PGA Group Pty Ltd v Idameneo (No 789) Limited (formerly Symbion Health Limited); Gunn v Idameneo (No 789) Limited (formerly Symbion Health Limited) [2011] VSC 382 (18 August 2011)

CONTRACT CONSTRUCTION – Meaning of “due” – Whether “presently payable” – Principles of construction – No express time for performance – Term to be implied – Reasonable time

GUARANTEE – Demand for payment – Whether deficiencies in the demand – Guarantor’s liability enlivened

TENDER OF PAYMENT – Principles to be applied – Tender invalid as payment not proffered unconditionally

EQUITABLE SET-OFF – Principles – Whether claim is so interrelated with the other claim that it would be unjust or inequitable for one claim to be met without bringing the other claim to account – Claims sufficiently interrelated

COLLATERAL CONTRACT – Principles – Consideration execution of main contract – No inconsistency between main contract and collateral contract

CONTRACT – Whether contract for consultancy services – No concluded agreement

EVIDENCE – Expert evidence – Whether evidence based wholly or substantially on specialised knowledge – Whether relevant to the issues for determination

APPEARANCES:	Counsel	Solicitors
For the Plaintiffs and Defendants by Counterclaim	Mr E. N. Magee QC with Mr A. A. Monichino SC and Mr E. Gisonda	Gadens

For the Defendants and Plaintiffs by Counterclaim	Mr R. C. Macaw QC with Mr T. J. Walker	Freehills

1 PGA Group Pty Ltd (“PGA”) is the parent company of the PGA group of companies, controlled by Peter Gunn (“Gunn”). In June 1999, PGA and Mayne Group Limited (“Mayne”) (now known as Idameneo (No. 789) Limited) merged their respective logistics businesses (“the merger”) into a new entity, MPG Logistics Pty Ltd (“MPG”), in which PGA took a 25% interest through its wholly owned subsidiary PGA (Logistics) Pty Ltd (“PGA Logistics”) and Mayne took a 75% interest. Gunn was appointed the CEO of MPG and Stuart Hinchen (“Hinchen”) from Mayne was appointed MPG’s Chief Financial Officer (“CFO”). Although the parties intended to float MPG within two years of the merger, it soon became apparent that the business objectives were unachievable and the merger was short lived. In September 1999 an in principle agreement was reached that Mayne would purchase PGA’s minority interest in MPG for $62 million (“the demerger”). The demerger was effected on 29 February 2000, as the result of which MPG became a wholly owned subsidiary of Mayne.

2 Although the parties separated their interests in 2000, PGA and Gunn assert three unresolved matters between the parties. The first matter relates to a set-off effected by Mayne. Mayne was due to pay $10.5m to PGA on 2 January 2001 and another $10.5m on 2 July 2001 in part payment for PGA’s shares in MPG. Mayne set-off against the payments due by it, a total of $4,971,657 in respect of a debt that Mayne claimed PGA (as guarantor) owed it. PGA seeks the recovery of some or all of the amount set-off (“the Southcorp claim”). The second matter relates to the quantum of the dividend that MPG paid PGA on 29 February 2000. The parties are in dispute about whether PGA has an entitlement to be paid more than it received (“the dividend collateral agreement claim”). The third matter concerns the existence and terms of a consultancy agreement for Gunn to provide consultancy services to Mayne following the demerger (“the consultancy agreement claim”).

3 The determination of these claims requires consideration of events that took place over 11 years ago and depends to some extent upon witnesses’ recollections of those events. It was hardly surprising that some witnesses had difficulty recalling matters or were unable to be precise in their evidence, although both parties sought to impugn the reliability and credit of the other party’s witnesses. There was considerable disparity in the evidence that was given and from time to time witnesses contradicted their own evidence or were shown to have imperfect recollections. Nonetheless I am of the view that all witnesses gave their evidence honestly as best as they could recollect either from independent recollection or aided by their review of contemporaneous documents. I could not conclude, however, that the recollection of any of them was particularly reliable because of the considerable time that has elapsed since the events in question. I found the contemporaneous documents to be of greater probative value than the independent recollections and reconstructed recollections of the witnesses.

4 The issues that arise for consideration under this claim are more readily understood against the background of the relevant events that, by and large, were not in dispute.

5 There were several agreements that governed and gave effect to the merger in June 1999. Those agreements included the PGA Sale Agreement pursuant to which PGA companies sold to MPG assets used by them in the PGA logistics business. Those assets excluded the “Southcorp contract” and the “Southcorp claim”.[1] At the time of the merger, PGA Logistics had a claim against Southcorp Whitegoods Pty Ltd (“Southcorp”) relating to the purported termination of a contract between PGA Logistics and Southcorp dated 17 August 1998. Although the “Southcorp contract” and the “Southcorp claim” were excluded assets, clause 9.1(d)(1) of the PGA Sale Agreement imposed the obligation on PGA Logistics to pursue the Southcorp claim actively “with a view to recovering the maximum realisable commercial benefit which is being foregone as a result of the loss of the Southcorp contract”.[2] Clause 9.1(d) further provided as follows:

6 As all staff associated with PGA Logistics had gone across to MPG as part of the merger, Gunn had the Southcorp claim pursued through another PGA company, PGA Management Pty Ltd (“PGA Management”) under the responsibility of Ian Urquhart (“Urquhart”), a director of PGA whom Gunn described in his evidence as his “advisor ... on all matters the subject of [PGA] companies’ businesses.”[4] The Southcorp claim was resolved in late 1999 upon Southcorp agreeing to pay PGA Logistics the sum of $5,000,000 which PGA Logistics received on or about 3 February 2000.

7 On 8 November 2000 MPG sent PGA Management an invoice for $5,000,000 because it had not received any part of the Southcorp proceeds. On 15 December 2000 Gunn sent a facsimile in response to that invoice addressed to David Cranwell (“Cranwell”) the General Manager of MPG. In the facsimile Gunn acknowledged that PGA had an obligation to account to MPG for the proceeds from the settlement of the Southcorp claim “less costs incurred in settling this claim”. The facsimile went on to state that:

The facsimile detailed a foreshadowed claim by Teklog Pty Ltd (“Teklog”) (a company in the PGA group of companies) against MPG and PGA (“the Teklog claim”).

8 Initially MPG disputed all the claimed costs and responded on 20 December 2000 by making written demands to PGA Logistics and PGA, as guarantor of PGA Logistics’ obligations under clause 20 of the PGA Sale Agreement, for payment of the whole of the proceeds of $5,000,000. On 22 December 2000 Gunn, in an endeavour to resolve matters, sent a cheque in the amount of $4,325,664 to MPG as payment of the net proceeds of recovery in respect of the Southcorp claim – that is $5,000,000 less deductions totalling $674,336. The payment was expressed to be:

9 On 29 December 2000 Cranwell sent a letter on Mayne letterhead to PGA Logistics returning the cheque in which he wrote that:

10 On 2 January 2001 Mayne was due to pay PGA the first instalment of the cash component of the consideration for PGA’s shares in MPG due under the MPG Sale of Shares Agreement. The instalment payable was $10.5m. On that day, Mayne gave notice to PGA Logistics and the guarantors under the PGA Sale Agreement, which included PGA and Gunn, that MPG had assigned to Mayne:

11 By a separate letter, also provided on 2 January 2001, Mayne informed them that it claimed a “set off against its obligation to pay [PGA] the sum of $10.5 million ... the amount of $4,825,664 in partial satisfaction of the debt owed by [PGA] as guarantor under [clauses 9.1(d)(4)(B) and 20] of the [PGA Sale Agreement]”. Mayne, in determining this amount, allowed all PGA Logistics’ claimed costs other than the management fee of $500,000 but reserved its rights to sue for the costs allowed if PGA could not adequately prove eligibility of those costs.

12 On 10 January 2001 Gunn wrote to Cranwell at Mayne stating that PGA Logistics would cancel the cheque returned to it on 29 December 2000, and would bank the cheque that the company had received from Mayne in the amount of $5,674,336. This was stated in the letter to be on the basis that PGA Logistics reserved its rights to be paid the $500,000 management fee and would provide all relevant information in support of its claim for the management fee “in the next week or so”. This information was provided on 23 March 2001 in a document headed “Justification of Fees” that was prepared by Urquhart.

13 The management fee issue remained an outstanding item for resolution between PGA and MPG and eventually on 2 July 2001 Mayne advised that it rejected the management fee claim as well as three of the other costs in respect of which it had earlier reserved its rights, namely $49,471 for sundry debtor claims, $61,522 in relation to the claim by C&S Howlett and $35,000 for the settlement of the wrongful dismissal claim by Hemming. On 2 July 2001, the day on which the second instalment of the cash component of the consideration payable by Mayne for PGA’s shares in MPG was due in the amount of $10.5m, Mayne informed PGA that it had set-off $145,993 and paid PGA an amount of $10,345,007.

(a) whether at the times of the set-offs, PGA was liable as guarantor under clause 20 of the PGA Sale Agreement with respect to any part or all of the proceeds recovered by PGA Logistics from the Southcorp claim;

(b) whether MPG assigned any of its rights under clause 20 of the PGA Sale Agreement;

15 The pleadings have raised for determination a number of issues that underpin the dispute between the parties.

16 PGA contended that as at 2 January and 2 July 2001, when the set-offs occurred, PGA was not liable to MPG under clause 20 as guarantor because the balance of the Southcorp Claim proceeds under clause 9.1(d)(4)(B) of the PGA Sale Agreement were not “due” by PGA Logistics to MPG, within the meaning of that word as used in clause 20.2.

18 It was argued that “due” in the context of clause 20.2 meant “presently payable”. I accept that construction as the meaning of the word “due” falls to be considered as part of the composite phrase “not paid when due” which clearly indicates that “due” must mean “presently payable”.[5]

(ii) Were the balance of the Southcorp proceeds “presently payable” by PGA Logistics to MPG under clause 9.1(d)(4)(B) at the set-off dates?

19 PGA contended that the balance of the proceeds were not presently payable by PGA Logistics to MPG as at 2 January and 2 July 2001 because, on the proper construction of clause 9.1(d)(4), the obligation on PGA Logistics to pay MPG under clause 9.1(d)(4)(B) arose after the proceeds recovered from the Southcorp claim were applied in payment of PGA Logistics’ reasonable costs incurred. It was further contended that the process in clause 9.1(d)(4)(A) was not complete as at 2 January and 2 July 2001 because MPG had disputed PGA Logistics’ costs and there was a foreshadowed possibility of further costs arising relating to the Teklog claim.

20 Mayne contended that clause 9.1(d)(4) should be construed as requiring PGA Logistics to pay over the proceeds of the Southcorp settlement, subject to its entitlement to withhold amounts for reasonable costs incurred in prosecuting it. Mayne argued that those costs were ascertainable by, or shortly after, the date of the successful prosecution and that the obligation arose at that point.

