Adelaide Petroleum NL v Poseidon Ltd

[1990] FCA 576

JUDGMENT NO. .57.6.../.&..2

C A T C H W O R D S

TRADE PRACTICES - misleading or deceptive conduct - pre-contractual representations - acquisition by one company of controlling shares in another - representation by acquirer as to intention to assume control and management and to appolnt specific directors to the Board - acquirer's executive negotiating beyond authority - agreement concluded other than as authorised by acquirer's Board - lntentlon by acquirer's executive to secure effective option wlth no substantive commitment by acquirer - accessorial liability of executive - damages - loss of opportunity to vendors to enter alternative transaction - significant contingencies attaching to alternative - assessment of loss.

DAI-mGES - loss of chance - assessment of loss.

CONTRACT - terms - express and implied - bases of implication - antecedent negotiations - whether repudiation - measure of damages

- loss of chance.

Trade Practices Act 1974 s.52, s.82, sub-ss.84(1) and ( 2 ) , s.86A

Pavlch v Bobra Nominees Pty Ltd (Fed. Court; 4/8/88; unrcp. French	-
J.)
David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 93 ALR 2-11 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 BP Refinery (Westernport) Pty Ltd v Shire of Iiastings (1977) 52 ALJR 20. Secured Income Real Estate (Australia) Ltd v St. 1-lartins Investments Pty Ltd (1979) 144 CLR 596 Prenn v Simmonds L19711 1 WLR 1381
-fa Construction Pty Ltd v State Rail Authority of NSW (1982)

49 CLR 337

Mackay v Dick (1881) 6 App. Cas. 251

Butt v ~ c E l d	(1896) 7 QLJ 68
Peter Turnbull and Co. Pty Ltd v Mundus Trading Co.	(Australasia)
Pty Ltd (1954) 90 CLR 235 Mahoney v Lindsay (1980) 55 ALJR 118

ADELAIDE PETROLEUM NL AND OTHER V POSEIDON LIMITED AND OTHERS
POSEIDON LIMITED AND OTHERS v ADELAIDE PETROLEUM NL AND OTHERS

NO. WAG 115 of 1980

FRENCH J .

PERTH

4 OCTOBER 19 90

IN THE FEDERAL COURT )

OF AUSTRALIA 1

WESTERN AUSTRALIA	1
DISTRICT REGISTRY	1
GENERAL DIVISION	) NO. WAG 115 of 1988
B E T W E E N :	ADELAIDE PETROLEUM NL AND OTHERS

Applicants

and

POSEIDON LIMITED AND OTHERS

Respondents

POSEIDON LII.IITED AND OTHERS

Cross-Claimants

and

ADELAIDE PETROLEUM NL AND OTHERS

Cross-Respondents

MINUTE OF ORDER

JUDGE I-IAKING ORDER:	FRENCH J.
DATE OF ORDER:	4 OCTOBER 1990
WHERE MADE:	PERTH
THE COURT ORDERS THAT:

1.         There be judgment against the first and sixth

respondents as follows: (1) In favour of the first applicant in the sum of $88,992.

(2) In favour of the second applicant in the sum of

$146,835.

(3) In favour of the third applicant in the sum of

$48,037.

(4) In favour of the fourth applicant in the sum of

$48,037.

(5) In favour of the fifth to twelfth applicants inclusive in the sum of $880,292.

The application is dismissed as against the second to fifth respondents.

The cross-claim is dismissed.

There will be liberty to the parties to file written

submissions wlthin fourteen (14) days on the question of

the appropriate costs orders and to apply within seven
(7) days thereafter for oral submissions if desired.

There will be liberty to the parties to file written submissions within fourteen (14) days on the question of

Note: Settlement and entry of orders is dealt with in	Heads of Agreement. the payment of stamp duty and fines in relation to the
Order 36 of the Federal Court Rules.

I N D E X

Introduction	1
Adelaide Petroleum NL - Properties and
Commitments	4
Adelaide Petroleum - Directors and their
Shareholders	7
Adelaide Petroleum - Management Agreements	8
The Divestiture Decision	9
The Pagini Negotiations
Poseidon Ltd
Counsell Meets de Crespigny - Late February
1988
Counsellrs Hemo to de Crespigny - #arch 1988	36
Counsell Communicates with Clarke - 5 April and
7 April	38
Meeting Between Counsell and de Crespigny -
7 April 1988	39
Sellarsf Proposal >Iemorandum of 8 April	40
Counsellrs Meeting with Naughton, Clarke and
Atkins - 1 2 April 1988	46
The Proposal Memorandum of 2 1 April	4 9
Meeting - Counsell, Sellars and de Crespigny

-26 April 50

Meeting - Counsel1 with Atkins - 27 April	53
Meeting - Counsel1 and Atkins - 28 April	55
Meeting - Sellars, Atkins, Walker and Counsell
- 29 April 1988	57
Clarke Meets Counsell - 30 April - Edinburgh
Hotel, Adelaide	60
Briefing the Poseidon Board - 2 May 1988	6 1
Clarke Meets Sellars and Counsell - 2 and 3
May 1988	65
Sequelae to the Clarke-Sellars Meetings of
2 and 3 May	70
Clarke Meets Sellars at Sellarsr Home - 7 May	73

J..

I . .

Clarke Meets Sellars and Counsell - Left Bank

Cafe - 8 May

Communications - Clarke, Sellars, de Crespigny,

Counsell - 9 May

de Crespigny and Counsell - 10 14ay

Chloe's Restaurant and Poseidon Offices
- 11 and 12 May

Sellars Meets Morgansr Representatives - 12 Nay Sellars and Clarke at Adelaide Airport - 12 May Sellars and Clarke - Sellars' Home - 15 May

Atkins' Draft Agreement and Various Exchanges

- 17 May

Sellars Weets Greness and Gets Further Drafts from Atkins - 19 and 20 May

De Crespigny and Sellars Send a Memorandum to the Board - 23 Islay

Sellarst Draft Section for Information 14emorandum to ADP Shareholders - 23 May

Sellars, Clarke and Atkins - Grand Palace

Restaurant - 26 14ay

Consideration of Draft Agreement - Sellars,

Atkins and Clarke - 27 May

Sellars' Memo to de Crespigny - 28 May

Due Diligence - The Technical Check - 30 May

Meeting - Clarke, Bahen, Sellars and Bridges

- Poseidon Boardroom - 31 May

1 June 1988 - Clarke Meets Zehnder - Sellars

Writes to de Crespigny

Poseidon Board Meeting - 6 June 1988

Clarke and Sellars Meet - 8 June

Settling Heads of Agreement - 9 June

Execution of Heads of Agreement and

Incidental Communications - 14 - 20 June

Sellars Raises the Question of Additional
Capital with Atkins - 20 June 1988

: i	Morgans (SA) and Aorgans (NSW) Confer - 20 June 1988
I	' I
l.,

Paterson Talks to Sellars - 23 June 1988

Leslie's 1,Iemo - 24 June 1988

De Crespigny Becomes Managing Director

ADP's Approach to Mosaic Oil - 5 July 1988

Atkins Meets de Crespigny - 7 July

Solicitors' Letters - Termination of

Agreement - 8-29 July 1988

Exploring Alternative

Clarke Attempts to Procure Orlginal

Underwriting

Prospects for Capital Raising under the
ADP/Poseidon Heads of Agreement

Prospects for Capital Raising and Borrowing under the original ADP/Pagini Transaction

The Pleaded Case

The Case Against Poseidon Ltd under the

Trade Practices Act 1974

Damages for Nisleading or Deceptive Conduct
The Contract Claim
Interest

Conclusion

IN THE FEDERAL COURT	)
OF AUSTRALIA	1
WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION	1 NO. WAG 115 of 1988
B E T W E E N :	ADELAIDE PETROLEUM NL AND OTHERS

Applicants

and

POSEIDON LIMITED AND OTHERS

Respondents

POSEIDON LIMITED AND OTHERS

Cross-Claimants

and

ADELAIDE PETROLEUM NL AND OTHERS

Cross-Respondents

- CORAM : FRENCH J .
4 October 1990

REASONS FOR JUDGMENT

Introduction

At the beginning of 1988 Adelaide Petroleum NL ("ADP") did not have a promising future. As an explorer for oil and minerals it had enjoyed little success. It had insufficient working capltal and faced heavy expenditure commitments to retain its various interests. The company's controllers realised its limited potential and their own possible exposure as directors should it continue to operate and fail. One solution to their problems was to find another company willing to buy them out as part of a restructuring arrangement. Early in 1988, they entered into parallel negotiations with two organisations, one represented by the South Australian company Poseidon Ltd ("Poseldon"), and the other, a company called Pagini Resources NL ("~agini Resources"), in which the merchant bank Schroders Australia Limited ("Schroders") had a substantial shareholding. By the middle of May 1988 they had come close to an agreement with Pagini Resources. A draft contract prepared by its solicltors was submitted for their consideration on 27 May. In June 1988 however, the ADP controllers decided that rather than pursue the Pagini Resources negotiations further, they would enter into an agreement negotiated wlth Poseidon. Heads of Agreement were signed on 10 June. Their terms involved the sale to Poseidon of the controllers' shares in ADP, the Injection of oil Interests held by Poseidon Oil Pty Ltd ("Poseidon Oil") in consideration of the issue of additional fully paid ADP shares, the purchase by the controllers of ADP's mineral interests and the termination of benefits accruing under management service agreements. The Heads of Agreement required as a condition precedent an agreement with a South Australian stockbroker, Paul Morgan (SA) Pty Ltd ("Morgans
and the passing of appropriate resolutions at a general meeting of	(SA)"), to underwrite a $2.8 million share issue and placement,
ADP. The Managing Director of morgans (SA) was also a director of ADP.

About three weeks after the Heads of Agreement were

signed, a dispute arose. poseidon took the polnt that the

document was prepared and its slgning procured by an executive of the company who had exceeded his authority. It did not reflect the transaction which the Poseidon Board had authorised at a meeting on 6 June, and which would have involved the acquisition by ADP of cash flow producing assets funded by a much larger capital raising than the $2.8 million referred to in the Heads of Agreement. By a letter dated 18 July 1988, the solicitors for Poseidon wrote to the solicltors for ADP advising that their cllent would comply with the Heads of Agreements if desired, but would not assume management control if the restructuring proceeded according to its terms. And two key directors of Poseidon, its chairman Robert de Crespigny, and technical director, John Zehnder, would not consent to act as directors of the restructured ADP.

