in, or party to, that contravention; and

· are therefore liable to a claim in damages pursuant to section 82 of the TPA.

315 In order to establish ancillary liability under section 82, it is essential, inter alia, to determine the subjective intent of the defendant (at least insofar as conduct identified in section 75B(1)(a) and (c) is concerned): Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661 at 669, per Mason ACJ, Wilson, Deane and Dawson JJ. Such liability cannot be established by proof of objective surrounding facts alone.

316 The plaintiff failed to lead evidence concerning the subjective state of mind and degree of involvement of Messrs Boysen and Grolimund in the production of the Letter. Accordingly, this aspect of the plaintiff’s claim fails.

Estoppel

317 In the light of the above holdings it is unnecessary for the Court to examine the further alternative claim put by the plaintiff by way of the estoppel cause of action.

Reserved rulings

318 Evidence was taken in Victoria by myself sitting as an examiner. On that occasion, before Mr McIntyre entered the witness box, I indicated the rulings which would be appropriate in terms of objections to his statements. Orders of this Court are made in precisely the same terms.

319 An objection was taken to the admission into evidence of page 503 of the materials originally marked MFI PX. That page is rejected on the grounds of relevance.

Short minutes of order

320 The parties are given leave to make submissions in relation to any matter which the Court may not yet have dealt with. Short minutes of order are required to be brought in. Costs will be dealt with at the same time.

I certify that paragraphs 1 - 320
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 31 March 2004


___________________
Susan Piggott
Associate
31 March 2004

LAST UPDATED: 02/04/2004