21 Clause 9.1(d)(4) did not in language prescribe when PGA Logistics was required to pay the balance of the proceeds to MPG. Rather, the stipulation was that the proceeds “must be applied” by PGA Logistics. The issue is whether it can be read into that stipulation that the balance of the proceeds were not payable to MPG until after PGA Logistics had applied the proceeds recovered to the payment of its reasonable costs incurred in prosecuting the Southcorp claim. The determination of this issue requires an objective inquiry into what the parties’ intended by the language used and, in ascertaining intention, the Court must consider clause 9.1(d)(4) in light of the contract as a whole, its purpose and object and the surrounding circumstances in which the contract was made.[6] Context is important to convey the meaning of a text that a reasonable person in the position of the parties would have understood the parties to have intended by the language used in the contract.[7]

22 PGA argued that the attribution intended by the word “first” in clause 9.1(d)(4) must be the application of the proceeds to PGA Logistics’ reasonable costs incurred, otherwise the word “balance” cannot be given its ordinary meaning of an amount that is left over. It was argued for PGA that the reason for paying PGA Logistics “first” out of the recovered proceeds was “readily apparent when considered against the role that PGA Logistics was to play under the 9.1(d) arrangement”.[8] That role was said to be the pursuit of the cause of action that PGA Logistics had against Southcorp which necessarily would involve PGA Logistics incurring costs. It was argued that as there was no provision for compensation for those costs other than by application of the proceeds of the Southcorp claim itself, the obligation that PGA Logistics pay only the balance of the proceeds following the application of some or all of the proceeds to its reasonable costs represented an important exercise of risk allocation. PGA Logistics was not to be kept out of its money for any longer than necessary and “to the extent that there was any dispute between PGA Logistics and MPG about the reasonableness of costs incurred, PGA Logistics was to hold the money while the dispute was resolved”.[9] It was also submitted that unless and until the proceeds had been so applied, the quantum of the balance was unknown and MPG’s rights were inchoate such that it could not be said that any moneys were payable to it.

23 I accept the submission that the proceeds were to be applied first in paying those costs of PGA Logistics which met the description in clause 9.1(d)(4) with the balance to be paid to MPG. The language of clause 9.1(d)(4) makes it plain that the parties intended that PGA Logistics would have the right to take its costs out of any proceeds recovered. This right is explicable having regard to the clear terms of clause 9.1(d)(1) read in conjunction with clauses 9.1(d)(4) and 9.1(d)(5). PGA Logistics was obliged to prosecute, at its own expense, the Southcorp claim for the benefit of MPG, subject to the right to recoup its costs to the extent that the proceeds that it recovered were sufficient to meet those costs and PGA Logistics was to bear the risk that its costs might outweigh the proceeds recovered. MPG had no responsibility for PGA Logistics’ costs, to the extent that the proceeds recovered by PGA Logistics from the Southcorp claim were inadequate to meet those costs, and the PGA Group was solely liable to meet those costs.

24 The question then is whether PGA Logistics’ right to take its costs out of any proceeds recovered meant that it was not liable to account to MPG for the balance before the proceeds were applied to PGA Logistics’ costs. In my view, clause 9.1(d)(4) should not be construed in that way.

25 Clause 9.1(d)(4) did not stipulate that the balance was not payable to MPG until the proceeds “had been” or “were” applied to PGA Logistics’ reasonable costs. The stipulation was that all proceeds recovered “must be applied ... in paying”. The language was in the active sense. That is to say, in the sense of the doing of an act, a direction as to what must be done with the proceeds.

26 There was no express time for performance of PGA Logistics’ obligation to account to MPG for the balance of the proceeds. However, a term may be implied that it was to be done within a reasonable time from PGA Logistics receiving the Southcorp proceeds and ascertaining the costs incurred by it in prosecuting the claim.[10] Such an implied term is consistent with the parties’ evident commercial purpose that PGA Logistics was to pursue the Southcorp claim for the benefit of MPG, into which the parties had transferred their logistics businesses. PGA Logistics had the substantive contractual obligation to prosecute the Southcorp claim to recover the maximum realisable commercial benefit,[11] and the substantive contractual obligation to account to MPG for the proceeds recovered, subject to PGA Logistics recouping its costs of prosecution.[12]

27 PGA Logistics received the proceeds on 3 February 2001. The evidence showed that PGA Logistics had ascertained its costs by 15 December 2000, at the latest. Gunn wrote to MPG on PGA Management letterhead advising MPG of those costs and that “so far as [he could] ascertain” the net amount of $4,325,664 was “available [to pay MPG] to date”. In my view, PGA Logistics was then liable to account to MPG for that net amount of $4,325,664. The obligation to account to MPG for the proceeds within a reasonable time of determining its costs meant that PGA Logistics could not withhold payment indefinitely pending some indeterminate claim by Teklog or because MPG subsequently disputed that PGA Logistics could net off the costs that it claimed. PGA Logistics by 15 December 2000, at the latest, was liable to MPG for the net amount that PGA Logistics had calculated was payable.

28 An alternate submission put forward in PGA’s closing submissions was that “the terms of the collateral contract were such that no obligation was owed at all [by PGA Logistics to MPG] until the subject-issues were resolved by KPMG’s intervention”.[13] This submission did not arise on the pleadings nor was there any evidential basis for it. The submission is accordingly rejected.

Issue 2: Was PGA’s liability as guarantor enlivened under clause 20.2 of the PGA Sale Agreement?

29 On 20 December 2000 MPG made a demand for payment on PGA to enliven its liability under clause 20.2 of the PGA Sale Agreement. The demand was in the following terms:

30 PGA argued that the demand was defective for a number of reasons which counsel for PGA described as “deficiencies” that “when taken together, lead to the conclusion that no demand within the terms of clause 20.2 was made on [PGA]”.[14] Six “deficiencies” were identified. They were identified as:

(a) first: an overstatement of the debt, which “on Mayne’s own case... is no more than $4,971,657”. This appears to be a reference to the amount that Mayne set-off, some six months after MPG had made the demand on PGA. Although counsel for PGA rightly accepted that an overstatement does not ordinarily invalidate a demand for payment,[15] it was submitted that the overstatement was “a relevant factor tending towards invalidity when considered against the other deficiencies”.[16] It is difficult to see how that can be so. The demand did not overstate the amount that MPG then regarded as owing by PGA Logistics. MPG’s position at the time of the demand was that the whole of the Southcorp claim proceeds in the amount of $5,000,000 were payable to it because PGA Logistics had not established that any of the costs that it claimed fell within the description in clause 9.1(d)(4)(A) as being “reasonable costs”. MPG explained in the demand why it sought payment of the full $5,000,000. The terms of the demand were sufficiently clear for PGA to pay the amount that it considered was owing, which it did when it tendered the cheque for $4,325,664 to allow for the costs that it claimed were deductible from the gross amount it had received from Southcorp.

(b) secondly: it was argued that MPG sought to do three things in its letter – (1) demand monies that did not constitute the balance of the proceeds as so described under clause 9.1(d)(4)(B); (2) assert a right to reject – and, by implication, unilaterally determine – what constituted a reasonable cost; and (3) require the proceeds of the Southcorp claim to be applied, first, in full payment to MPG, and then second, with any reasonable costs to be credited back to PGA Logistics. It was submitted that MPG did not have a contractual entitlement to do any of these three things and that by framing its demand in these terms, it did not comply with its obligations under clause 20.2. In my view, this is not a fair characterisation of the demand. The letter explained the basis for demanding the amount of $5,000,000 and not some lesser amount. It was based upon MPG’s view that PGA Logistics had not established that any of the costs claimed were costs as described in clause 9.1(d)(4)(A);

(c) thirdly: it was argued that MPG withheld from PGA its intention to assign its claim against the guarantors to Mayne which “goes to the question of good faith”.[17] It was submitted that PGA ought to have been told about the proposed assignment and set off. It is difficult to see why, as PGA was not the principal debtor. PGA was guarantor for PGA Logistics and had the secondary obligation to answer for the debt of PGA Logistics. In making the demand, MPG was seeking to enforce the guarantee by exercising its contractual right to make PGA liable as guarantor for the debt of PGA Logistics;

(d) fourthly: it was argued that the terms of the letter and subsequent conduct of MPG evinced an intention to reject a payment of an amount less than $5,000,000, even if the amount tendered was the amount that was justly due. Apart from the fact that no attempt was made to identify the putative conduct in question, the submission was unsupported by the terms of the letter. The submission is rejected;

(e) fifthly: it was argued that the letter required payment within two days, which was not a reasonable time because (1) it was not enough time to organise the mechanics of a multi-million dollar payment; (2) the demand was to expire just before the Christmas and New Year break in which many employees are typically not at work; and (3) MPG and PGA Logistics were still in dispute as to the amount that was due and no mode of resolution had been suggested in the letter. Once a demand has been served, the guarantor must be given a reasonable time to comply because failure to comply enlivens the guarantor’s liability. What may constitute a reasonable time will depend on the particular circumstances. In this instance, the short answer to this submission is that PGA Logistics was able to organise payment in response to the demands to it and PGA Logistics within the time provided. Further, the fact that there was a dispute between the parties as to the actual amount payable did not make the time for meeting the demand unreasonable; and

(f) sixthly: it was argued that the demand contravened the terms of “the collateral agreement”. This submission entirely lacks substance. It was not part of PGA’s case as presented on the pleadings nor was there any evidence to that effect. The submission is rejected.

31 Upon scrutiny, the submissions on the “deficiencies” identified appeared to suggest, without being explicit, that MPG made the demand on PGA for some collateral purpose that has vitiated the validity of the demand. Insofar as the submissions were intended to amount to an attack on the bona fides of MPG in making the demand, those submissions are rejected as they lack evidentiary basis. No lack of good faith on the part of MPG could be inferred merely because it took steps to enforce the guarantee given by PGA under clause 20 of the PGA Sale Agreement.

Issue 3: Were PGA’s obligations as guarantor discharged by PGA Logistics’ tender of payment of $4,325,664?

32 On 22 December 2000 PGA Logistics, in response to the demands for payment, sent a cheque for $4,325,664 to MPG under cover of a memorandum from Gunn to Cranwell. The memorandum relevantly stated:

33 Mayne returned the cheque by letter dated 29 December 2000. The letter explained that:

34 PGA has contended that its obligations as guarantor were discharged by the tender of the cheque. Mayne has contended that the tender was invalid because of the basis on which payment was made.

35 The legal principle of tender is that payment should be proffered unconditionally. A tender is invalidated and is of no effect if the tender is made on terms that would adversely affect the rights of the person to whom the tender is made. In Shaw v Wright[18] Molesworth J said:

The rationale for the legal principle is that the creditor would be required, as a condition of the tender, to give up the right to recover more than that which the debtor considers is in fact owed.[20] The creditor must be left in a position after accepting the tender to be able to allege that more was due than the payment that was made.

36 It was submitted for PGA that the terms on which the cheque was sent to MPG were analogous to a tender where the debtor states that he considers that the amount tendered is all that is due or that he reserves the right to dispute the amount. A tender on that basis would be valid because in essence all that is conveyed is that payment is tendered without admission of liability. However, that was not the language of the memorandum. The actual wording was in terms that the cheque for $4,325,664 was proffered “in settlement of the Southcorp claim” on the “basis” that “MPG [was] to indemnify PGA against any further expenses that may be incurred in concluding the Southcorp matter”. In my view, it was plainly conveyed to MPG that acceptance of the cheque on the terms prescribed was payment in settlement of the Southcorp claim. This was not an unconditional payment by way of tender. The payment was proffered in satisfaction of PGA’s liability to MPG and accordingly did not constitute good tender.[21]

37 I find that PGA’s obligations as guarantor were not discharged by PGA Logistics’ tender of payment.

Issue 4: Were PGA’s obligations as guarantor discharged to the extent of $4,325,664 under clause 18.2 of the PGA Sale Agreement or by general law?