ADP's controllers represented by three of its directors, Naughton, Clarke and Atkins, took this as a repudiation of the agreement on the basis that Poseidon's attitude was calculated to result in failure of the underwriting requirement. On 29 July, their solicitors wrote accepting the repudiation and treating the agreement as terminated. They now maintain that they were induced

assume management of ADP and to support the electlon of de	Poseidon's intentions to proceed on the basls of that agreement to to enter Into the Heads of Agreement by misrepresentatlons of
Crespigny, Zehnder and another director of Poseidon, Webb, as directors of ADP.
They claim that, on the strength of these representations, they did not proceed with the alternative
proposal negotiated with Pagini Resources in May 1988.
Poseidon and Poseidon Oil, various of their directors and the executive who negotiated the Heads of Agreement with ADP, are sued under the provisions of the Trade Practices Act 1974 relating to misleading or deceptive conduct in trade or commerce. The companies are also sued for damages for breach of contract. Damages are claimed on the basis of the loss of beneflt that would have accrued from the proposed Pagini agreement and the loss of the benefit which, it is said, would have arisen out of the Heads of Agreement made on 10 June. Poseidon and Poseidon Oil cross-claim alleging that it is the applicants who have wrongfully repudiated the contract and that they were at all tlmes ready, willing and able to perform it.
The trial of this action occupied some 37 hearing days with 3,228 pages of transcript and 252 exhibits. The evidence traversed convoluted sequences of negotiation and comrnunlcation. It disclosed elements of commercial gamesmanship which were ultimately unproductive of anythlng much beyond substantial legal expenses and time wasted in litigation.

Adelaide Petroleum NL - Properties and Commitments

In or about September 1984, Paul Naughton, a chartered accountant, David Clarke, a geologist, and Andrew Counsell, a stockbroker, formed Adelaide Petroleum NL. The company was established to explore for hydro-carbons and minerals and was

listed on the Adelaide Stock Exchange in 1985. Its shares were
subsequently quoted in all Australian capital cities.

Initially ADP acquired interests in petroleum exploration permits in the Eromanga, Cooper and Pedirka Basins in South Australia and the Northern Territory. By late 1985 some drilling had been undertaken without significant result and farm-out agreements entered into with other parties to enable work to be carried out on a number of the properties. The disposition of interests and agreements remained substantially unchanged to

the end of 1987. They were set out in a schedule to the 1987

Annual Report of the company whlch was verified in evidence by Clarke, who as "Technical Director" was responsible for the majority of the farm-out arrangements. As listed in the schedule, the interests were as follows:

Permits E.P.1. PEL 5 + 6 PEL 5 + 6 PEL 5 + 6 PEL 5 + 6 PEL 31 Dalhousie Pedirka Lake Eyre Patcha- Curdi- Block Block Block warra murka +

East Blk Maree

+ PPL 26 Block

Gross
Area

(sq.krn.) 9,280 30,319 49,494 20,550 7,636 18,527

ADP 75.00 5.00 4.53 5.00 2.50 85.00

Interest (Operator) (Operator)

( 9 ; )

Early in 1987 the company entered upon a significant diversification Into gold minlng. It took over Grampian Mining Pty Ltd which held a series of tenements in the Eastern Goldfields of Western Australia and acquired mineral interests at Tennant Creek in the Northern ~erritory. A schedule of those interests was set out in the 1987 Annual Report. They included 11 locations in Western Australia, another 11 in the Northern Territory and one at Lewis Ponds in New South Wales. A number of the properties listed were subject to options to purchase and the ownership of one, called Anthill, was the subject of litigation. The directors also declded in 1987 to become involved in petroleum exploration outside Australia. Through Bosavi Exploration (PNG) Ltd, ADP acquired an interest in 011 Exploration Permit PPL 94 in Papua New Guinea. In 1988 thls was the subject of a farm-out agreement as to 10% with Mosaic Petroleum NL and an operating agreement with a subsidiary of Shell Oil called Pecten. ADP also entered into an agreement with an Argentinian company, Bridas Saplc, under which it was to acquire a share in a petroleum property CNE 27 in

Argentina. In the event the acquisition did not proceed.

Associated with ADP's petroleum and mineral Interests were substantial expenditure commitments. For the years 1988 to 1993 inclusive, the net projected costs for seismic testing and exploratory drilling on the petroleum properties were:

Year 1988 1989 1990 1991 1992 1993

Amount $
(Thousands) 2315 9344 11670 4642 5640 16304

It was clear that at the beginning of 1988 ADP had heavy commitments and little, if any, source of lncome to meet them. There was a need to take steps to either ralse additional share

capital or to borrow money.

Adelaide Petroleum - Directors and their Shareholdings

Initially the board of ADP comprised Naughton as Chairman, Clarke as Technical Director and Counsel1 as a part-time non-executive Director. In May 1987 michael Atkins, a chartered accountant, left his practlce and became full-time Flnance Director. Naughton held no ADP shares in his own name. His interests comprised shares held by three companies, Lytton Nominees Pty Ltd, Swlrl Pty Ltd and Guinevere Nominees Pty Ltd and by the Macquarie Bank Ltd. Lytton was trustee of the Naughton Family Trust and Swirl, trustee of the National Share Trust, whose beneflciarles were the members of the Naughton family. Gulnevere was described as a "bare trustee" for a number of shareholders, and held shares on behalf of Swirl. The holdings of these respective companies in fully pald shares as at 19 January 1988 were:

Lytton Nominees Pty Ltd 1,337,500

Swlrl ~ t y	~ t d	495,000
Guinevere Nomlnees Pty Ltd	1,391,006

Clarke said in evidence that he and his father each held 400,000 shares and 400,000 options over fully paid shares held by Guinevere. However, a master llst of shareholders discloses that Clarkers family company, Moublon Pty Ltd, had some 217,000 fully paid shares, and that he and his father and mother had 35,000 between them.

In April 1987, Atkins was allocated 400,000 contributing shares under an employee share scheme. He transferred 200,000 of these to a company called Windamurah Pty ~ t d as trustee for the windamurah Trust. 200,000 remained in his own name. These shares were paid to one cent each. Another company called South Australian Industrial Minerals Pty Ltd, of which Clarke's parents were directors and shareholders, and Atklns an alternate director, held 388,000 fully paid shares.

Adelaide Petroleum - Management Agreements

Naughton and Clarke's servlces were provided to ADP under agreements made with Lytton Nominees and Moublon respectively. The original agreements were dated 5 October 1984. ADP was to pay to each company an annual fee of $49,999.92 by monthly instalments of $4,166.66 together with a fee of $115 for each hour in excess of 30 monthly that Naughton and Clarke's services were provided. The fees were to be reviewed on 1 October each year, according to increases in the consumer price index for the City of Adelaide. The agreements were each expressed to

commence on 1 October 1984 and to be for a term of 10 years unless

earlier determined in accordance wlth their provisions. The

companies could terminate on 3 months notice and ADP on 2 years,

subject to the companies' rlghts to elect to be pald 2 yearsr fees In lieu of notice. It was Clarke's uncontradlcted evidence that the hourly fees were never claimed, and that for about 18 months neither he nor Naughton drew any cash salary from ADP because they felt their level of involvement was such that a drawing would not be justified.

These agreements were each varied by a series of three successive supplemental agreements made 19 July 1985, 30 January 1986 and May 1989. The first provided for additional payments to the companies of a sum representing 4% of any production profits earned by ADP or related entities. The second substituted for the indexed fee payment of all costs incurred by Lytton Nominees and Moublon in the provision of services to ADP together with a 25% administration charge. The thlrd agreement provided for payment of 4% of the net proflts won by ADP or related entities from mlneral properties. These entitlements were later referred to as the "net profit interests". Up to June 1988 no payment was made in relation to them.

The Divestiture Decision

Naughton and Clarke had a substantial involvement in a
mining company, Australmin Holdings Ltd, which they had formed

together in August 1985. In 1987 they secured significant

financial backing for that company when Industrial Equity ~ t d

("IEL") became a major shareholder. They undertook to IEL that they would reduce their involvment in ADP so that they could concentrate on the management of Australmin. Clarke saw Australrnln as holding more promlse of financial return than ADP. And in the latter part of 1987 and early 1988 ADP faced significant financial difficulties wlth a diminished working capital standing at between $500,000 and $1 mllllon agalnst the

- l

' ' I

. . .

relatively enormous expenditure commitments on its petroleum and mineral properties. Atkins advised Naughton and Clarke in or about August 1987 that they should consider reducing their interests in the company which he said required "a fairly sizeable capital influx".

Attempts were made in August and September to negotiate capital raisings but these foundered after the stock market crash of october 1987 when the All Ordinaries Index dropped by about 50% in the space of one month. In November 1987 Clarke spoke to Warren Leslie, then Petroleum Manager for Poseidon. He told Leslie that he was not interested in running ADP any longer than he had to, and that he wanted to explore the possibility of some

transaction under which Poseidon could dispose of petroleum

interests to ADP and acquire its mineral interests. Leslie said he was not sure where poseidon was headed in relation to petroleum exploration. But he Introduced Clarke to his Managing Director, Bruce Webb. Clarke suggested to Webb that there might be an

opportunity for some sort of deal between ADP and Poseidon, given

that both had a mix of petroleum and mineral interests that did not seem to be working particularly well. They agreed that he

would send Webb some documentary information about ADP.	He
subsequently forwarded a copy of ADP's 1987 Annual Report and its	report to the Adelaide Stock Exchange for the September quarter.
In the event he heard nothing further from Webb. On 17 January 1988, Clarke was injured in a motor vehicle accldent and precluded from any significant buslness activity until mid February. Even then his activities were restricted until early April.
In the meantime Atkins was becoming more concerned about ADP's financial position. In January 1988 he went to London, and spent 3 1/2 weeks approaching various stockbrokers and a merchant bank with a view to getting support for a further capital raising for ADP. In these efforts he was not successful. In the meantime Naughton initiated ultimately fruitless inquiries in Australia with the brokers, Prudential Bache Securities (Australia) Ltd and "McIntoshrs", apparently a reference to McIntosh Hampson Hoare Govett Ltd. On his return to Australia, Atkins spoke with Naughton and Clarke about possible courses of action for the company. He kept in touch by telephone with Counsell who lived in Adelaide. He alerted hlm to the lack of cash flow and the company's low cash reserves. In early March he told Counsell that if ADP were not able to come up with a solution to its cash problems soon the directors would have to consider whether the company could carry on in the light of their obligations under the Companies Code. This I take to have been a reference to the possibility that the company might become insolvent. He asked Counsell to consider whether he had any clients or contacts he could use to come up with a proposal for the reconstruction of ADP.

The Pagini Negotiations

On 2 March 1988 Naughton spoke with Hugh Boland, the Chairman and Chief Executive of the merchant banker, Schroders Australia Limited. They had met previously at a Pacrim conference. Schroders had an interest in Pagini Resources which was incorporated on 24 March 1987 following an agreement between

Schroders and Pagini Holdings Pty Ltd, a trucking and trading company operating in Papua New Guinea. The petroleum and mineral exploration activities of Pagini Resources were carried out by its wholly owned subsidiaries Pagini Oil and Gas NL and ~agini Mining NL respectively. All three companies had the same people as directors. Schroders' objective in participating in the formation of Pagini Resources was to acquire an attractive portfolio of petroleum and mlneral exploration properties and have the company listed on the Stock Exchange after which it would dispose of its interest. However following the October 1987 crash it was decided that the best objective was to seek a "backdoor listing" through acquisition of a company already on the Exchange. As at March 1988, Schroders' plans with respect to Pagini Resources did not Involve any long term commitment.

Boland and Naughton discussed their companies' common interests, particularly having regard to ADP's involvement in PPL 94. They decided, according to Naughton, that some kind of deal might be done between them. It was clear enough from the context that they were talking in terms of a transaction under which Pagini would acquire a controlling interest in ADP. Naughton and

Boland agreed to refer the matter to their respective executives	for further discussion. Subsequently Naughton was telephoned by
Chris Ryan, a director of Schroders and Chairman of Directors of Pagini Resources. It was agreed that he should talk with 14ichael Atkins. Ryan did not disclose to Naughton or subsequently to Atklns the short-term nature of Schroders' commitment to the

i i-	company. He regarded himself as acting as a director of Pagini
; c
j	Resources, mindful at the same time of Schroders' interests. He
: r-
; L.!
had support from his collegues at Schroders for a transaction in which Pagini Resources would borrow money to buy ADP shares. It was never his intention that Schroders should act as a financier. His primary concerns were to advance Schroders' interests and objectives with respect to Pagini Resources.
Atkins and Ryan had a number of meetings in quick succession, the flrst of which was in Ryan's office on 10 March
1988. They discussed the need to obtain Forelgn Investment Review
Board approval for any transaction involving acquisitions by Paginl Resources, and the need to obtaln valuations of the relevant ADP petroleum and mineral interests. Atkins kept rough short notes of their discussions. He could not recall the precise sequence of topics addressed. It was apparent from the notes that they talked about the Lytton and Moublon management agreements and the possibility of continuing the "consultancy" if the two companies were prepared to provide advlce in relation to the proposed acquisition. The alternative was termination of those agreements. Rationalisation of premises between the two companies and post-acquisition staffing out of existing ADP staff were also covered. "Objectives" of the proposed acquisition were canvassed,
PNG mineral properties once they had been appraised. The notes
and included concentration on PNG petroleum properties and consideration of the options of farm-out, sale or management of
also recorded as an objective "obtain a cash flow from somewhere". Cross-examined about this entry, Atkins was not prepared to accept that ADP needed a cash flow source or that this was common ground
> ,	in his discussion with Ryan. He said that Ryan had discussed it
!	.	L	and he conceded that the acquisition of a cash flow source was
"one of two ways of funding an exploration". But the notes and his expressed concerns about the state of ADP's finances suggest that in the context of his negotiations with Ryan, Atkins accepted as an objective that any reconstructed ADP should "obtain a cash flow from somewhere". I

8             :

j

i

Atkins claimed to have received an indication from Ryan at their flrst meeting that Schroders would make money available	I '
I-;
I !
to "make the proposal happen". Final confirmation of that position had to awalt Boland's return to Sydney. Atkins' notes bore the entry:

"Cannot get answer on whether Schroders will put cash in until Wed. (Chlef Ex. not back untll Tues) ."

According to Atkins, Ryan subsequently confirmed that Schroders would make available a figure starting "at somewhere around $4 million, some of which might come from its managed funds." That commitment, he said, was maintained throughout the negotiations, although later it reduced to something in the vicinity of $2 milllon.

Ryan, who was called as a witness for the applicants, was not asked in examination-in-chief whether he had indicated a willingness on the part of Schroders to provide financial support for the new ADP. He did say that Atkins had pressed him to have Schroders' name associated wlth the transaction as an underwriter for a capital raising by public lssue of shares. He repeatedly rejected thls proposition on the basis that there were underwriters available in the market for that purpose. And in

cross-examination he accepted without reservation the proposition that he had made it abundantly clear to Atkins that Schroders would neither underwrite any issue associated with the reconstruction nor put any money up. He would not have encouraged any view that Schroders would be a financial backer or "big brother" to the company. His testimony in that regard conflicted with that of Atklns and with the entries already referred to in Atkins' notes. I am of the view that Ryanrs testimony is more probably correct on this point. It was consistent with Schroders' underlying objectives that there was never any promise or indication of its financial involvement in the transaction as an underwriter or otherwise. It may be that Atkins too readily equated Pagini Resources with Schroders for the purposes of his negotiations with Ryan. And that is an equation which would have been understandable having regard to the two hats that Ryan was wearing.

On 30 March 1988, a valuation of the mining properties
held by ADP was prepared by Stuart Robinson of Nenaki Pty Ltd,

Geological Consultants. Atkins accepted its characterisation in

deal with Schroders". It was described in its text as "an	cross-examination as "a valuation prepared for the purpose of the
independent assessment" applylng the Guidelines for the Valuation of Vendor Interests to meet Stock Exchange Listing Requirements for Mining Companies as published by the Australian Institute of Mining and Metallurgy (1983) and simllar guidelines published by the Australian Stock Exchange Ltd in 1987. It lncluded a disclaimer that "...all the properties are currently ln the exploration stage and hence it is not possible to assign a precise value". Reference was made to potentially significant gold mineralisation disclosed by drilling evaluation of certain tenements in WA and the Northern Territory. The total value of ADP's interests in the various properties was assessed at
$2,645,000. Atkins was cross-examined on this valuation in the
light of the directors' later preparedness to acquire essentially the same interests from ADP for only $600,000 as a part of the proposed transaction with Poseidon. He argued that a valuation of properties for balance sheet purposes does not mean that they can be sold for that amount at the time.

Atkins' discussions with Ryan proceeded into April. By

the middle of the month he felt confident that they were "close to agreement on the fundamentals of a deal". On 15 April he sent a fax to Schroders marked for Ryan's attention outlining a proposal which he believed his fellow directors would favourably consider. The proposal was said to be based on valuation of the "Schroders' properties" previously provided and a figure of $ 4 million for the ADP mineral properties representing an Increase over the Robinson figure of $2.6 mlllion but still, in Atkins' opinion, a conservative amount. The proposal set out involved Schroders	acquiring fully pard shares, contributory shares and options for	the ADP directors at 45 cents, 3 0 cents and 2 5 cents respectively,
a total of $2,375,000. Management agreements would be pald out at
$700,000. Naughton and Clarke would acquire ADP's shares in
Australmln and Sabminco for $550,000. Schroders and others would
take a placement of 2 .5 million shares at 4 0 cents for a total of
$6.25 million. ADP would retain all Papua New Guinea interests
and Australian Petroleum interests. Schroders would end up with
54.5% of the shares on this proposal.
Ryan regarded the fax as "a welcome first indication of the structure of transaction which Adelaide Petroleum would entertain". The first element, the acquisition of ADP's shares from its directors, was, he said, "more or less accepted", although it was evident that he had in mind an acquisition by Pagini Resources rather than by Schroders. He told Atkins that he did not consider that Paginl Resources should assume the burden of paying out the management agreements. The price proposed for Australmin and Sabminco shares seemed reasonable, but the proposal that Schroders should take a placement of shares was "totally unacceptable". On 21 April, Pagini Resources received a valuation of its petroleum interests from Nicholas Papalia & Associates. The total value was assessed at $9.975 million. PPL 9 4 was valued at $150,000 per one percent.
Despite his rejection of the suggestion that Schroders take a placement of shares, Ryan felt that there was at that time a sound basis for negotiation with ADP. He agreed with the
proposition put in cross-examination, that negotiations had reached a stage where a mix of proposals was being advanced, some of which were acceptable and some not. On 27 April, Atkins sent
him a handwritten fax relating to the management agreements with Lytton Nominees and Moublon. In it he pointed out the two year fee in lieu of notice provision, the continuance of the net profits entitlement in relation to future production and the provision for purchase of options. On 29 Aprll, Naughton met with
Ryan again. The evidence does not suggest that negotiations were substantially advanced by that meeting. Indeed Naughton's recollection seemed rather to confuse it with their initial meeting in March.
On 3 May, Atkins sent Ryan a further fax enclosing extracts from the minutes of ADP to evidence the conditions attaching to contributory shares and a copy of a draft balance sheet and profit and loss account as at 31 march 1988. Ryan continued to hold the vlew that a sound basis for negotiation had been established "between Schroders and Paginl on the one hand and Adelaide on the other". Naughton met with Boland again on 5 May. He understood as a result of that meeting that the negotiations between Atkins and Ryan were proceeding and that "Schroders basically wanted to see the deal done". He said that Boland had given him to understand that Schroders would be "a significant backer to the merged company". He believed, although he did not recall Boland expressly saying so, that Schroders would be a major shareholder in the company, able to provide it with funds in the future. Ryan, he said, had told him over the phone that Schroders would provide loan finance for the acquisition of his and the
upon which Ryan had made this statement. Asked about Ryan's other directorsr shares in ADP. He could not recall the occasion evidence that Schroders was not going to provide funds, he said he
disagreed with it. In my n e w , Ryanrs evidence on thls polnt was clear and consistent wlth his explanation of Schroders' objectives, and is to be preferred. It may be that Naughton's understanding was a case of misunderstanding fuelled by wishful thinking. I do not accept that he was ever told that Schroders would be financing any transaction that might be concluded between ADP and Pagini Resources. It is likely that Ryan told Atkins that Pagini Resources would have to borrow in order to acquire the ADP shares. While he had no precise recollection of the conversation, he remembered seeking indications from his colleagues at Schroders of their willingness to support him in negotiating a transaction that involved Pagini Resources borrowing money to that end.
On 13 May, Ryan prepared an Aide Memoire reflecting what he saw as "...the sort of transaction which we could agree on based on Atkins' representatlon of mid April". At that stage arrangements had been made for Naughton to meet with Boland again on 5 14ay to see if some agreement could be reached. Before he sent the Aide 1-lemoire, Ryan discussed it with his colleagues in Schroders and "at Board level in Pagini Resources". The document set out a proposition involving six polnts:
"1. Paginl Resources NL would borrow AS2.5 million and purchase from the directors of Adelaide Petroleum the following shares and options:

Fully paid shares	: 1,000,000 at 45 cents $ 450,000
Contributing Shares	: 3,500,000 at 30 cents 1,050,000
Options (over F/P shares): 1,500,000 at 25 cents	375,000
Options (over P/P shares): 2,000,000 at 30 cents	600,000

2.    Pagini Resources NL would transfer to Adelaide Petroleum all the capital in its wholly owned subsidiaries Pagini Minlng NL and Paglni Oil and Gas NL in return for the issue of securities identical to that currently on issue.