38 PGA argued that its obligations to the extent of $4,325,664 were discharged by operation of clause 18.2 of the PGA Agreement. Clause 18.2 was in terms that:

39 The argument was to the effect that PGA’s liability under the guarantee would have been no more than $674,336 had Mayne not rejected the tender but accepted payment of $4,325,664, and therefore no claim would have arisen against PGA for the amount of $4,325,664 “but for” the rejection of the tender.[22] This argument has no merit. The claim under clause 20 arose against PGA because PGA Logistics was in default. MPG was acting within its lawful rights to make its demand on PGA under clause 20.2 and Mayne (as assignee) was acting within its lawful rights to reject PGA Logistics’ tender of payment. Accordingly clause 18.2 has no application and did not operate to discharge PGA from liability for the unpaid proceeds.

40 Next it was argued for PGA that the rejection of the tender should be regarded as the refusal by a creditor of performance of the duty guaranteed that constituted “misconduct” which attracted the intervention of equity to relieve PGA from its obligations under clause 20 to the extent of $4,325,664. This submission is rejected for like reasons for rejecting the argument based on clause 18.2.

Issue 5: Was there an effective assignment from MPG to Mayne of MPG’s claim against PGA as guarantor?

42 PGA accepted that a claim under clause 20.2 of the PGA Sale Agreement was a claim in respect of the amount payable under clause 9.1(d)(4)(B) and thus that the assignment was effective to pass claims against PGA “in respect of the amount payable” by PGA Logistics to MPG pursuant to clause 9.1(d)(4)(B), if there was an extant claim at the time of the assignment.[23] PGA’s contention that the assignment was ineffective was based on the contention that no amount was presently payable by PGA Logistics to MPG as at 20 December 2000, when the demand was made by MPG on PGA. I have already rejected that contention.

43 The balance of the arguments for PGA supporting its contention that the assignment was ineffective related to whether the assignment was effective to assign claims under clauses 20.3 and 20.4 of the PGA Sale Agreement. It is unnecessary to deal with those arguments in view of my finding that MPG had a claim against PGA under clause 20.2.

45 Gunn responded by letter on PGA Logistics letterhead dated 10 January 2001 that:

46 On 23 March 2001, Urquhart sent documentation to MPG “in support of the Management Fee claimed in respect of prosecuting the Southcorp Claim”. The documentation was under cover of a document headed “Justification of Fees”.

47 On 2 July 2001, Mayne wrote to PGA Logistics, Gunn, PGA and Stanlake. After referring to the “Justification of Fees” document and to Mayne’s letter to them of 2 January 2001 in relation to setting off amounts referable to the Southcorp Claim, Mayne advised that it did not consider that the management fee was a “reasonable cost” of prosecuting the Southcorp Claim and that Mayne also rejected the claims for $49,471 for the sundry debtor amounts, $35,000 for the Hemming settlement and $61,522 for the C&S Howlett claim. The letter went on to state:

48 By letter dated 4 July 2001, the solicitors for PGA and Stanlake advised Mayne that PGA “vehemently” disputed that the payments made by Mayne satisfied Mayne’s obligations contained in the MPG Sale of Shares Agreement, but that PGA Logistics would bank the cheque for $10,354,007 “on the basis that it reserves all of its rights generally” and “particularly” with respect to the costs that it had claimed.

49 Mayne contended that the right to set-off existed in equity. To establish the right to a set-off in equity, it is not sufficient merely to point to cross claims nor is the issue one of fairness only. The basis of the right is founded in the connection of the claims with each other. Equity will recognise the set-off if the cross claim “impeaches” or “goes to the root” of the claimant’s “title” to the other claim.[24] The notion of impeachment reflects the requirement that the claims must be so closely linked with each other that payment on one claim could not fairly be made without accounting for the cross claim. For equitable set-off the nature of the connection between the claims must call into question the right of one party to assert its claim without giving recognition to the other party’s claim. Where there is that connection, equity will recognise the right to set-off if it would be unjust or inequitable to allow one claimant to insist on satisfaction of his or her claim without taking account of the cross-claim.[25] As the learned authors of Equity and Trusts in Australia[26] explained, after reviewing the authorities on equitable set-off:

Each case needs to be considered on its own particular facts to determine whether the required interconnection of claims exists. In a particular case, the sufficiency of the connection between the claims and the injustice of one claim being paid without accounting for the other claim may be established simply from the fact that they arise out of the same contract or transaction. However, it is not necessary for the claim and the cross claim to arise from the same contract as the test is not whether the claims are mutual but whether one claim is so interrelated with the other claim that it would be unjust or inequitable for one claim to be met without bringing the other claim to account. [28] Thus, the fact that the claims arise out of the same contract will also not be determinative because the claims nonetheless may be separable and independent. The required standard for the party claiming the set-off to show is that the cross-claim is “essentially bound up with”[29] the other claim so that the other claimant’s right to recover is called into question or “impeached” by that party’s claim.

50 In this case, the respective claims arose under different contracts. Nonetheless I am of the opinion that the claims were sufficiently interrelated to entitle Mayne in equity to set-off the debt due by PGA to MPG, which MPG had assigned to Mayne, against the debt due by Mayne to PGA. Mayne’s debt to PGA arose in the context of the termination of the joint undertaking that Mayne and PGA had conducted through MPG, as the joint venture corporate vehicle for their merged logistics businesses. The joint undertaking had been terminated because its objectives could not be achieved and the parties had agreed to sever their business connection by Mayne buying-out PGA’s shareholding in MPG for cash and the issue of shares in Mayne. As Mayne and PGA were the only shareholders in MPG, the consequence of the buy-out was that MPG became a wholly owned subsidiary of Mayne. On the due dates for payment of the cash component of the consideration for PGA’s shares in MPG, Mayne set-off the unpaid debt that PGA owed to it. That debt arose in the context of the failure of PGA Logistics to account to MPG under clause 9.1(d)(4)(B) of the PGA Sale Agreement, with respect to the Southcorp proceeds that PGA had been contractually bound to pursue for the benefit of Mayne and MPG jointly. PGA had contracted to pursue the Southcorp proceeds with a view to recovering the maximum realisable commercial benefit[30] and to pay the amount recovered less its costs in recovering it to MPG.[31] PGA had guaranteed the making of that payment. These obligations were part of the joint venture arrangements that PGA effected with Mayne. It is not to the point that the debt was owed to MPG and that Mayne obtained its rights by way of assignment. The respective claims fall to be considered against the background that Mayne and PGA were the sole shareholders of MPG, which they had set up specifically for the purposes of conducting the joint business operations and in which they held shares proportionate to their respective interests in the joint undertaking. Those joint undertaking arrangements were the source of both liabilities. In my view, the claims were sufficiently related so as to make it unjust and inequitable that PGA could have enforced Mayne’s obligation to pay it the amounts owing for its 25% interest in MPG without accounting to Mayne for the balance of the proceeds from the Southcorp claim.

51 It was then submitted for PGA that an equitable set-off should be denied notwithstanding the closeness of the respective claims, because of MPG’s conduct in rejecting tender of the cheque and “reversing ... the order of succession laid out in clause 9.1(d)(4)”[32] by requiring payment from PGA Logistics of the whole of the proceeds with a right of credit for those costs that PGA Logistics was able to verify to the satisfaction of Mayne. The conduct of the parties is relevant to the question of the availability of equitable relief by way of set-off because the issue is whether equity should intervene to prevent an injustice.[33] However, as I have already found that MPG was within its lawful rights to make the demand and for Mayne to reject the tender, I would not deny the equitable set-off on the basis of Mayne’s refusal of the tender.

52 In the circumstances, it is unnecessary to consider Mayne’s alternate contention that it was entitled to rely on r 13.14 of the Supreme Court (General Civil Procedure) Rules 2005 [34] and also undesirable that I do so given that there is a divergence of judicial views on whether this rule itself creates a substantive defence or simply describes the procedure to be followed where a cross-claim is relied on as a defence to a plaintiff’s claim.[35]

54 I would, in any event, have concluded that PGA is estopped from contesting that Mayne had an equitable right of set-off. Mayne had put PGA on notice of the basis on which it was making the remittance less the amounts that it was contracted to pay. On both occasions PGA banked the cheques. On the first occasion it banked the cheque on the basis that it reserved its rights to be paid the $500,000 management fee. On the second occasion it banked the cheque on the basis that it reserved its rights generally but particularly reserved its rights to be paid all of the items of cost that Mayne had not accepted. Critically, whilst that letter stated that PGA Logistics reserved its right generally, at no stage before proceedings were commenced did PGA cavil with Mayne’s asserted right to set-off the net amount that PGA Logistics had ascertained was available to pay MPG as at 15 December 2000. The evidence bore out that PGA’s dispute with Mayne was not over its right to set-off but, rather, the dispute was over the amount that Mayne had set-off. By its actions in banking the cheques and disputing only the quantum, PGA represented to Mayne that it did not contest the right to set-off. PGA resiled from that position when it challenged MPG’s right to set-off on commencing this proceeding in 2006. PGA now contends that Mayne would be statute barred from recovering the balance of the proceeds or precluded by clause 18.3 of the PGA Sale Agreement, if the equitable set-off was denied to Mayne. If that were correct, Mayne will have suffered detriment, given that it was lawfully entitled to recover the balance of the Southcorp proceeds from PGA as assignee of MPG’s claim against PGA. In the circumstances, I would have concluded that PGA is estopped from resiling from the representation by conduct.[36]

55 The parties are in dispute over the amount due by PGA Logistics under clause 9.1(d)(4)(A) of the PGA Sale Agreement. The clause provided that the proceeds of the Southcorp claim were to be applied first “in paying all reasonable costs incurred by PGA Logistics in prosecuting the Southcorp claim including but not limited to legal costs”. In issue is whether:

56 The management fee is a claimed success fee of 10% of the gross proceeds of the Southcorp claim that PGA Logistics alleges it agreed to pay PGA Management for prosecuting the Southcorp claim on its behalf. Gunn and Urquhart gave consistent evidence to the effect that Gunn made a request to Urquhart in about June 1999, shortly following the merger, for PGA Management to pursue the Southcorp claim on behalf of PGA Logistics. They discussed the engagement by PGA Management of an external firm to undertake the task. Urquhart approached KPMG to undertake the task on a “no win no fee” basis. KPMG indicated that it would only perform the task on a fee for service basis. Urquhart’s evidence was that he and Gunn subsequently decided in discussion in mid to late June 1999 that PGA Management would undertake the task itself on behalf of PGA Logistics. Urquhart’s evidence was that he then engaged two persons to work exclusively on the prosecution of the Southcorp claim, one person to undertake the basic investigative work which he directed and supervised and the other person to provide secretarial support. His evidence was that both these persons worked exclusively on the prosecution of the Southcorp claim between July and December 1999. The work done between this time culminated in a formal claim document being drafted which was presented to Southcorp on 13 December 1999. Shortly afterwards, Southcorp through Robert Aitken (“Aitken”), Southcorp’s then Executive General Manager, made an offer to settle the Southcorp claim for $2,700,000. A few days later negotiations between Gunn and Aitken resulted in an agreed settlement sum of $5,000,000. A letter of acceptance was received a day or two later from Southcorp confirming the settlement and a cheque for $5,000,000 was received by PGA Logistics on 3 February 2000. A deed of release was executed.

57 Urquhart’s evidence in chief was that he had an expectation from his discussions with Gunn that PGA Management would receive a fee sufficient to cover its costs, plus a success fee. He did not elucidate in his evidence in chief what he expected to be paid by way of a success fee.