3.    Adelaide Petroleum either would have a rights issue, or would place in the market 20 milllon fully paid shares at 25 cents per share, to raise AS5 million. This would require the assistance and support of a broker/underwrlter.

4.   Naughton and Clarke and Australmin would purchase the Australmin and Sabminco shares respectively.

5.    Adelaide Petroleum would terminate the service agreement with Naughton and Clarke, as follows:

(a) payment of 2 years fees;

(b) issue of 400,000 options (over contribs.) each;

(C) Naughton and Clarke would grant a five year option to

Adelaide Petroleum to acquire the net profits interests
for payment of AS1 million to each of Naughton and
Clarke.

6.   The directors of Adelaide Petroleum would use their best efforts to obtain the continued services of key Adelaide Petroleum executive staff to be located in Perth."

In a covering memorandum Ryan said, inter alia:

"If this transaction meets your agreement, the next step is for us to identify a broker wllling to underwrite the rlghts lssue or guarantee the placement. We have a slight preference for the rights issue route but are willing to dlscuss pros and cons with you."

At the time he wrote the memorandum he was confident that a broker would be found willing to underwrite the rights issue or guarantee the placement. He anticipated that Pagini Resources would be able to provide the funds necessary to acquire the interests of the ADP directors.

Naughton received the Aide Memoire on or about 13 May. He said that he liked the proposal. It involved the economic benefits of a merger of the Pagini Resources and ADP petroleum ~nterests, and offered a prlce for the fully paid shares which was

5 cents higher than that being proposed in parallel negotiations

underway with Poseidon. He also liked the fact that "Schroders were clearly behind the company". He dld not reply in writlng to

the Aide Memolre but passed it on to Atkins to deal with. He could not recall giving him any directions in relation to thc proposal although, he said, they had discussed it informally. It was put in cross-examination that he had become less enthusiastic about the Pagini Resources negotiations at this stage. Although he denied this, the lack of any concerted and systematic approach to the preparation of a response or counter-proposal 1s indicative of a lower priority placed on these negotiations than those with Poseidon. Naughton said that he and Ryan had "a significant number of telephone conversations and even some meetings regarding the matter". But when pressed in cross-examination he could not recall any discussion with him specifically relating to the Aide Memoire.

Atkins did not reply in writing to the Aide Memoire but had a series of discussions with Ryan in the week to ten days that followed. There was substantial agreement between them on the six points set out. Atklns pressed the view that Schroders be the underwriters, but Ryan said that Schroders would not accept that role. Ryan also told him that he felt another underwriter could be obtained, and that it would help expedite the transaction if discussions with potential underwriters could be held forthwith.

Atkins asked, without explaining why, that no steps be taken in	that regard. It was no doubt the case that he did not want to
affect the Poseidon negotiations. Contrary to that request, Ryan later made enquiries to satisfy himself that an underwriter would be found for the transaction. These led him to believe that Ord Minnett were likely to consider underwriting the necessary share issue, and subsequently he passed that information on to Atkins.

Nobody from Ord Minnett was called by the applicants, and the evidence could not be regarded as proof of that firm's attitude to underwriting or the probability of securing an underwriter generally. It was received as evidence of the course of discussion between Ryan and Atkins. The general effect of the Pagini Resources' proposal as outlined in the Aide Memoire and explained by Ryan in evidence, was that Pagini Resources would acquire some 33 1/3% of ADP and its subsidiaries would become wholly owned subsidiaries of that company.

Following the discussions with Atkins, Ryan gave instructions on 21 May to the solicitors Mallesons Stephen Jaques in Sydney to prepare an agreement to give effect to the Aide Memoire proposal, a copy of which was sent with his instructions. At that time, he said, he had no reservations that there were any outstanding areas of disagreement although he was aware that ADP was engaged in discussions with others, as was Pagini Resources. He agreed in cross-examination that they had not resolved the question of Schroders taking up shares in ADP, a course which it was not prepared to contemplate. He was confident that he could resolve the difficulty by gettlng an underwriter other than

properties, making them more attractive combined than singly. He	effect arislng out of the combination of the Pagini and ADP Schroders. Ryan believed also that there would be a synergistic
and Naughton both described it as a "one plus one equals three" concept.
Ryan received a first draft agreement from the solicitors on 25 May, another on 26 May and a third on 27 May, a
copy of which he sent by fax on that date to Atkins. The draft was expressed to be an agreement between Pagini Resources, ADP, Naughton, Clarke, Counsel1 and Atkins, Lytton Nominees and Moublon. The shares in Pagini Oil and Gas and Paginl Nining were referred to as "contract shares" while the fully paid and partly paid shares and options in ADP held by Lytton Nominees and Moublon were referred to as the "contract securities". The first substantive provision (c1.2) was for the sale of the Pagini Oil and Gas and Pagini Mining shares to ADP and the sale of the Lytton Nominees and noublon shareholdings to Paginl Resources. By way of consideration for the acquisition of the Pagini Oil and Gas and Pagini Mining shares, ADP was to issue and allot to Pagini Resources or its nominee the following:

1.   17,296,011 ordinary fully paid ADP shares of 20 cents each.

2.   5,400,000 ordinary 20 cent ADP shares pald to 1 cent each.

3.    4,636,006 options over fully paid 20 cent shares in ADP.

4.    4,000,000 options over ADP shares paid to 1 cent.

Pagini Resources was to pay Lytton Nominees and Moublon the amount

of $2,475,000 for the acquisition of thelr ADP shares. By c1.5 it

was to pay $1,925,000 of that amount on Completion and a further

$550,000 upon the acquisition by Naughton and Clarke of ADP's

Australmin and Sabmlnco shares for $550,000 (cls.2.4 and 13).

The agreement contained the following conditions

precedent whlch it is convenient to set out fully:

"3.1	The obligations of Pagini to sell and Adelaide petroleum to purchase the Contract Shares and of the Shareholders to sell and Pagini to purchase the Contract Securities are subject to the fulfilment of all of the following conditions precedent:
(a) authority in terms of the Central Banking

(Forelgn Exchange and Gold) Regulations Chapter 138 from the Bank of Papua New Guinea being obtalned by Pagini wlth respect to the sale of the Contract Shares and the acquisition of the Contract Securities;

(b) no material breach or material inaccuracy of any of the warranties given by Pagini and collectively Adelaide Petroleum or the Directors hereln becoming apparent to Adelaide Petroleum o r Pagini respectively;

(C) no breach occurring of any of the obligations covenants or undertakings of any of the partles hereunder;

(d) the approval of the issue of the Adelalde petroleum Shares and the Options to Pagini or its nominee pursuant to Clause 2.3 belng approved by the shareholders of Adelaide Petroleum as required by the

companies Code, the Companies

(Acquisition of Shares) (South Australia) Code and the Listing Rules of the Australian Stock Exchange Limited;

(e) the approval of the members of Adelaide Petroleum to the acquisition of the

for by Sectlon 12(g) of the Companies contract Securities by Pagini as provided

(Acquisition of Shares) (South Australia)

Code and such other partles whose consent may be required;

(f) that, pursuant to the Foreign Takeovers ~ c t 1975, the Treasurer of the commonwealth of Australia consents to the proposed transfer of the Contract

Securities and the allotment of the

Options and Adelaide Petroleum Shares to Pagini and the Treasurer shall be deemed to have so consented:

( i )     if a notice is issued pursuant to

Section 26(2)(b)(ii) of the Foreign Takeovers Act stating that the Commonwealth Government does not object to the proposed transfer and the proposed issue; or

(ii) if notice of the proposed transfer and the proposed issue having been given to the Treasurer pursuant to Section 25 or Section 26 of the Foreign Takeovers Act, the said Treasurer is, by reason of lapse of time, not empowered to make any order under Part I1 of the Foreign Takeovers Act in relation to the proposed transfer or the proposed issue;

(g) the obtaining by Paginl of financial accommodation upon normal commercial terms and conditlons to enable it to make payment pursuant to Clause 5."

The balance of the clause provlded for Pagini Resources and ADP to waive by written notice any of the conditlons to be satisfied by the other (c1.3.3). The partres were to take all practicable steps within their respective powers to enable the conditlons to be fulfilled (c1.3.4). If any of the conditions were not fulfilled as at 15 September 1988 then either Pagini Resources or ADP might glve 14 days wrltten notice of intention to terminate the agreement (c1.3.5). And in the event of any breach or inaccuracy in any of the representations, warranties or

undertakings in the agreement becomlng apparent to either party,	it might without prejudice to any other remedy terminate its
obligations under the agreement. The proposed completion date was a date occurring within flve business days of all conditions being satisfied or such other date as might be agreed.

Clause 7.1 provided for termination of the management

agreements with Lytton Nominees and Moublon subject to:

(a)	Payment by ADP of $100,000 in respect of each agreement.
(b)	The issue of 400,000 options to each of Lytton Nominees and Moublon over ADP shares paid to 1 cent.
(c)	The grant to ADP of an option to acquire the net profits interests granted under the management agreements for $1 mlllion and execution of an option agreement attached as annexure D.
(d)	The net profits interest was not to be calculated in respect of any assets acquired by ADP under the agreement.

Clause 7.2 provided that Atkins would agree to continue to act in some unspecified capacity with ADP for at least 6 months from completion. Clause 7.3 provided for the directors to use their best endeavours to procure the continued employment with ADP of various members of its existing staff. By c1.9 the directors Naughton, Clarke, Counsel1 and Atkins and Pagini Resources

17,296,011 shares in ADP at 30 cents per share according to the	acknowledged that after completion ADP would conduct a rights issue or place shares with the publlc offering not less than
terms of an underwriting agreement which was annexed. The Australmin and Sabmlnco shares were covered by c1.13, which provided:

"13.1 Naughton and Clarke agree wlth Adelalde
Petroleum that they will purchase or procure
the purchase of all shares held by Adelaide
Petroleum in Sabminco NL and Australmin
Holdings Limited for a total $550,000 by not
later than the date 4 weeks from the

Completion Date."

Atkins said he regarded ADP and Pagini Resources as close to agreement at that time. They had reached a consensus in principle on price and on other important terms. Ryan also expressed the vlew in evidence that as at 27 May he believed that the transaction was "on track to be completed". They had "apparently reached agreement as to the commercial terms" and he had "every confidence" that it could be completed. Atkins in cross-examination described the draft agreement as the "culmination of negotiations".

Atkins had made notes of issues arising out of the draft

for discussion with Ryan. They referred, among other things, to

certain of the conditions precedent. There was a note about the requirement in c1.3(a) for Central Bank approval in Papua New Guinea. Ryan had discussed this with Atkins who had simply recorded it as a legal requirement to be attended to by Pagini Resources. An informal approach had been made to the Bank on

behalf of Pagini Resources by Coopers & Lybrand. The response to the approach had encouraged Ryan to believe that approval would be	granted but there was no direct or admissible evidence to
establish the probability of such an outcome. On the other hand he was confident on the basis of his own experience that the

1	:	1	L-	Australian Foreign Investment Review Board would give the approval necessary to obtain the Treasurer's consent to the transaction under the Foreign Takeovers Act 1975 required by c1.3(£). In this
context, Atkins' notes queried the ownership of Pagini Resources. He had only a vague idea of its shareholders. Another note, "Agreement goes too far - should fall short of Pagini transfer etc", may have been a reference to detailed warranties embodied in a Schedule to the draft. But that issue was never finally resolved. He also noted that the agreement did not appear to be conditional on underwriting even though there was provision for an
i	-
underwriting agreement to be annexed. At the foot of the notes he designated "Major Issues" being:

1 r1

I r:  L.. "Schroders must underwrite.
Exclude references to mechanics of acquisition of
Pagini assets - simply (if at all) a reference to
12(g) acquisition.
Discuss if Schroders agreed to underwrite - wlll we
accept "subject to 12(g)"."

The latter reference was to a possible quid pro quo to be discussed between Atklns and his fellow directors under whlch he might agree to the requirement for a shareholders' meeting under s.l2(g) of the Companies (Acquisition of Shares) Code if Schroders agreed to underwrite. He could not recall following that matter up with his fellow directors. Ryan had told him that Schroders would not underwrite and that position remained unchanged.

It was Ryan's evidence that Paglni Resources could borrow the money necessary to fund the acquisition without resort to Schroders. There were a number of parties active in the market at the time in providing debt finance against shareholders in listed companies. Security would have been provlded by the
33 1/3% shareholding acquired in ADP.	He accepted that the

valuation of the shares for security purposes would depend upon
the valuation of the underlying post-acquisition assets of ADP.

In the event, according to Ryan, over two weeks passed from the sending of the draft without any response. He finally rang Atkins on 13 June. In the interim he had made the enquiries mentioned earlier, as to the possibility of Ord Ninnett underwriting the necessary share issue. He wanted to communicate the results of those discussions to Atkins. He said that Atkins undertook to get back to him within a few days to have a detailed discussion on the terms and conditions set out in the draft. He was not prepared to have such a discussion on that occasion. Atkins did not communicate with hlm agaln and a few days later Ryan read in the newspaper that ADP had signed Heads of Agreement with Poseidon. Atkins said nothing during thelr telephone conversation on 13 June to indicate that any agreement had been signed with another party.

Atkins said in evidence that he had had a discussion
about the agreement with Ryan "fairly soon" after he received it,

although he was not sure exactly when that took place. At the

possible transaction with Poseidon and regarded both that and the	of the parallel negotiations with Poseidon. He was told of a	time, however, he had information from Clarke about the progress
Pagini Resources proposal as acceptable. But while the Pagini Resources agreement would have been more attractive to the vending shareholders, the Poseidon transaction had, in his m e w , greater certainty attached to it. Had he known what he did not then know, namely that the Poseidon transaction would involve the need to
raise capital in the order of $6 mlllion, he would have "more strongly pursued the Pagini Resources deal".
Even at this stage, after receiving the draft agreement which made no mention of any financial input or acquisition of ADP shares by Schroders, Atkins maintained that it was his understanding that Schroders would apply about half a million dollars out of its managed funds to take up some of those shares. He accepted however that he had received no undertaking to that effect. He did not regard the condition precedent 3(g) relating to Paginl's abillty to borrow for the acquisition as having any bearing on Schroders' intentions with respect to its financial involvement in the transaction. He was not clear on the degree of Schroders' ownership of Pagini Resources but saw it as a kind of prospective corporate sponsor for the post-acquisition ADP. By this he meant that, with Ryan on the Schroders board and the board of ADP, Schroders would have a "management influence". He also referred to its "management of other funds" as an element in the sponsorship relationship. It was apparent from his evldence in cross-examination that Atkins did not have a very clear idea of the connection between Schroders and Pagini Resources, nor of the
ownership, issued capital or borrowing power of that company.
In my opinion, it is quite improbable that further negotiations would have achieved a commitment from Schroders of financial assistance to Pagini or involvement in the underwriting of the proposed share issue. ADP's posltlon at that time however was sufficiently difficult that, absent any alternative arrangements, the Pagini negotiations would probably have proceeded to a concluded agreement along the lines of the draft of 27 May with some amendment to the warranties. Agreement having been reached, the questions whether the conditions precedent would have been fulfilled and the necessary capital raising achieved, remain to be considered.

Poseidon Ltd

Poseidon was incorporated in South Australia in 1952. Its name is still remembered for the extraordinary increase in its share prices in 1969/70 following the discovery of nickel and copper deposits at Mount Windarra near Laverton in Western Australia. Although the Windarra deposits were developed, the company experienced financial difficulties and went into receivership in 1974. Its shares were delisted in 1976 and its interest in the Windarra project sold by the receiver in 1977. The receiver's appointment was ultimately revoked in 1978 at which time the company's shares were relisted.

By 1987 Poseidon had become, in the language of the were described as relating to "investments in gold minlng, mining	Annual Report for that year, a mining and exploration company wlth	diverse interests throughout Australia. Its principal activities
for silver-lead-zinc and tungsten and exploration for minerals and petroleum". It had a number of subsidiaries including Poseidon Minerals Ltd and Poseidon Oil. Group proflt after tax in 1986/87 was said to be $17.3 million.
Poseidon Oil had interests in petroleum tenements in the Eromanga and Otway Baslns in South Australia (PELs 5, 6, 8, 27 and 28), the Gippsland Basin In Victoria (PEP 109 and 110), the Southern Surat Basin in New South Wales (PEL 182 and 411) and the Canning Basin in Western Australia (EP 143 and 725). Poseidon Minerals Limited had mining tenements in Western Australia, Queensland, South Australia and Tasmania. The 1987 Report indicates that there had been no commercial quantities of hydro-carbons detected. The company's exploration activities were dominated by the search for gold.

' D	!
i
i	The Board of Directors comprised Allister McLeod who had been Chairman slnce 1985, Robert Champlon de Crespigny as Deputy
i	I '1

i ! . I

l Chairman, Bruce Webb who had been Group Chief Executive since July

. !	l	1983, Lewis Barrett, a director since 1978, Cornelis de Bruln, Norton Jackson, a director since 1983, and John Zehnder, a director since 1982. De Crespigny was also Executive Director of a company called Normandy Resources NL ("Normandy") which he had formed on 1 October 1985. De Bruin was another of Normandy's directors. In April 1987 Normandy had acquired 18.5% of
Poseidon's issued capital from Anglo Amerlcan Investments Pty Ltd
played no role in the day to day management of Poseidon until 1 De Crespigny described himself as a non-executive director who upon which de Crespigny and de Bruin were appointed to the Board.
July 1988 when he became Managing Director. However, as Poseidon's 1987 Annual Report discloses, he was appointed in April of that year as Deputy Director with responsibility for corporate finance planning. Although he may have been in some senses a non-executive director, it is apparent that he occupied an influential position on the Board. One of his most experienced CO-directors was John Zehnder who had been involved with the technical and operational aspects of the oil industry since 1949. He had held a considerable number of directorships, including the office of Managing Director of Santos Ltd between 1972 and 1981. He had also held office in a number of industry bodies. An employee of Poseldon crucially involved in the dealings which led to the present proceedings was Mark Philip Sellars. He was a chartered accountant of some 12 years standing and had been employed by Poseldon since 1983. He was Company Secretary and Manager, Corporate Development and Finance.