58 Gunn in his examination in chief said that Urquhart came up with a formula based on the amount recovered, with the greater the amount recovered from Southcorp the greater the fee that would be payable[37] and that “we adopted that as the method”.[38] Gunn also said that he spoke to Robert Dalziel (“Dalziel”) the Managing Director of Mayne and the Chairman of MPG, about the fee arrangement by which Urquhart would be “incentivised” to recover as much as possible from Southcorp and that Dalziel “accepted that and he said, ‘it can only be upside and all the downside is with you’ or words to that effect”.[39] Gunn said that he had a similar discussion with Robert Atkins (“Atkins”) the incoming CEO of MPG.[40]

59 Gunn also gave evidence about a later discussion he had with Atkins in December 1999 when it looked as though there was going to be a resolution of the Southcorp claim. He said that he told Atkins that he felt that the fee formula that had been previously agreed was going to be too generous to PGA and that Atkins said that he wanted to reflect on it. Gunn said that Atkins came back to him one or two days later with “the concept” of a 10% success fee “since the overheads of the business were of the order of 10%”.[41] Gunn “thought that it made sense”.[42]

60 Urquhart’s evidence was that Gunn communicated to him verbally the amount of the fee shortly prior to Christmas 1999. Urquhart said that Gunn told him that this amount had been arrived at between him and Dalziel or Atkins of Mayne and was based on 10% of the gross settlement amount. On 23 March 2001 Urquhart sent to MPG in his capacity as a director of PGA Logistics a paper entitled “Justification of Fees”. The document recorded:

The figure of $4,825,664 was the gross amount of $5,000,000 less the “cost” items contended for by PGA, other than the management fee.

61 The management fee is not supported by any accounting records created by PGA Management. Urquhart explained in his evidence that:

62 It was argued for Mayne that the management fee of $500,000 was not deductible from the gross proceeds of the Southcorp claim because it was not “incurred” in the prosecution of the Southcorp claim as there was no legal obligation on the part of PGA Logistics to pay it. The proposition that no legal obligation arose was based on the contention that any agreement as to fees was as between Gunn on the one part and Mayne on the other part, not as between PGA Logistics and PGA Management. The contention has a degree of artificiality about it. Gunn was a director of both PGA Logistics and PGA Management. His evidence was that he was aware in June 1999 that PGA Logistics had the responsibility to chase Southcorp for damages but as all staff associated with the PGA Logistics business had gone across to MPG as part of the merger he accordingly asked Urquhart, who was then employed by PGA Management, to undertake the responsibility of preparing a claim against Southcorp. Urquhart gave evidence to similar effect. There was no reason on the evidence to doubt their evidence or to doubt that the work was undertaken by PGA Management. The lack of accounting records supporting the fee agreement was explained by Urquhart, whose evidence I accept on that matter. I find on the evidence on the balance of probabilities that PGA Management was engaged by PGA Logistics to undertake the prosecution of the Southcorp claim on behalf of PGA Logistics for a fee, agreed in the amount of $500,000. It follows from this finding that the management fee was a cost “incurred” by PGA Logistics within the meaning of clause 91.(d)(4)(A) of the PGA Sale Agreement.

63 Next it was argued for Mayne that the management fee was not a “reasonable cost” because it was a success fee the benefit of which accrued to the parent company PGA, because PGA Logistics and PGA Management were wholly owned subsidiaries of PGA. This submission does not give due regard to the existence of PGA Logistics and PGA Management as separate corporate entities carrying on separate businesses. The mere fact that they had common ownership or a common board does not dispel their separate existence. Moreover, the fact that the fee is incurred internally within the group does not detract from the reasonableness of a fee incurred under a commercial arrangement between two group companies where one group company is paid for the services that it provides to another group company.

64 Accordingly, I find that the fee of $500,000 payable by PGA Logistics to PGA Management was a reasonable cost incurred by PGA Logistics in prosecuting the Southcorp claim.

65 Urquhart gave evidence that Southcorp had a debt owing to PGA Logistics for $49,471 in respect of work performed by PGA Logistics prior to the termination of the Southcorp contract. As part of the settlement with Southcorp, PGA Logistics released Southcorp from the obligation to pay this debt and hence part of the settlement involved the extinguishment of the debt that Southcorp owed to PGA. Mayne argued that this was not a “cost” of prosecuting the claim. I disagree.

66 In my view, there is no warrant for a restricted construction of the clause in relation to the items of “costs” qualifying under it. First, the ordinary and natural meaning of “cost” is broader than expenditure. Its connotations include “price”, “loss” or “sacrifice”.[44] The release of a debt is within the connotation of “price”, “loss” or “sacrifice”. Secondly, it is evident from clause 9.1(d)(4) itself in the provision that the costs that PGA Logistics was entitled to deduct were not limited to legal costs and that the parties did not intend to restrict the type of ‘cost’ that PGA Logistics would be able to deduct. Rather the limitations imposed were in the qualifications that the costs were “incurred” and “reasonable”. Thirdly, the contractual obligation on PGA Logistics to which clause 9.1(d)(4) related, namely clause 9.1(d)(1), did not require anything other than that the ordinary and natural meaning be given to clause 9.1(d)(4).

67 In my view, the release of debt was a cost incurred by PGA Logistics within the meaning of clause 9.1(d)(4)(A).

68 Urquhart gave evidence that PGA Logistics engaged C&S Howlett Pty Ltd (“Howlett”) to assist it with the provision of services to Southcorp pursuant to the Southcorp contract. As a result of the termination of the Southcorp contract, PGA Logistics terminated Howlett’s contract. Howlett then sought reimbursement from PGA Logistics of its costs. PGA settled the claim by agreeing to pay Howlett $61,522. Mayne argued that third party costs were not “costs” of prosecuting the claim. I disagree.

69 The costs that PGA Logistics was entitled to deduct were those costs that were “incurred” by it in pursuing the Southcorp claim. The parties gave “Southcorp Claim” a broad meaning for this purpose:

The language was apt to include claims by and against PGA Logistics arising out of the termination of the Southcorp contract. In my view payment out of such claims could reasonably be regarded as a cost to PGA Logistics within the terms of clause 9.1(d)(4)(A) and the clause should not be read restrictively so as to exclude costs incurred in paying out third party claims arising out of the termination of the Southcorp contract.

70 This was another third party claim. PGA Logistics had terminated Hemming’s employment as the result of the termination of the Southcorp contract. Hemming sued PGA Logistics for wrongful termination. PGA Logistics settled with Hemming for $35,000. This claim falls into the same category as the Howlett claim and comes within the terms of clause 9.1(d)(4)(A) as a “cost” that was deductible by PGA Logistics.

71 I find that PGA Logistics was entitled to deduct the amount of $645,993 from the Southcorp proceeds received of $5,000,000. Accordingly PGA has been successful on the Southcorp claim to the extent of establishing that it is entitled to recover the amount of $645,993 from Mayne.

72 When the objectives of MPG could not be achieved, PGA agreed to sell its shares in MPG to Mayne. The sale was effected and completed on 29 February 2000 on the terms contained in the MPG Sale of Shares Agreement, which was executed by the parties on that date. On the same day, shortly before the MPG Sale of Shares Agreement was executed, MPG paid an interim dividend to PGA out of the profits of the company for the half year to 31 December 1999. The signed minutes of meeting of the directors of MPG on 29 February 2000 recorded the resolution to pay the dividend:

The minutes of meeting had been prepared in advance of the meeting and left blank the amount of the interim dividend that the directors would resolve to pay. Someone hand wrote in “$6.2m” and “in aggregate of $6.24m”. No witness was able to identify the handwriting but it was common ground that Gunn was presented with a cheque at that meeting in the amount of $1.56 million, which is 25% of $6.24 million.

73 PGA has alleged that the profits of MPG for the period to 31 December 1999 were greater than $6.24m and that MPG, in paying an aggregate dividend of $6.24m, did not discharge its obligation under the terms of the MPG Shareholders Agreement, made on 22 April 1999 as amended on 7 June 1999, to distribute its profit to the shareholders to the fullest extent possible[46] and to do all things necessary to give full effect to the MPG Shareholders Agreement[47].

74 PGA has also alleged that in order to induce PGA to enter into the MPG Sale of Shares Agreement, Mayne, by collateral agreement with PGA, had agreed:

(a) to pay PGA the difference between the dividend paid to it of $1.56m and the dividend that MPG was obliged to pay;

(b) to appoint KPMG to determine “the true net profit after tax” of MPG for the period between 7 June 1999 and 31 December 1999; and

(c) to pay PGA the difference between one quarter of the amount determined by KPMG as MPG’s true net profit after tax for the period and the dividend paid to PGA on 29 February 2000.[48]

75 The collateral agreement was alleged to have been constituted by discussions between Gunn and Dalziel in a private meeting during the course of the MPG directors’ meeting on 29 February 2000. PGA has alleged a breach of the collateral contract and has claimed damages equal to the adjusting payment that it would have received from Mayne had KPMG carried out the task of determining MPG’s true net profit after tax for the period to 31 December 1999.

76 Mayne did not dispute that Dalziel had a private conversation with Gunn during the directors’ meeting on 29 February 2000, but disputed that Dalziel made any agreement with Gunn to the effect alleged. It was common ground that KPMG was not appointed to undertake a review of MPG’s profit and that Mayne did not make any adjusting payment to PGA. Moreover it was Mayne’s case that MPG’s net profit for the period to 31 December 1999, which was premised on its reported EBIT, was $6.4m.[49]

77 There are two primary issues for determination on this claim. The first issue is whether there was a collateral contract as alleged. The second issue is the quantification of the loss and damage, if there was a collateral contract as alleged. It is alleged that the loss and damage is equal to the difference between the dividend payment that PGA received of $1.56m and the dividend payment that it should have received representing, first, one quarter of the difference between $8.142m, being MPG’s reported net profit after tax and $6.24m, being the dividend declared by MPG on 29 February 2000, and secondly, one quarter of the difference between $8.142m and MPG’s “true net profit after tax”, taking into account the “proper treatment of the Southcorp settlement sum”.[50] The sub-issues raised by the loss and damage claim are whether MPG’s net profit figure of $6.24m on which the dividend was based was understated because (1) profit on the sale and lease-back of certain equipment was reversed out of the accounts without the approval of the MPG board; and (2) capitalised costs of $2.3m were incorrectly written off against the Southcorp settlement sum brought to account.

78 It was common ground that shortly into the board meeting of the MPG directors on the afternoon of 29 February 2000, where the parties intended to finalise and execute the demerger transaction documents, Gunn was presented with a cheque for $1.56m representing PGA’s share of the interim dividend paid by MPG for the half year to 31 December 1999. It was also common ground that Gunn protested about the amount and raised issues about the way that the profit had been calculated. Gunn recalled mentioning that the profit from the Southcorp settlement had been understated and that there had been a washing of Mayne’s expenses through the MPG accounts. His evidence was confirmed by Urquhart and another witness, Michael Skerrett (“Skerrett”), PGA’s then solicitor. Skerrett recalled Gunn looking at the cheque and immediately protesting as to its adequacy and saying “this doesn’t reflect one quarter of MPG’s published profit”.[51] His evidence was that Gunn then raised the issue of alleged washing of Mayne expenses through MPG with the effect that MPG’s profit was diminished at the expense of PGA and that at the mention of washing of accounts, Dalziel immediately said to Gunn that “we need to discuss this”[52] privately and that Gunn and Dalziel left the room. Dalziel (who was called for Mayne) recalled Gunn raising some issue about MPG’s profits although he could not recall the details.