Counsell Meets De Crespigny - Late February 1988

In January 1988 de Crespigny, who had been resident in Western Australia, moved to South Australia to live. He was interested in developing his contacts in the buslness community there and in February 1988 had a breakfast meeting with Andrew Counsell, whom he had already met brlefly. Counsell was at the time Chairman of the Adelaide Stock Exchange and senior partner in Morgans (SA). He was also known to de Crespigny as a director of

ADP. De Cresplgny had what he described as a "working knowledge" of the structure of ADP and the way it operated. He thought of it	as a pioneer in the concept of entering into joint venture
arrangements with low, early annual financial commitments and large payments closer to the end of their terms. He was conscious of the fact that the company was then facing substantial outlays and that this was a source of concern to it. The evidence does not disclose who suggested the meeting. As they talked, Counsell briefed de Crespigny on local business identities. This occupied the greater part of their conversation as de Crespigny wanted to find out how the members of the Poseidon Board fltted into the South Australian business community. At some point Counsell raised the subject of ADP. He told de Crespigny he had been involved in its formation through Morgans (SA) who were brokers to the first issue when it was listed. The company was going badly, it had a shortage of funds and needed to re-organise its financial commitments. The assets he thought were worth a lot of money. De Crespigny asked how ADP could meet its commitments so that it could retain the petroleum properties it had. Counsell told him that they were negotiating joint ventures with malor companies to try and cover the expenses. He was nevertheless concerned about the future. The fact that the company was going badly could be
embarrassing for him if it were not reorganised.
Counsell then asked what Poseidon wanted to do with its petroleum interests. De Crespigny believed that Poseidon's involvement in oil exploration had been very expensive, consuming some $20 to $25 mlllion of its gold revenues without any success. He had advised the Board that the petroleum assets should be disposed of in one way or another. He said as much to Counsell and told him that he had not yet been able to get support for his suggestion. Counsell asked whether he would be interested in
selling the Poseidon petroleum Interests to ADP for shares. De Crespigny said this might be worth considering if ADP dld not have the problems it did and if the major exploration commitments could be farmed out. He referred to the management agreements, their flat rate remuneration and net profit interest provisions. He told Counsell that he did not want to sell Poseidon's petroleum interests to a company that would not be successful and that Poseidon would have to run. They discussed ADP's petroleum properties, particularly PPL 94, EP 1 in the Northern Territory and the Patchawarra East Block. De Crespigny was aware that there was a substantial expenditure commitment of the order of $4 million or $ 5 million on Patchawarra East. Counsell said he was conscious of it, that time was running out and ADP had to do something to lay off the expense because it was too small to joint venture. He valued the Papua New Guinea interest at $20 million. De Crespigny queried this and Counsell sald they were about to enter into a jolnt venture wlth Shell that would reflect that value. De Crespigny said that he did not think a farm-in commitment of $20 million to earn a 50% Interest meant that the 50% retained was also worth $20 million. They discussed a recent valuation of Poseidon's petroleum interests by J.M. Blumer & Associates at $4.8 million. De Crespigny told Counsell he thought it was an optimistic figure.
Although de Crespigny downplayed the significance of the discussion about ADP in the overall context of his meeting with Counsell, it was evident that their conversation on that subject
was conducted in some depth. It IS also apparent that he had a substantial knowledge of ADP's properties, financial problems and
management arrangements. That is not to say that he had been studying ADP with a view to some transaction. His association with Normandy Resources and another resource company, Command Petroleum, explains his Interest in and awareness of ADP as an operator in the same area of activity.
The meeting finished with Counsell suggesting that he might "do some work on it". De Crespigny said that he could if he wanted to but his attitude as explained in his evidence was that:

"... it did not really interest me a lot and that he

should do the work; and I would not be able to help him - we were involved in another transaction that I had to concentrate my mind on as far as Poseidon is concerned, and I dld have another buslness to

run anyway. "

Counsell asked if he could get information on Poseidon's properties. De Crespigny said he would make one of Poseidon's executives, Mark Sellars, available to talk to Counsell about that.

Counsell's Memo to De Crespigny - March 1988

On the same day or very shortly thereafter de Crespigny received from Counsell, on Morgansr letterhead, an outline of information relating to ADP. The outline which was undated, comprised six typed pages (X-176) and set out the capital structure, directors' shareholdings and summary valuation of the

interests and investments by McIntoshts in January 1988,

Prudential Bache in February 1988 and the directors in March 1988.

A suggested new capital structure was set out on the third page in

which a purchaser, X Ltd, would acquire 1 million fully paid shares of 50 cents, 2.5 million contributing shares at 30 cents, paid to 1 cent and 2.5 million options at 30 cents, a total of $ 2 million. X would vend in interests for $4 milllon, representing 8 million shares at 50 cents and would inject cash of $3 million, representing 6 million shares at 50 cents. The twenty largest shareholders as at 20 February were listed. Naughton, Clarke and Atkins, it was said, "would want to sell total holdings for

$2,844,000 and their management agreement entitlement for a

combined value of $700,000".

De Cresplgny asked Sellars to consider what equity Poseidon would gain if its petroleum Interests were sold to ADP for shares. A few days later, he came lnto Sellars' office. Sellars was, in his words, "playing around wlth the papers still". De Cresplgny had wanted a calculation of the equity acquired in ADP for a $5 million input. He sat down with him and did some rough working out of the value of the ADP properties. These were considerably less overall than the flgures attributed to McIntoshPs, Prudential Bache and the directors.

Towards the end of March, Counsel1 contacted Atkins and told him he had a client who might be interested in a transaction involving ADP. He asked to be provided wlth a summary of shareholdings, values of various properties and "basic asset

one page sheet headed "Valuation of Adelaide's Properties"	issued shares and shareholdlngs of the directors. He wrote out a structures". Atkins prepared a typed summary of ADP's assets, its
supporting a theoretical asset value in excess of $1 per share with the rider that he had been discussing "equity deals in range of 40-45 cents per share for control". A further one page annexure which he entitled "Schroder's Deal" outlined the progress of the Pagini negotiations (X-8). The document was faxed to
Counsell on 31 March. And shortly afterwards financial accounts for ADP as at 31 March were prepared. These included a balance sheet, profit and loss account, trial balance, creditorsr list, asset register and statements of exploration interests and investments. Counsell as a director probably received one of these also.

Counsell Communicates with Clarke - 5 April and 7 April

On 5 April Clarke was in aelbourne, where he was telephoned by Counsell, who was in Sydney. Counsell told him that he had a cllent in Adelaide who wanted to take control of a listed public company and become substantially involved in the petroleum industry, and that ADP might be the listed company to meet that purpose. They arranged to meet for breakfast at the Sheraton wentworth Hotel In Sydney on 7 April. At that meeting Counsell repeated what he had said over the phone. Clarke asked the identity of the company and was told that Counsell would prefer to keep that confidential for the time being. He outlined a proposal, of whlch Clarke made notes at the time. Aided by reference to his notes, he recalled that it involved the incoming

million shares at 5 0 cents. There would be further shares issued	company putting petroleum properties into ADP and receiving 8
to bring the incoming company's shareholding to about 40%. He noted at the time that the lncoming party was to inject about $3 mlllion worth of funds to account for 6 million shares at 50 cents, and that there would be a placement to the public of 2 milllon shares of 5 0 cents to raise a further $1 million. The management agreements with Lytton Nominees and Moublon would be
terminated and the net profit interests for which they provided would be bought back in some way. There was no discussion of post-acquisition management arrangements. Counsell said that he knew the people concerned and would be happy to stay on as a director of ADP. He also suggested to Clarke that he and Naughton should personally pay a fee of $25,000 to Morgans (SA). Clarke said he was not keen on the principle of that suggestion but would talk to Naughton about it.

Meeting Between Counsell and de Crespigny - 7 April 1988

On 7 April de Crespigny and Counsell met again, this time at Poseidon's offices. No-one else was present. De Crespigny could not recall who had set up the meeting. He told Counsell that they had done enough research to conclude that ADP had major solvency problems and needed to raise substantial funds relative to its existlng capitalisation. He summed up the thrust of the conversation in his evidence as being "along the llne of saying we were not interested in looking at it any further". He told Counsell that he should consider his position as a director if AD? was as badly off as he thought it was. They talked about

ADP's properties and he told Counsell that they were not worth

what he thought and that he would have to have a rlghts issue to

protect the company's financial position. He made the point that the policy of entering Into arrangements whlch deferred expenditure assumed a rise in oil share prices before the commitments fell due. Because thls had not occurred the policy was coming back to "haunt" ADP. In de Crespigny's view, whlch he expressed, a small exploration company could not become a real business and survive in the long term unless it acquired what he called a "critical mass". By this metaphor he meant a minimum level of internally generated cash flow.

Counsell asked if Poseidon would be at all interested in doing business. De Crespigny said they could only deal if there were a "massive rearrangement of the company". He was aware at the time that an injection of $5 million for Poseidon would make it a major shareholder in ADP. The incumbent controllers would have to sell back the management agreements at fairly nominal amounts, cancel their net proflt Interests and buy out the non-petroleum assets. He told Counsell that additional capital would have to be raised for the restructured company, and that ADP would have to buy a cashflow source or it would never survive. Counsell said that the existing Board could not raise the money to buy cashflow assets. He said that ADP was still trying to farm-out its interests in PPL 94 in Papua New Guinea and that if it did not succeed they would have to go to the PNG government and try to reduce the acreage, a task not as easy in New Guinea as it is in Australia.

The meeting concluded and Counsell said he would like to continue working on the possiblllty of some dealing with Poseidon because he was not sure that ADP had many other options open to it. He asked de Cresplgny to put together "a summary of thoughts" for him.

Sellars' Proposal Memorandum of 8 April

De Crespigny said in evidence that his attitude to the possibility of further dealings with ADP was very negative. He

felt that ADP and Poseidon were poles apart. ~ l l he really wanted was for ADP to "go away" so that he could concentrate on another transaction for Poseidon in which he had an interest. In spite of this he asked Sellars to prepare a "cheat sheet" or "summary of things" that Counsell could take back to ADP for further discussion. He could have drawn it up himself "in a few seconds". He explained his decision to brief Sellars to do it in this way:

"I ....p robably sound a wet answer but, I had just left Perth, where I had been for 13 years and did not really know anyone in Adelaide at all, in fact I knew 3 or 4 people, and Mr Counsell was one of them. When we left the meeting he sald could I have a summary of it or some such thing, and normally I would say "no" , but it was a - trying to look a bzt efficient and, in a way because I did not know many people in Adelaide. It was done for that reason and no other."

Sellars, he said, would have known he was developing further a train of thought that they had been discussing over the previous 2 or 3 weeks. In the context of his other evidence this suggests

some confusion of thought or recollection on de Crespigny's	part
about his attitude to the future of dealings with ADP. In my

opinion, Sellars was asked to prepare a document which would set a framework for continuing discussions with ADP. Consistently with this, I accept that de Crespigny's principal oblective was to maintain and develop a good relationship with Counsell, who he saw as well connected in the Adelaide business community.

On 6 April, Counsel1 had been sent by Atkins a summary of anticipated expenditures in connection with ADP's petroleum and mineral interests respectively (X-9). Sellars was given a copy of that memorandum, probably by de Crespigny. Sellars prepared a document as requested. He said that it embodied a proposal evolved out of a computer model reflected in a spreadsheet which he had used to calculate cashflow for a restructured ADP, and from which he had developed an hypothetical balance sheet as at June

1988. The document was dated 8 April and ran to five typed pages

covered by a two page memorandum on Poseidon letterhead which
began with the words:

"There is considerable merit in the broad outline of your proposal to merge the Poseidon petroleum interests with those of Adelaide Petroleum N.L.