79 It was also common ground that Dalziel and Gunn left the meeting and went to Gunn’s office where they were in private discussions for about half an hour and that, on their return, the transaction documents were executed. Dalziel was frank that he had a poor recollection of the discussion as it occurred more than 10 years ago, and that he was unable to be specific about what was said. Gunn said he had a clear recollection of the “thrust” of that discussion. Notwithstanding the asserted clear recollection, Gunn’s evidence cannot be accepted uncritically in the light of all of the evidence considered as a whole.

80 Gunn’s evidence was that he showed Dalziel accounts for MPG for the half year ended 31 December 1999 which recorded the net profit at $8.142m and that Dalziel agreed that an adjustment would have to be made. Although Dalziel could not recall seeing those accounts or recall agreeing to any adjustment, it was a fact that the 6 month financial statements of MPG, as presented to the board members of MPG on 19 January 2000, recorded a net profit of $8.142m. Also in evidence was a note that Gunn made of the discussion that same day. The note recorded that the dividend was “agreed to be $2.04m” (i.e. 25% of the $8.142 million profit figure). Gunn was adamant that Dalziel agreed to the adjustment “because I produced the accounts in my office”[53] and that “faced with the actual copy of the accounts which were put in front of him, he could draw no other conclusion”.[54]

81 The note went on to record that “70% or more of the $2.04m dividend will be tax free in the hands of PGA” and “30% or less may be exposed to tax in the hands of PGA”. Gunn could not explain this nor had he given any evidence about it in examination in chief as he had no recollection of what Dalziel said to him about the franking of the dividend. In my view this was telling about the reliability of his recollection. This becomes important in view of the next part of the note.

Whilst Gunn was unable to recall what was discussed about the franking of the dividend, Gunn’s evidence was that he recalled Dalziel telling him that he should trust him. Furthermore that the “trust me” was in relation to KPMG coming in to do a forensic review of MPG’s profit, with the adjustment of the dividend to which PGA was entitled to be made “in a way yet to be determined”.

The signatures on the note were that of Gunn and Skerrett whom Gunn called into his office after Dalziel left.

84 Gunn’s evidence was that he also pointed out that MPG’s profit figure did not take into account the “washing” of Mayne expenses through MPG’s accounts and understated the profit to be brought to account on the Southcorp settlement. On Gunn’s evidence, Dalziel agreed to appoint KPMG to do a forensic audit of the accounts of MPG and to make an adjusting payment to PGA in cash or in the form of shares or both. According to Gunn, Dalziel said “[Gunn], we will appoint KPMG, trust me to ensure that this is done”.[55] Dalziel asked him whether he wanted him to document that by way of a side letter and Gunn said “no, that's okay”.[56] Gunn said that the meeting concluded by Dalziel going back to the main meeting. Gunn stayed while he called his solicitor, Skerrett, (who was also in attendance at the board meeting) to come in and witness a document “concerning the dividend that was going to be adjusted immediately and the rest of it were the “trust me” that I said [Dalziel] has promised to do various things”.[57] In cross examination he elaborated on his answer and said that he told Skerrett that:

85 Significantly, the note contained no reference to KPMG. When asked in cross examination why there was no reference to KPMG in the note, Gunn replied that “I didn’t summarise every single event at that meeting, just the fact that I trusted him, that we would get KPMG in”.[59] Gunn stated that what he attempted to do in writing this note was:

86 I am satisfied on the evidence on the balance of probabilities that Dalziel agreed that PGA should be paid a dividend of $2.04m based on a net profit figure of $8.142m, in accordance with the accounts presented to the MPG board on 19 January 2000. First the note is cogent evidence of the outcome of the private discussions between Gunn and Dalziel and that was the wording used in the note: “Dividend [agreed to be $2.04 million]”. Secondly, it is also plausible on the evidence that Dalziel would have agreed to a dividend payable to PGA based on the net profit recorded in the accounts presented to the 19 January board meeting.

87 The net profit after tax figure for MPG for the period ended 31 December 1999 as it appeared in the accounts presented to the 19 January 2000 MPG board meeting was $8.142m based on an EBIT of $16.905m. The EBIT figure was different to the EBIT recorded in the final accounts for the same period on which PGA’s dividend entitlement was based. Those accounts recorded an EBIT of $14.3 (giving rise to a net profit after tax figure of $6.4m). The difference in EBIT figures was largely attributable to the reversal of a profit of $2.45m booked on the sale and lease-back of plant and equipment formerly owned by PGA, which had been reflected in the year to date accounts presented to the 19 January 2000 MPG board meeting. The reversal was the subject of discussion at the MPG board meeting on 23 February 2000, at which Dalziel and Gunn were in attendance. Gunn’s evidence was that he “got quite vocal”[61] at that meeting about the reversal of the profit. His evidence was that he said “the profit on sale had been of the order of $3 million and why would anyone in their right mind now want to reverse that and lead to selling the assets at less than their market value”.[62] He continued to voice his opposition in a memorandum that he sent to Hinchen on 28 February 2000 in which he wrote:

88 The following day was the MPG board meeting at which Gunn was presented with the cheque for $1.56m. Although there was no direct evidence from Dalziel who had little recollection of the events, Dalziel must have known of Gunn’s opposition to the reversal of the profit on the sale and lease-back transaction and it is reasonable to infer on the evidence that Dalziel would have been aware of the impact this would have on the net profits of MPG out of which the dividend would be paid. It is also reasonable to infer that Dalziel agreed that PGA should be paid a dividend of $2.04m, representing 25% of the net profit of MPG calculated as including the profit on the sale and lease-back, to facilitate a resolution so that finalisation of the demerger, which was to be announced to the ASX and the press the following day, could proceed.

89 The inference can properly be drawn on the evidence that the undertaking that Dalziel gave Gunn “to make up the difference in a way yet to be determined” meant with respect to the extra amount to bring the dividend up to $2.04m and it may be accepted that Gunn was prepared to proceed with the demerger based on this assurance. I do not accept Gunn’s evidence, however, that Dalziel agreed to appoint KPMG to do a forensic review of MPG’s accounts to determine its true profit and that the difference which Mayne was to make up “in a way yet to be determined” related to the additional amount determined from that forensic review.

90 Dalziel could recall that he did say something to Gunn during their private meeting, to the effect that he “was happy for KPMG to look at the issue of the profit for the relevant period to 31 December and that Mayne would accept their findings”.[63] He was unable to elucidate in evidence the nature of the issue but it is inherently unlikely in light of the objective evidence that Dalziel undertook to appoint KPMG to do more than advise Mayne on how “to make up the difference” between the dividend that PGA was to be paid, based on MPG’s published profits and the $2.04m amount to which Dalziel had agreed.

91 First, MPG’s profit for the half year to 31 December 1999 excluding the profit on the sale and lease-back transaction, had already been incorporated into Mayne’s consolidated half year financial report ended 2 January 2000 that was due to be published the following day, being 1 March, together with the announcement of the demerger. That report had been independently reviewed by KPMG.

92 Secondly, in view of the fact that KPMG was not engaged to conduct any forensic review of MPG’s profit, it is significant that there was no evidence that Gunn, or anyone else on behalf of PGA, thereafter pursued this matter with Mayne, particularly given that several other matters and issues arising out of the demerger continued to be ventilated by Gunn with Mayne.

93 Thirdly, the issue was first raised in these proceedings a year after commencement of these proceedings when the statement of claim was amended to include this claim. It is significant that the claim was first made several years after the event.

94 Gunn sought to support his evidence through calling Skerrett as a witness. In the witness statement tendered as his evidence in chief, Skerrett paraphrased what Gunn told him.[64] No evidentiary value attaches to that evidence because it was a paraphrase of that conversation rather than evidence of what he was told. Skerrett’s evidence in cross examination was that when he was called into the room:

On Skerrett’s evidence, Gunn showed him the note which Gunn wanted signed “as a contemporaneous note”[66] which he signed. They then returned to board meeting. Skerrett was asked in cross examination whether anybody said anything about the subject of the discussion between Dalziel and Gunn to which he answered “no”. [67]

95 I place no weight on Skerrett’s evidence that Gunn told him on 29 February 2000, when Gunn called him into his office after his private meeting with Dalziel, that it had been agreed that KPMG would be appointed to do a forensic review of the whole of MPG’s profit. Skerrett was not present at the meeting between Dalziel and Gunn and did not have first hand knowledge of what was said. More particularly there was no reference to it in Gunn’s note. It is implausible that Gunn would not have made a note of it if that had been the agreement. It is also implausible that Skerrett would not have advised Gunn to include that matter in his note, if it had been told as he said in evidence, as the purpose of the note was to record what was discussed.

96 Further, I reject Gunn’s evidence that he mentioned to the board members when the MPG board meeting resumed that KPMG was to undertake a forensic review of MPG’s profit. The evidence was not supported by Urquhart or Skerrett, who were both in attendance when the meeting resumed. Furthermore, it would be expected that any announcement to that effect would have been recorded in the minutes, which it was not.

97 Further, it is also inherently unlikely that Gunn told Urquhart “a week or two”[68] after 29 February 2000, as Urquhart said in evidence, that Dalziel had agreed with Gunn that KPMG would do an independent review of MPG’s accounts. Urquhart admitted that he had no recollection of any details and certainly the evidence was that Urquhart took no action following his discussion with Gunn. Urquhart’s explanation was that “[Gunn] is a very able person when it comes to business matters”.[69] Be that as it may, it is implausible that such a conversation took place, given that Urquhart was the CFO for PGA and Gunn’s “right hand man” to whom Gunn gave the responsibility of chasing up a number of outstanding matters that required resolution with Mayne after 29 February 2000.

98 I find that the only agreement reached between Dalziel and Gunn was that PGA would receive $2.04m by way of dividend. I find that Dalziel told Gunn that KPMG would be asked to determine how to make up the difference as to which Mayne “would accept their findings” and the “Trust me” related to honouring that bargain.

99 Furthermore, I am prepared to find on the evidence on the balance of probabilities that the bargain was honoured. The available contemporaneous documents evidence that as at December 2000 there was only one outstanding issue concerning the dividend, namely that PGA had been unable to obtain confirmation that the dividend would be franked to at least 70%. This was raised by Urquhart in “briefing notes” that he prepared for Gunn in December 2000 for the purpose of a forthcoming discussion between Gunn and the chairman of Mayne on outstanding matters relating to the demerger. The briefing note is consistent with Gunn’s 29 February 2000 note that “at least” 70% of the dividend agreed at $2.04m would be franked. Gunn’s evidence was that he raised the matter with the chairman.[70] The next reference to the dividend issue is in an internal memorandum of outstanding matters that Gunn drew up in February 2001 in which he listed as an item:

The copy in evidence had the item crossed out. It would appear that it was crossed out sometime between February 2001 and May 2001 as the item did not appear in a subsequent list that Gunn prepared in May 2001. As there was no further reference to it in any document before the Court, it is reasonable in the circumstances to assume that the matter of the dividend was resolved to the satisfaction of PGA.

100 In JJ Savage v Sons Pty Ltd v Blakney[71] the High Court held that in order to establish a collateral contract in respect of a statement of fact three elements must be established: (1) that the statement was intended to be relied on; (2) reliance by the party alleging the existence of the contract; and (3) an intention, on the part of the maker of the statement, to guarantee its truth. These elements are made out in the factual findings which establish the existence of a collateral contract, the consideration for which was PGA’s execution of the agreements giving effect to the demerger.[72] That contract was consistent with the intention of the parties that MPG’s available profit would be distributed to the shareholders by way of dividend payment before the demerger was completed[73], consistently with MPG’s contractual obligation to PGA to distribute its profits to the fullest extent possible. [74] However, I find against PGA that the terms of the collateral contract were to the effect alleged. On the evidence, the agreement reached was that PGA would receive a dividend amount of $2.04m, of which at least 70% would be tax free in the hands of PGA, and Mayne would make up the difference between the dividend paid on 29 February 2000 and the additional amount “in a way to be determined” by KPMG. I also find against PGA that the collateral agreement was breached. I am satisfied on the evidence that the matter of the dividend was resolved to the satisfaction of PGA.

101 In case it should become necessary I should deal with PGA’s claim for loss and damage and specifically the two specific items that PGA contended caused MPG’s profit to be understated.

102 PGA has claimed that its loss and damage included the profit of $2.88m on the sale and lease-back transaction initially recorded in the MPG accounts. The primary contention was that Hinchen did not have authority to effect a reversal without board approval and as no approval was given by the MPG board prior to 29 February 1999, that the purported reversal of the booked profit was ineffective. It was also argued that the reversal of profit after 1 January 2000 did not have retrospective effect. There are, in my view, several difficulties with this claim.

103 First, I am satisfied on the evidence that the MPG board never ratified or approved the sale and lease-back transaction initially recorded in the MPG accounts. Secondly, I am satisfied on the evidence that the MPG board never ratified or adopted the accounts presented to the MPG board at its January meeting, which according to the minutes of that meeting, the board only “considered” and “noted”. Thirdly, it appears from the published accounts that no profit on the transaction was in fact brought to account.

104 The evidence showed that the question of whether any profit should be booked on the sale and lease-back transaction was considered by the board on two occasions – at its meetings on 24 November 1999 and 23 February 2000. Although the minutes of these meetings did not elucidate on the content of what was discussed, other evidence filled in the gaps. The best evidence emerged from a reasonably contemporaneous memorandum that Hinchen sent to Gunn on 15 March 2000 in which Hinchen wrote

105 Although Gunn hotly disputed that he had agreed to the sale of the equipment at its stated cost, there is no reason to doubt the motivation for the course of action that was taken. It was common ground that the profit was reversed in January 2000. Hinchen could not recall precisely how it was effected, whether “we cancelled a document and then created a new document or whether we went back and just amended the valuation schedules”.[75] Earlier he had explained that it was the valuation of the items that gave rise to the profit.

106 There is also no reason to doubt that there were discussions on the transaction at the board meeting on 24 November 1999, including of the potential impact on MPG in recording a profit and no reason to doubt that the board agreed to withdraw the paper on the transaction from final approval pending determination from Mayne on how it would account for the transaction in its books. The minutes of that meeting confirm that a paper on the sale and lease-back transaction was withdrawn. That paper cannot now be located but Hinchen recalled that the paper said that he was “unsure of the accounting treatment implications for Mayne and for [MPG]” and that “the matter had to be checked”.[76]

107 There was no suggestion from any witness or in any of the documents that the MPG board had any further discussions on the matter before the 23 February 2000 meeting, at which the matter was discussed. By that time the profit had been “reversed” and the exclusion of the previously booked profit was reflected in the year to date EBIT figure in the CFO’s report. Although the minutes of that meeting simply recorded that:

there is no reason to doubt that the board proposed to ratify the sale of the equipment at its stated cost.

108 Although there was no document in evidence recording the board’s formal ratification, the position that no profit on the transaction was ultimately brought to account was reflected in MPG’s reported EBIT in Mayne’s published accounts, reviewed by KPMG, for the half year ended 2 January 2000. This was consistent with the state of the accounts presented to the MPG board at the meeting on 23 February 2000 and the net profit after tax figure on which the MPG board paid its interim dividend on 29 February 2000.

109 Contrary to the premise on which this claim was based, the evidence did not substantiate that the MPG board ever recognised the profit recorded in the initial book entry. Furthermore MPG’s approval of the reversal of the profit is implicit in MPG’s EBIT figure in the Mayne accounts.

110 A net profit of $2.7m was recorded in MPG’s accounts arising from the Southcorp settlement. The net profit was derived by expensing capitalised costs in the sum of $2.3m as at 31 December 1999. It was common ground that in order for MPG to have expensed costs that had been capitalised in its balance sheet as at 31 December 1999, MPG must have determined that the assets representing the capitalised costs would not provide any future economic benefit to MPG either by their continued use or their disposal. GAAP (Generally Accepted Accounting Principles) required costs incurred by MPG as a result of the Southcorp claim to be expensed once the claim was settled, unless they could be attributed to other revenue generating activities in the period after 31 December 1999. It was also common ground that the offsetting of the expenses of $2.3m against the Southcorp proceeds was in compliance with GAAP if MPG’s expectation at the time the accounts were prepared was that the relevant assets were not going to be deployed for alternative revenue producing purposes. In issue is whether the assets representing the capitalised costs would not provide any future economic benefit.

111 The assets in question were computer hardware and software in connection with a warehouse management system for Southcorp that MPG had acquired as part of the merger; a lease commitment in relation to a warehouse in Fairfield; and equipment lease commitments in relation to the lease of 19 forklifts. It was PGA’s case that the maximum capitalised expenses that could have been accrued from the time of the merger and then written off, assuming those assets had no future utility, totalled $568,548, not $2.3m but that in any event the assets in question had future utility.

112 I am not persuaded that MPG wrongly expensed $2.3m worth of capitalised costs. PGA’s case was based largely on a difference in views between Hinchen and Gunn about the future utility of the assets in question. Shortly stated, Gunn was firmly of the view that the assets not only had future utility but were redeployed in MPG’s business. Hinchen’s evidence was that a schedule was prepared of all expenditure that could be capitalised for use going forward for the business and what would be applied against the Southcorp settlement sum, which he had to approve. For that purpose he undertook an analysis of the assets referrable to the Southcorp contract and it was his opinion that expenses that he capitalised related to assets referrable to the Southcorp contract that had no ongoing utility to the business. Hinchen was challenged on his view. Mr Magee QC for PGA sought to demonstrate that it was not a view that was reasonably based or a view that Hinchen honestly held. I am not persuaded that the challenge was well founded. Hinchen was able to recall and explain his methodology. His evidence was cogent and he was able to justify the views that he formed. It may be accepted that Gunn had a different view about the future utility of the assets but Gunn’s view does not deny the reasonableness of the views formed by Hinchen in concluding that $2.3 million of capitalised costs should be expensed against the Southcorp claim.

113 Moreover, KPMG specifically reviewed the treatment of the Southcorp settlement proceeds as part of its half year review report to the audit committee of Mayne. As MPG’s results were to be incorporated into Mayne’s consolidated accounts for the half year ended 2 January 2000, the review included MPG’s results. The report stated that:

The report noted that it included information that had been provided by, or based on discussions with, senior management and “except to the extent necessary for the purposes of the review, this information has not been independently verified”. As an audit was not performed, an audit opinion was not expressed. The report noted that:

Subsequently KPMG performed a statutory independent review of Mayne’s consolidated results and approved them. MPG’s EBIT result for the half year of $14.3 million as recorded in those accounts included the amount of $2.7 million profit on the Southcorp settlement claim.

114 It was argued for PGA that the independent scrutiny of KPMG, which was not an audit, was of little or no weight in the absence of a proper understanding of the information that was provided to KPMG by Mayne senior management. It was further submitted that the Court should make an adverse inference from the failure of Mayne to call a Mr Priestley who was in attendance at the Mayne Audit Committee meeting and who prepared a witness statement but who was not called. Further, that an adverse inference should be made from the failure to call the CFO of Mayne who was “no doubt involved in the giving of instructions to KPMG in respect of the preparation of its report”.[77] I draw no adverse inference from the fact that neither of those persons was called as a witness. It was not open on the evidence to conclude other than that KPMG had competently and appropriately conducted its independent review and made the enquiries of the relevant persons. There is no adverse inference capable of being drawn.

115 Accordingly I reject PGA’s claim that MPG’s reported profit for the half year ended 31 December 1999 was understated because the capitalised costs that were expensed were inflated. I also reject the submission that the maximum costs, in any event, must have been $568,548,00. That submission is inconsistent with the claim that PGA Logistics itself made against Southcorp which was lodged on 16 December 1999. That claim identified on page 7 the following costs as part of the claim:

The Southcorp claim proceeded upon the footing that those costs had no further utility.

116 PGA claimed that MPG’s net profit after tax for the period ending 31 December 1999 was revised downwards from the $8.142 million recorded in the December 1999 CFO report premised on an EBIT of $16.95 million to $6.4 million premised on an EBIT of $14.314 million as reported in the Mayne consolidated accounts for the half year ended 2 January 2000. It was submitted that no proper explanation was given of the downward revision of the EBIT figures. That submission cannot be accepted. The adjustment was manifestly attributable to the reversal of the profit booked on the sale and lease-back transaction.

117 It was also submitted that in a board paper, dated 24 February 2000, co-signed by Dalziel and the Mayne CFO, presented to the Mayne board meeting on 29 February 2000, it was noted that:

It was put that, at 24 February 2000, the CFO of Mayne must have believed that MPG’s net profit after tax for the period up to 31 December 1999 was at least $6.8 million. That submission does not follow from the Mayne board paper of 24 February 2000. The figure given in that board paper was an approximate figure only and in any event, not so different from the $6.4 million reported profit as to constitute an unexplained downward revision.

118 PGA has failed to establish that MPG’s profit for the period ended 31 December 1999 would have been greater than $6.4 million, to which it was entitled to receive 25% by way of dividend. Accordingly, PGA has not established any loss or damage in the event that it had been successful in establishing its collateral contract, with the claim on the terms alleged in the statement of claim.

119 In dispute is whether Mayne had a contract with PGA for Gunn to provide consultancy services to Mayne for a three year period after the demerger of MPG for which Mayne would pay PGA $100,000 per month and a “project by project success fee”. The dispute has its genesis in discussions between Gunn and Dalziel on or about 21 January 2000 to discuss the terms of Mayne’s purchase of PGA’s shares in MPG. The fact and details of the discussion were not in question, which was summarised in point form by Cranwell, the director of operations at Mayne, in a facsimile to Gunn of the same date. That document recorded, amongst other things, that (1) Mayne would enter into a three year consultancy agreement with PGA, which would provide Gunn’s services exclusively to Mayne and Gunn would undertake specific assignments; (2) the remuneration for the consulting was “to include” “$100K per month retained” and a “Project by Project success fee”; and (3) in consequence Gunn would step down as CEO of MPG, resign as a director of MPG, Gunn’s employment agreement with MPG would be cancelled, and the consultancy agreement would be entered into. Further, the evidence showed that steps were taken by both parties for a new consultancy agreement. However no formal written consultancy agreement was ultimately made. On 15 February 2000, Gunn was diagnosed with a brain tumour and went on sick leave for three months from 1 March 2000 at his existing rate of pay. At the expiration of his sick leave, Gunn was told that Mayne did not require any further assistance from him through any formal consultancy arrangements.

120 PGA’s case was that it had a binding contract with Mayne as at 29 February 2000, the starting date of which was postponed until Gunn was well enough. It has sued for consultancy fees in the sum of $3.6m, being the monthly fee of $100,000 per month for three years and a “reasonable success fee” in respect of a project called the “53 foot container project” in an amount to be determined by the Court. Mayne’s case was that negotiations on the terms of the consultancy agreement were not concluded before Gunn’s health problems became known and that there was no binding agreement. Mayne’s case was that Gunn and Dalziel agreed that a new service agreement would not be negotiated until it was known if, or when, Gunn would return to work. In the meantime Gunn would have three months sick leave on his old salary.