(ADP) ."

It expressed the belief that the current market price of 25 cents for ADP's shares reflected its underlying assets. It also referred to a valuation of Poseidon's petroleum interests at $4.8 million by J.M. Blumer & Associates Pty Ltd. The first two pages of the memorandum then continued:

"The major problems with ADP that we have born [sic]

in mind when structuring the proposal are:

- the existing equity kickers and other beneifts
[sic];

- the current lack of funds;

- the lack of foreseeable cash flow;

- the horrific future gross exploration

commitment;

- the lack of a "big brother" to build the
company from its small base.

A merging of our interests could be effected by:

- the acqulsition of ADP's existing service agreements, including the equity kickers and other benefits, from Messrs. Naughton and Clarke with no strings attached upon parting;

- Poseldon acquiring control for $1.5 million

cash;

- the vending of Poseidon's petroleum interests
into ADP for 12.5 million shares;

- the sale of non-petroleum assets for $2.3

mlllion;

- placements to raise $5.0 million ($3.0 milllon from Poseldon and $2.0 milllon from institutions - underwritten by Paul Morgan (S.A.) Pty. Ltd.).

The whole package would, of course, be subject to shareholder approval because of the Acquisition of Shares Code and the Australian Stock Exchange Listing Rules.

ADP would emerge from the reconstruction as a cashed up ($7.0 million) petroleum company with a wide spread of exploration interests. Asset backing per share, excluding the contributing shares and the options, would be approximately $0.45.

The whole proposal is subject to ADP providing the further information (as set out on the attached schedule) which, together with data already to hand, will be reviewed by Poseidon.

ROBERT J. CHAMPIION [sic] de CRESPIGNY

The first page after the memorandum set out what were said to be	De Crespignyls name was misspelt by the inclusion of two "1's". MARK P. SELLARS
Poseldon's and ADP's estimated net worths at March 1988, $8.9 million and $25.5 million respectively. The latter flgure
included $16 million for the Argentinian interest and the note "no details". The next page was headed "PROPOSAL" and attached to this was a "PROFORMA BALANCE SHEET - JUNE, 1988" for the reconstructed ADP, a list of matters on which information was required and a "SUMMARY OF BENEFITS". The "PROPOSAL" was in the following terms:

"1. Service Agreements with Messrs.

Naughton/Clarke

Poseidon and Mr A.H. Counsel1 would buy the agreements, including the net profit interests and other benefits, for $100,000 each. (ADP would buy the contracts for $100,000 plus listed options.)

2.    Control of ADP for $1.3 million

Poseidon would acquire the following directors' interests: 1.0 million fully paid shares

2.5 million partly paid

shares

2.5 million options

3.    Package to be Approved by ADP Shareholders Approval is necessary under:

* 12(g) of the Acquisition of Shares (S.A.)

Code

* Australian Stock Exchange Listing Rules.

(a) Sale of Investments t o Messrs.

Naughton/Clarke for $0.8 million cash

AHC) . (subject to discussion between RJCdeC and

(b)	Sale of W.A. Gold properties to Naughton/Clarke for $1.0 million cash (subject to discussion between RJCdeC and
AHC) .

(C) Sale to Australian Development Limited of Northern Territory gold exploration interests at independent valuation.

(d)	Acquisition of Poseldon's oil interests for $4.8 million satisfied by way of 12 million ADP shares ( @ $0.40) based on valuation by J.M. Blumer & Associates Pty. Ltd.
(e)	Placement to Poseldon of 7.5 million ADP shares @ $0.40.
(f)	Placement to Institutions of 5.0 million ADP shares @ $0.40 (underwritten by Paul
Morgan & Co. (S.A.) ~ t y . Ltd.).
(g)	Acquisition by ADP of the service agreements for $100,000 each and listed 5 year options.

(Note: saves ADP management fee of

$120,000 p.a.

saves ADP 8% Net Profit Interest.)

(h) Appointment of 3 directors.
(RJCdeC, AHC, Managing Director)

Note:The whole concept can only be effected by a series of timed events. subject to necessary shareholder approval of the following steps."

Sellars said he had prepared the initial draft while de Crespigny "edited it in some minor circumstances". Subsequently, he said, a copy was glven to de Crespigny and another to Counsell. And in answer to an interrogatory administered to Poseidon and Poseidon Oil, Graham walker, their company secretary, having been referred to the memorandum and asked who were its authors, said they were Sellars and de Crespigny. Asked on whose behalf the document was written he said "Poseidon Limited".

Notwithstanding this, it is improbable that de Crespigny saw the document before it was glven to Counsell. There are a number of internal features which support that view, not least of which is the misspelling of his name. The attribution, albeit provisional, of a value of $16 million to the Papua New Gulnea interests in PPL 94 is inconsistent with what I accept was his sceptical attitude to that property. While the early development of the proposal contained in the memorandum is consistent with the general approach adopted by Sellars as it emerged in the course of the evidence, I do not believe it was the kind of document that de Crespigny would have prepared or lent his name to.

Counsell's Meeting with Naughton, Clarke and Atkins-12 April 1988

On 12 April, Counsell was in Perth on buslness for Morgans (SA). He rang Naughton early in the morning and said he had something to discuss. They met shortly afterwards. Counsell began by asking Naughton whether he was interested in selling his ADP shares. Naughton presented hlmself as a reluctant vendor who was interested because of his commitment to IEL in relation to the management of Australmin. Given the difficulties then facing ADP and Counsell's knowledge of them, this must have seemed more than a little ingenuous. Counsell said he had a buyer for the shares but did not identify it. Naughton then invited Atkins and Clarke to join them. Atkins was present for the rest of their meeting and Clarke came in and out during it. Notes were made on an electronic whiteboard as they talked. The whiteboard was able to

the heading "Issues Requiring Decision". These issues and the	evidence. Naughton wrote a list of key issues on the board under print out copies of what was written upon it and these were in
discussions surrounding them related to the buying price of shares and options, the net profit interests, management agreements and ADP's gold mineral properties. Counsell said that the prospective purchaser only wanted to acquire a portion of the directorsr shares. Naughton and Atkins made it clear that they would only
sell one hundred percent and this point was noted under the heading "Variances" to identify points of difference. Counsell said the purchaser would not be interested in ADP's gold properties and that the directors would have to buy them back. Nor would it want the management agreements to continue. It proposed a total payout of $100,000 on each of the agreements. There would be no requirement for the existing staff, office and office equipment of ADP. Counsell said his client would pay a maximum of $1.5 million. The value of the shares and underlying assets was discussed, as were measures necessary to keep the price down to $1.5 million. A price of 40 cents per fully paid share was canvassed. According to Atkins, Counsell indicated that, at that price, "his client" would be prepared to acquire 1 million fully paid and 2.5 million contributory shares plus 2.5 million options. He made reference to a Grand Prix box in Adelaide which ADP shared with Morgans (SA) and Morgans' desire to retain its rights in that regard. There was also discussion of the tax implications of a termination of the management agreements and disposition of the net profit interests. The need for an independent valuation of gold interests was accepted and noted. Counsell suggested that Naughton and Clarke buy ADP's Australmin and Sabminco shares and their value was noted at $200,000 and
$350,000 respectively. There was a reference to a discount on that acquisition because some of the shares were in escrow for a
period of two to three years. Atkins noted on the board that he, Naughton and Clarke wanted $2.75 mlllion for their shares. From that could be deducted $750,000 that would go back into the company for the acquisition of gold interests, leaving a net outlay of $2 million. In discussing the asset values, Naughton made reference to PPL 94 and a farm-out agreement then under negotiation with Mosaic Oil NL. Under the agreement being negotiated, the value of ADP shares was to be $12.8 million. He also referred to the discussions with Pagini Resources and Schrodersr assessment of $17 million as an indication of current asset value.
As Atkins described it, the meeting concluded with broad agreement on the issues and an arrangement to give further Information to Counsell. Counsell was confident he would be able to take the matter further. He asked Atkins to get him information on the cost base of the gold properties and on the farm-out agreements. On 13 Aprll, Atkins sent him a memo signed by Mr W. Foster of ADP on the subject of "Overseas Interests and Obligations". This referred to the PPL 94 property gained through the acquisition of Bosavi Exploration (PNG) Limited and ADP's
liability for imposts over normal payments comprising $250,000 and a 0.94% wellhead production royalty payable to Bosavirs founding shareholders. The proposed farm-out of PPL 94 to Mosaic 011 was also covered, as was ADP's withdrawal from the Argentinian transaction. Attached to the papers was a memorandum from Atkins
headed "Cost Base for Gold Projects" which included reference to the Australmin shares. On 14 April, Atkins faxed a further
handwritten memo setting out the directorsr holdings in ADP and comments on the exploration and administration cashflow. Counsell recast the information provided into a typed memo headed "NOTES" and gave it to Sellars in late April (X-132). Sellars found that it tended to conflrm assumptions on which he had been operating in developing hls computer model. When de Crespigny was shown the document in cross-exammation he said he could not recall ever having seen it before.

"84(1) Where, in a proceeding under this Part in respect of conduct engaged in by a body corporate, being conduct in relation to which section 46 or 46A or Part V applles, it 1s necessary to establish the state of mind of the body corporate, it is sufficient to show that a director, servant or agent of the body corporate, being a director, servant or agent by whom the conduct was engaged in within the scope of the person's actual or apparent authority, had that state of mind."

Sellars' intentions did not differ from those of the Board in

proceed to become involved in the reconstruction of ADP. No

relation to the essential conditions upon which Poseidon would

question of corporate schizophrenia based on differing states of mind in different corporate officers arises. He saw the Heads of Agreement as a bait to extract a commitment from ADP but one which would not involve any corresponding commitment from Poseldon. This was reflected in his memorandum to Webb and McLeod of 14 June, which referred to Poseidon's power "to make the underwriting agreement lmposslble for morgans to fulfll". And on 16 June, in a memorandum to the Chairman and Directors over his own name and that of de Crespigny, he said:

" ~ t should be noted that the proposal is subject to

a successful underwriting of the funds to be raised, which we can prejudice if we do not wish to proceed with the whole transaction."