121 Both Gunn and Dalziel gave evidence about their discussions. For the most part, I did not find the evidence of either of them particularly helpful, other than as an expression of what each witness could recall of the events eleven years ago. The most reliable evidence was found in the contemporaneous documents prepared at the time, although Gunn disputed much of what was written. Although I do not doubt that Gunn honestly believed that what was recorded at the time was contentious or wrong, I am not persuaded that I should prefer his evidence over the written record. The available documents chronicled the relevant events as follows.

122 Shortly after Dalziel’s meeting with Gunn on 21 January 2000, Mayne’s lawyers must have received instructions that a new consultancy agreement would be entered into as a memorandum was sent on 1 February 2000 by Kathleen Farrell (“Farrell”) from Freehills (who were Mayne’s solicitors) to Cranwell, Robin Bishop (“Bishop”) from Macquarie which was advising PGA, and Tony Osmond (“Osmond”), a Mayne advisor. The memorandum set-out “some topics for discussion at our meeting on ... 2 February in relation to the detailed documentation of the proposal” which included:

123 On the same day, Bishop sent a facsimile to Urquhart at PGA containing the “PGA Share Transfer Agreed Principles 1 February 2000”. That document included a reference to the consulting agreement in slightly different terms to Cranwell’s summary in his facsimile of 21 January 2000 to Gunn, in that there was no mention of a fixed 3 year term or of the remuneration that would be paid. The document recorded, amongst other things, that Mayne “would enter into a rolling annual Consulting agreement with PGA (or an alternative service company of [Gunn]), which would provide [Gunn’s] services to [Mayne]”. The document also recorded that “as a consequence of the above ... [Gunn’s] employment agreement would be cancelled and the above mentioned Consultancy Agreement would be entered into”. Bishop noted that this was a “draft currently being proofed”. On 3 February 2000, Bishop sent “the revised transaction principles reflecting our discussions yesterday” to Cranwell, Urquhart, Farrell and Osmond. This revised document, relevantly, was in like terms to the 1 February 2000 document in relation to the consultancy agreement. It may be inferred that the discussion referred to occurred at the meeting foreshadowed by Farrell in her 1 February memorandum. It may also be inferred that Bishop had instructions from Urquhart that the document correctly recorded the state of the negotiations on the consultancy agreement as also on 3 February, Bishop sent another memorandum to Gunn and Urquhart in which he stated that:

No witness could explain what the $5.6m payment was about but the language indicates that the proposed new consultancy agreement was somehow related. It is nonetheless reasonably apparent that the parties were still at the negotiation stage and that there was no concluded agreement on the consultancy agreement. A subsequent memorandum of 8 February 2000 from Bishop to Urquhart and Gunn makes it plain that there was no concluded agreement then on the terms of any consulting agreement, including amongst other things, the success fee payable on any projects assigned to Gunn.

124 The next document in the chronology is a draft letter to the ASX prepared by Farrell on 11 February 2000 seeking a waiver from listing rule 10.1 in relation to the proposal that Mayne acquire PGA’s minority interest in MPG. The draft recorded, amongst other things that:

125 Although Gunn disputed that there was an agreement in those terms, it appears from a letter from Urquhart to Bishop at Macquarie dated 13 February 2000 that Cranwell had given Gunn a copy of that draft ASX application which Gunn then provided to Urquhart. Urquhart arranged for Skerrett and Bishop from Macquarie to meet to discuss the document and any remaining issues. Significantly the documentation does not disclose that Gunn raised with Urquhart any issue about the content of the draft ASX letter concerning the proposed consultancy and remuneration. Significantly also, Urquhart appears not to have raised any issue with Farrell, as Farrell sent the draft letter to the ASX on 16 February 2000. The content of that letter was the same as the 11 February draft concerning the consultancy arrangements. Farrell provided a copy of the 16 February 2000 letter to Skerrett by facsimile on 17 February 2000 under cover of a note which read:

The evidence did not explain where Cranwell obtained his understanding from. Be that as it may, the respective advisors to Mayne and PGA were in regular communication about the ASX letter and the outstanding issues to effect the demerger. Significantly there was no mention in any of the documents about issues concerning the consultancy agreement, as expressed in the ASX document.

126 On 21 February 2000 Cranwell sent an email to Bishop at Macquarie in which he wrote that he was:

127 In the meantime, Farrell provided Skerrett with some of the proposed transaction documents by letter dated 18 February 2000. They included the 1999 Transaction Documents Amendment Agreement which provides in clause 2.7:

128 It may be inferred that Skerrett sought specific instructions from Urquhart on the contents of the letter of 18 February 2000 as on 22 February 2000 Urquhart provided instructions to Skerrett that the reference to the Gunn Service Agreement in the 1999 Transaction Documents Amendment Agreement was “to be deleted save that presumably the original is to be terminated”.

129 Documents between 23 February and 29 February 2000 are consistent with Mayne’s case that Gunn and Dalziel agreed to defer negotiating the new services contract until after Gunn’s state of health was known:

(a) Skerrett informed Farrell by letter dated 23 February 2000 that his understanding was that Gunn’s service contract was to be terminated;

(c) a board paper for the directors of Mayne signed by Dalziel and the then CFO of Mayne on 24 February 2000 seeking approval to purchase PGA’s minority interest recorded:

(d) on 28 February 2000 Skerrett passed onto Farrell his “final comments regarding” the 1999 Transaction Document Amendment Agreement. The letter made no mention of clause 2.7.

(e) the final form of the agreement that was executed by the parties on 29 February 2000 contained a clause 2.7 in the following terms:

Gunn was a signatory to that agreement in his personal capacity and in his capacity as director of, amongst entities, PGA and PGA Logistics. Also on that date Gunn resigned as a director and CEO of MPG. On 1 March 2000, Dalziel announced through the media and at the Mayne shareholder’s meeting that Gunn would continue to have a role in Mayne.

(f) the board minutes of the meeting of the directors of Mayne on 29 February 2000 (who included Dalziel) recorded that:

130 The documentary evidence up to 29 February 2000 is inconsistent with a concluded binding agreement for Gunn to provide consultancy services to Mayne. Furthermore, the existence of a concluded binding agreement as at 29 February 2000 was not supported in the evidence of Urquhart or Skerrett. Urquhart said that the matter of Gunn’s consultancy was a matter of “ongoing discussion up to February 29,”[78] and Skerrett’s evidence was that if he had been alerted to the possibility that a consultancy agreement had been orally concluded he would have insisted that it was adequately documented.

131 The documentary evidence after 29 February 2000 is also inconsistent with a concluded binding agreement for Gunn to provide consultancy services to Mayne:

(a) an internal Mayne memorandum of 4 April 2000, in which Dalziel was copied, “confirmed” the “details” of “a consultancy fee for [Gunn]”:

(b) on 24 July 2000, Atkins, the new CEO of MPG, sent an email to Gunn in which he stated:

(c) also on 24 July 2000, Atkins sent a memorandum to Peter Smedley [Smedley], the then group managing director and CEO of Mayne, in which Atkins wrote:

(e) Smedley did not meet with Gunn but rather responded to him by letter dated 31 July 2000. Smedley confirmed that Mayne “will not require any further assistance from [Gunn] through any formal consultancy arrangements past 30 June 2000”. Smedley also wrote that:

(f) Gunn responded to that letter on 1 August 2000. Significantly, there was no indication in that letter that Gunn disputed that his contract had come to an end on the 30th of June or that he was to repay the salary paid to him on 15 July 2000.

(g) on 13 October 2000 Urquhart did a calculation of what PGA owed MPG in the “wash up” of the demerger. Urquhart claimed an amount of $43,385 was due by MPG to PGA. He determined this as follows:

(h) significantly, whilst over the ensuing months Gunn prepared several documents in which he outlined the “outstanding issues” with Mayne, there was no mention of the consultancy claim.

132 If I was to confine my consideration of the evidence on this claim solely to the contemporaneous documents, I would not hesitate to find that there was no concluded binding contract for the provision of services on the terms alleged in the statement of claim. The letter from Cranwell to Gunn on 21 January 2000 containing the “terms” which were alleged by PGA must be considered in context. The evidence showed that the discussions between Gunn and Dalziel on 21 January 2000 were preliminary. It was plainly the intention of the parties that Gunn would be engaged to provide consultancy services to Mayne after the demerger, but those documents on their face evidenced that no concluded agreement was reached on those terms by 29 February 2000. This was to be explained by Gunn’s ill health, which became known on 15 February 2000 and disclosed to Mayne on or around 18 February 2000. It is inherently plausible that the parties determined not to conclude the terms of a new consultancy agreement at that time when Gunn’s prognosis was unknown, and agreed to defer negotiations until Gunn’s health position was clearer. The interim arrangement was that Mayne would pay Gunn three month’s sick leave to 30 June 2000 based on his existing salary.

133 PGA pointed to other evidence, however, to demonstrate that there was a binding agreement on the terms alleged in the statement of claim. Gunn’s evidence was to the effect that there were no outstanding matters on the consultancy that had to be resolved as at 18 February 2000. His evidence was that Dalziel had agreed to a project by project success fee calculated as a percentage of “the net tangible benefit to Mayne” and that in the event that agreement could not be reached on the net tangible benefit, the parties would appoint an external umpire, such as KPMG, to determine the dispute. The evidence of Dalziel was to the contrary. Dalziel acknowledged that points he had discussed with Gunn included that Mayne would agree to a consultancy agreement that had success fees attached to specific projects as well as a monthly retainer, but his recollection was that the success fee had not been negotiated and no agreement reached on the fee that would apply. The written submissions for PGA expressed a different view of Dalziel’s evidence. It was submitted that there was no dispute on the evidence that by 29 February 2000 Gunn and Dalziel had reached agreement on the essential terms of the consultancy. Reliance was placed in particular on the line of questioning at pages 777-779 of the transcript. The fair reading of that evidence however was that the principles of the new consultancy agreement had been determined but the actual terms and conditions were still subject to negotiation. Moreover, this is supported by the contemporaneous documentation. To the extent that there is inconsistency between the documents and Dalziel’s oral evidence, I place greater weight on the content of the contemporaneous documents than Dalziel’s independent or reconstructed recollection.

134 The written submissions for PGA also placed considerable weight on the importance to Gunn of securing a concluded consultancy agreement. The significance to Gunn at the time is not doubted but Mayne has never disputed that it intended to engage Gunn to provide consultancy services. Its contention was that nothing was concluded as at 29 February 2000 because of Gunn’s ill health and that because of Gunn’s ill health, the parties had agreed to defer negotiations on the terms and conditions of the consultancy agreement until they knew what his position would be.

135 Next it was argued for PGA that Mayne’s position that there was no concluded binding agreement was inconsistent with Farrell’s letter to the ASX dated 16 February 2000. I disagree. It was sent as a draft only, not as the formal application. The formal application to the ASX was not made until 24 February 2000 under cover of Farrell’s facsimile of that date. In that facsimile Farrell referred to discussions with personnel at the ASX and confirmed her advice to them that in view of Gunn’s recently discovered illness, the current service agreement between Gunn and Mayne would be terminated with effect from 29 February 2000 and that no new agreement would be negotiated until his long term prognosis was clear.

136 Next the submission was made that Farrell’s draft letter to the ASX of 16 February 2000 was misleading as on Gunn’s evidence there was never any agreement between PGA and Mayne in the terms of her letter. It was submitted that the Court should draw an adverse inference from the failure of Mayne to call Farrell as a witness. I reject that submission. I am not satisfied on the strength of the evidence that Gunn should be believed on this matter. The evidence bore out that Gunn and his advisors, Urquhart and Skerrett, knew about the content of the 16 February draft letter as Farrell had provided Gunn with a copy some days before she sent it to the ASX, yet there was no evidence that suggested that they raised any issue about the content with Farrell. It would have bee expected that if the content of the draft letter was inaccurate in any material sense to the PGA interests it would have brought this to Farrell’s attention.

137 Next it was submitted that the Court should draw an adverse inference from the failure of Mayne to call Cranwell as a witness, having regard to Farrell’s letter of 17 February 2000 to Skerrett which was based on her understanding from Cranwell. Again I reject that submission. It is inherently implausible on the evidence that Skerrett did not take instructions from Gunn. If Farrell’s understanding was incorrect, it would have been expected that the PGA interests would have conveyed this to Farrell.

139 In case I am wrong in my finding that there was no consultancy agreement and no concluded agreement that Gunn would be paid a success fee on a project by project basis, I should deal with the claim for damages based on the 53 foot container project. Gunn’s evidence was that from 1 July 2000 he continued to provide some consultancy services to Mayne in relation to specific projects. One of these was the 53 foot container project, which was successfully completed some time in late 2001, early 2002. PGA has made a claim for damages based on a “reasonable” success fee payable on that project.

140 It was clear from the evidence that Gunn had commenced work on this project before the merger of PGA and Mayne Logistics into MPG, and that Gunn continued to work on the project during the period of the joint venture operations conducted through MPG. Gunn’s evidence was that he provided guidance and advice to Mayne personnel in respect of the 53 foot container project after he came out of hospital. That evidence may be accepted, but it does not support the claim for damages made, assuming that Gunn provided those services under the new consultancy agreement with Mayne. First, I have not accepted Gunn’s evidence that Dalziel agreed that Gunn would be paid a success fee based on the net tangible benefit to Mayne of the project. Secondly, the best evidence of the contractual arrangements (on the assumption there was a concluded agreement) is that contained in Farrell’s draft letter to the ASX of 16 February 2000, which recorded that from July to December 2001 Gunn would provide consulting services to Mayne on a project by project basis for which he would receive an hourly rate. Thirdly, there was no evidence that this was a specific project which Mayne engaged him to undertake, in respect of which any success fee would be payable. Accordingly this claim is also rejected.

141 In case I am wrong, and as a considerable proportion of the trial was taken up with expert evidence on the quantum of the success fee payable to Gunn on the 53 foot container project, it is desirable that I address the expert evidence. Expert evidence was led by both parties. PGA called Dr Cameron, a logistics expert who gave evidence on the “process by which ... the net economic benefit” to Mayne of the 53 foot container project would be calculated and, applying that process, on Mayne’s “net economic benefit”. PGA also called Mr Meredith, a forensic accountant, who gave evidence on what was a reasonable success fee payable by Mayne to PGA. Mayne called Mr Cordukes, also an expert in logistics and Mr Bryant, a forensic accountant.

142 Mayne objected to the evidence of Dr Cameron and Mr Meredith on the ground of relevance and to Mr Meredith’s evidence on the ground that his evidence of what is a reasonable fee was not based wholly or substantially on specialised knowledge. I reserved on the objections in order to give consideration to the question of relevance and the issue of expertise based on a full comprehension of the issues and the evidence. In my view that evidence should be admitted.

143 The challenge to the relevance of the evidence was based on the submission that the evidence of Dr Cameron and Mr Meredith was directed to projections as to the benefits that Mayne might be expected to achieve, not to the benefits actually derived by Mayne, which they contended was the issue that the Court must determine in this case. That submission takes an unduly narrow and unrealistic view of the evidence. The issue is not one of relevance, but rather whether it was sufficient for PGA to establish the quantum of the success fee on the balance of probabilities based on assumed costs and returns to Mayne, as distinct from actual costs and returns.

144 The submission that Mr Meredith’s evidence was not based wholly or substantially on specialised knowledge also took an unduly narrow view of the nature of that evidence. Dr Cameron’s evidence was directed to determining the net economic benefit to Mayne on which the success fee would be based. Dr Cameron calculated that benefit as the projected costs savings from the use of the 53 foot containers in lieu of 48 foot containers. Mr Meredith opined on what would be an appropriate success fee based on that net economic benefit. For that purpose Mr Meredith applied his skills as a forensic accountant to identify an appropriate proxy to determine a reasonable success fee payable to Gunn. In his opinion, that proxy was a percentage of annual net cost savings of between 12.5% and 50% of the net cost savings realised over a period of 1 to 2 years. I disagree with the submission that the determination of that proxy did not require specialist knowledge.

145 PGA’s pleaded case was that Gunn and Dalziel agreed a success fee based upon the net economic benefit of the 53 foot container project to Mayne. There is cogency in the submission on behalf of Mayne that this required PGA to prove Mayne’s net economic benefit, and that Dr Cameron’s evidence about projected costs savings for Mayne was insufficient to establish that fact, based as it was on unproved assumptions. Apart from the fact that it is implausible that Dalziel would have agreed to a success fee based on net economic benefit without fixed and determined integers by which the fee was capable of calculation with certainty, Dr Cameron’s calculations were not based on Mayne’s actual data.

146 It was submitted for PGA that it could not undertake a calculation of net economic benefit based on actual data because of inadequate discovery by Mayne and that in the absence of proper discovery the Court should proceed on the assumption that the figures as projected by Dr Cameron was the best evidence of the actual net economic benefit. The assertion that there was inadequate discovery was made by PGA’s solicitors to Mayne’s solicitors in a letter dated 14 October 2010. Confirmation was sought from Mayne’s solicitors that they did not have any further discoverable documents in their possession, power or control, given that there was no discovery material relevant to the question of Mayne’s financial performance prior to and subsequent to it utilising the 53 foot containers. Senior counsel for PGA did not put the response into evidence but informed the Court that Mayne’s solicitors claimed that they had made discovery. On the state of the evidence it is not possible to form a view that Mayne had not complied with its discovery obligations.

147 In the circumstances, I do not accept Dr Cameron’s report as establishing the net economic benefit of the 53 foot container project to Mayne. Accordingly, PGA failed to establish the quantum of the success fee to which it was entitled, assuming that I am wrong on my finding that no binding consultancy agreement was made.

148 PGA has been successful only on the Southcorp claim to the extent of establishing that it is entitled to recover the amount of $645,993 from Mayne. In the circumstances I will give judgment for that amount to PGA but otherwise dismiss the proceeding. It follows from the findings that have been made that the counterclaim should also be dismissed. I direct the parties to put orders before the Court reflecting the judgment and will hear the parties on the question of costs, in the event that they cannot be agreed upon.


	S CI 2006 10603

BETWEEN:


PGA GROUP PTY LTD (ACN 005 265 921)	Plaintiff

- and -

IDAMENEO (NO. 789) LIMITED (ACN 004 073 410) (FORMERLY SYMBION HEALTH LIMITED)	Defendant


AND BETWEEN:


IDAMENEO (NO. 789) LIMITED (ACN 004 073 410) (FORMERLY SYMBION HEALTH LIMITED)	Plaintiff by Counterclaim

- and -

PGA GROUP PTY LTD (ACN 005 265 921)	Firstnamed Defendant by Counterclaim

PETER GUNN	Secondnamed Defendant by Counterclaim

STANLAKE NOMINEES PTY LIMITED (ACN 005 371 460)(IN ITS CAPACITY AS TRUSTEE OF THE GUNN FAMILY TRUST)	Thirdnamed Defendant by Counterclaim

PGA (L) PTY LTD (ACN 005 824 751) (FORMERLY PGA (LOGISTICS) PTY LTD)	Fourthnamed Defendant by Counterclaim

[1] PGA Sale Agreement, definition of “Business Assets” and “Excluded Assets”, Cl 1.1.

[10] York Air Conditioning & Refrigeration (Australasia) Pty Ltd v Commonwealth [1949] HCA 23; (1949) 80 CLR 11; W & J Investments Ltd v Commissioner of Taxation (1987) 16 FCR 314; Southlink Holdings Pty Ltd (as trustee of the Failsafe Trust) v Moreland Pty Ltd [2010] VSC 214, 9 [28]-[29].

[15] Geraldine May Andrews and Richard Millett, Law of Guarantees (4th ed, 2005), 253; see also Bank of Montreal v Winter (1981) 101 APR 385 (NLSC).

[22] Reply and Amended Defence to Counterclaim (25 February 2011), [36]; Plaintiff’s Closing Submissions, [50].

[24] The classic test was formulated by Lord Cottenham LC in Rawson v Samuel (1841) 41 ER 451; see also AWA Ltd v Exicom Australia Pty Ltd (1990) NSWLR 705, 711 (per Giles J), Cathedral Place Pty Ltd v Hyatt Australia Ltd & Ors [2003] VSC 385, 20 [39].

[26] GE Dal Pont and DRC Chalmers, Equity and Trusts in Australia (4th ed, 2007).

[29] Cathedral Place Pty Ltd v Hyatt Australia Ltd & Ors [2003] VSC 385, 20 [39].

[33] Re Interesting Developments Pty Ltd (2009) VSC 12, [36]-[37]; AWA Ltd v Exicom Australia Pty Ltd (1990) NSWLR 705, 712 (Giles J).

Where a defendant has a claim against a plaintiff for the recovery of a debt or damages, the claim may be relied on as a defence to the whole or part of a claim made by the plaintiff for the recovery of a debt or damages and may be included in the defence and set off against the plaintiff’s claim, whether or not the defendant also counterclaims for that debt or damages.

[35] MEK Nominees Pty Ltd v Billboard Entertainments Pty Ltd (1993) V Conv R 54-468, 65,465 (Tadgell J); Moffatt v Pinewood Resources Ltd (Unreported, Tadgell J, 7 April 1989); Victorian WorkCover Authority v Concept Hire Ltd [2009] VSC 194; (2009) 24 VR 695 at 700; cf LU Simon Builders Pty Ltd v HD Fowles [1992] VicRp 60; [1992] 2 VR 189, 195 (Smith J).

[48] Fourth Further Amended Consolidated Statement of Claim (11 May 2011), [20].

[49] Defence to Fourth Further Amended Consolidated Statement of Claim (18 May 2011), [12.2(c)].

[50] Fourth Further Amended Consolidated Statement of Claim (11 May 2011), [22 (Particulars)].

[73] MPG Minutes of Directors meeting 29 February 2000, 2; MPG Sales of Shares Agreement dated 29 February 2011, Recital D(1); See Hoyts Pty Ltd v Spencer (1919) CLR 133.

[76] Supplementary Witness Statement of Stuart John Hinchen (29 April 2011), [5].

JUDGE:	Davies J
WHERE HELD:	Melbourne
DATE OF HEARING:	2 – 5, 9 – 12, 16, 18 – 19, 23 and 24 May 2011
DATE OF JUDGMENT:	18 August 2011
CASE MAY BE CITED AS:	PGA Group Pty Ltd v Idameneo (No. 789) Limited (formerly Symbion Health Limited); Peter Gunn v Idameneo (No. 789) Limited (formerly Symbion Health Limited)
MEDIUM NEUTRAL CITATION:	[2011] VSC 382


IN THE SUPREME COURT OF VICTORIA		Not Restricted

Supreme Court of Victoria

PGA Group Pty Ltd v Idameneo (No 789) Limited (formerly Symbion Health Limited); Gunn v Idameneo (No 789) Limited (formerly Symbion Health Limited) [2011] VSC 382 (18 August 2011)