The represented intentions on the part of Poseidon to honour the agreement in its terms, to take over the management of ADP and to appoint or support the appointment of Zehnder to the Board, were misleading or deceptive withln the meaning of 5.52 of the Trade Practices Act 1974. I am satisfied therefore that the applicants have established misleading or deceptive conduct on the part of Poseidon by virtue of the various representations made by Sellars and the execution of the Heads of Agreement. I am also satisfied that Sellars was a person knowingly concerned in the making of the representations and therefore, pursuant to s.75B of the Act, was involved in the contravention - Wheeler Grace and Pierucci Pty Ltd v Wright (1989) ATPR 40-940 at 50-25550,256.

I am not satisfied on the other hand that any case has been made to show that de Crespigny, Zehnder or webb were involved in the contravention in the sense contemplated by s.75B. Although de Crespigny had been told prior to 3 July that Heads of Agreement had been signed, he was not aware of the terms and the limlted nature of the transaction concluded by Sellars until 3 July. There is clearly insufficient evidence to involve Zehnder and Webb

to the extent required to establish accessorial liability under
s.75B of the Act.

On the questlon of reliance, I am satisfied that Naughton, Clarke and Atkins believed at the time the Heads of Agreement was executed that Poseidon intended to take over the management of ADP and to proceed with the terms as outlined in that document wlthout any reservation or qualification, save for the preparation of formal documentation. These beliefs, induced by Sellars' representatlons, were substantial factors in the decision to enter into the agreement. And it was a corollary of that decision, that they declined to proceed further wlth the mooted Pagini transaction. That 1s not to say that other considerations may not have played a role, but in my opinion the apparent progress of the Poseldon negotiations and the position adopted by Sellars were substantial contributing factors.

Damages for Misleading or Deceptive Conduct

Poseidon's contravention of s.52 of the Trade Practices

Act and Sellars' involvement in it, give rise to causes of action

under s.82 of the Act which in sub-s.(l) and (2) provides:

"(1) A person who suffers loss or damage by conduct

of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(2 An action under sub-sectlon (1) may be commenced at any time within 3 years after the date on which the cause of action accrued."

The loss or damage recoverable under the section, is that suffered

"... by conduct of another person that was done in contravention

of a provision of Part IV or V". The word "by" has been interpreted to mean "by reason of" or "as a result of". It forges a link in a chain of cause and effect. The loss recoverable is that suffered because of the conduct. In most cases of misleading or deceptive conduct, it will have been suffered because somebody relied upon a representation that was not true and acted upon it to his detriment. That is not to say that reliance will always be the link between conduct and loss. The Act does not so limit recoverabillty. The present case however, falls into the maln stream of mispresentation, reliance and consequential detriment. The applicants declined to proceed with the Pagini transaction because they relied upon representations made by Poseldon. That such a decision will lay a proper foundation for a claim for damages is apparent from the joint judgment of Mason, Wilson and Dawson JJ. in Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 13, where their Honours said of the tortious measure of damages which they regarded as appropriate in most, if not all, Pt. V cases:

"Because the object of damages in tort is to place

the plalntiff in the position in which he would have been but for the commission of the tort, it is necessary to determine what the plalntiff would have done had he not relied on the representation. If that reliance has deprived him of the opportunity of entering into a different contract for the purchase of goods on which he would have made a profit then he may recover that profit on the footing that it is part of the loss which he has suffered ln consequence of alterlng his .

position under the inducement o f the representation. This may well be so if the plaintiff can establish that he could and would have entered into the different contract and that it would have ylelded the beneflt claimed: cf. Esso Petroleum Co. Ltd. v. Mardon [[l9761 QB 8 0 1 3 - -8291; DO-. Olby (Ironmongers)

PP -

referable to opportunities foregone by reason of ~td:~l[!::b]~:~QB at +- p.1 71. The lost benefit is reliance on the mlsre~resentation. In this res~ect
the measure of damages in tort begins to resemble
the expectation element in the measure of damages
in contract save that it is for the plaintiff to
establish that he could and would have entered into
the different contract."

In the present case, the damages arising from Poseldon's conduct are to be determined by assessing what was lost as a result of the applicants' decision to turn away from the Pagini transaction. The recoverable loss is that caused by the conduct and questions of mitigation or contributory negligence have no role in its determination. On the other hand, an applicant's carelessness or failure to avoid a loss may break the causal chain

which links the loss to the impugned conduct - Munchies Management v ~elperio (1988) 84 ALR 700, 712-713; Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd (1987) 16 FCR 410,

418-19; Pavich v Bobra Nominees Pty Ltd (Fed. Court; 4/8/88 unrep.

French J.). The circumstance that the misleading or deceptive conduct is one of a number of factors inducing a lossmaking decision does not break the chain of causation. There will be

mlsrepresentation, acts upon more than one consideration. Someone	many cases in which it can be said that a person actlng upon a
who buys a business under the influence of a misstatement as to its turnover may be influenced in that decision by considerations of a domestic, personal or non-economic nature. That does not detract from the characterisation of the loss as suffered "by" misleading or deceptive conduct where such conduct has been a

non-trivial contributing factor to the decision.

I I !

In this case the loss 1s measured by reference to the benefits that were foregone when the applicants decided not to continue their negotiations with Paglni Resources. But the actual loss cannot be assessed by simply equating it to the benefit foregone. There was no certainty and many contingencies attaching to the successful conclusion of the Pagini transaction. It is appropriate however to take as a base for assessment, the amount of the benefit foregone on the assumption that an agreement with Pagini would have been concluded in June 1988.

On the assessment of loss, the applicants called Trevor Gorey, a chartered accountant of 21 years standing and a partner in the firm Mann Judd. He calculated the benefit foregone at three dates. They were:

1.    27 July 1988, the date upon which the applicants

say the Pagini agreements would have "gone ahead".

2.    26 August 1988, the claimed completion date for the

Poseidon agreement.

3.    26 April 1989, about the time that the third and successful Pagini agreement was able to be performed following Poseidon's unsuccessful application to this Court for an injunction to restrain the dispositions for whlch that agreement provided.

I

!	~n niy opinion, it can be said that the applicants suffered the relevant loss at the time that they decided not to proceed with
l !	the Pagini agreement but that it did not crystallise until alternative arrangements were put into effect in April 1989. The

I I	I I -
I	basis upon which the loss is calculated is the loss of the benefit
i	represented by the Paginl agreement, less the benefit able to be
l I	obtained with alternative arrangements, assuming that they were

!- ,

I / , not made with such dilatoriness or carelessness of the applicants'

own interests as would break the nexus between conduct and loss.

l ;-	I ,
!	I am satisfied that there is no such nexus-breaking element in this case. The relevant alternative arrangements were effected in

I	S	April 1989 under the thlrd Pagini agreements.
i

i ' Gorey's calculation of loss as at 26 April 1989

I ,	identified capital and revenue losses under the following
i
headings :

: I:;	1.	Losses incurred by directors and their associated entities in relation to the sale of ADP shares.
2.	The loss of opportunity to Naughton and Clarke to
buy Australmin shares at a price which would have allowed them to make a profit on resale.
3.	Losses to Lytton and Moublon arising from failure to recelve the proposed Paginl transaction payout on management agreements.

4.    Losses incurred by ADP because the rights issue or placement contemplated by the Pagini transaction did not go ahead.

Each item identified a capital and revenue element based on the assumption that the capital benefit would have been invested in 180 day bank bills and applying the interest rates applicable to those. The theoretical losses thus calculated were summarised as follows, with the revenue losses calculated to 31 July 1989:

Directors and Associated Entities

l(a) Capital losses on ADP

shares and options

(b) Revenue losses

2(a) Loss of profit on sale of

Australmin shares

(b) Loss of revenue on sale of

Australmin shares

3(a) Capital loss on termination

of management agreements

(b) Revenue loss on termination

of management agreements

Adelalde Petroleum Pty Ltd

1. Capital Losses

2. Revenue Losses

The assumed price to be paid to the vendor shareholders in ADP was

taken from Ryanls "Aide Memoire" of 13 May. That was $2,475,000. On the basis that ADP shares were selling at 7 cents in Aprll 1989, Gorey assumed a nil valuation for the contributing shares and options, leaving a net value at that date of $70,000. After deducting $910 for stamp duty and brokerage, the proceeds available as at April 1989 were $2,475,000 less $69,090, a figure of $2,405,910. Revenue losses measured from 26 April 1989 to 31 July 1989 were $109,519, assuming investment of the capital loss in 180 day bank bills at the rates payable over that period. Gorey accepted in cross-examination that in assessing the value of the ADP shares held by the directors' entities in April 1989, he had not allowed any premium for the control conferred by that block of shares.

The loss of profit on the sale of the Australmin shares was calculated by reference to the price of $550,000, which it was provided in c1.13 of the draft agreement of 27 May would be paid to Naughton and Clarke or some purchaser procured by them. In all probability this would have been Topend, which was named as purchaser of these shares in the ADP/Poseidon Heads of Agreement. In August 1988, Australmin shares were selling at 14 cents, which would have yielded $1,114,260 on a resale by Topend and after

$1,099,774. The loss measured by the difference between that and	stamp duty and brokerage of $14,486, the proceeds would have been
the $550,000 to be paid for those shares under the Pagini agreement was $549,774. The revenue loss on that amount to 31 July 1989 was $80,963. Gorey agreed that he had not been asked to consider the possibility that ADP might have had to dispose of the Australmin shares earlier in order to meet its financial commitments, as happened in fact.
The capital loss in relation to the termination of the management agreements under the Pagini transaction was based on the assumption, as set out in the Aide Memoire, that Lytton and Moublon would each have received $100,000 plus 400,000 options over contributing shares. Taking the value of the options at 3 cents each in August 1988, the total yield to the two companies would have been $224,000. In fact, they were paid $25,000 each in 1989, leaving a capital loss of $174,000 and an associated revenue loss of $32,345 at 31 July 1989.
ADP's losses were calculated on the assumption that it was to have a rights issue or placement of not less than 17,296,011 shares at 30 cents or 20,000,000 shares at 25 cents. The lesser alternative would have yielded $4,877,475 after brokerage. Assuming an issued value of 6 cents in April 1989 when the ADP shares were selllng at 7 cents, the proceeds of the placement would have been $875,494. Thus ADP was said to have suffered a capital loss of $4,001,981, being the difference between $4,877,475 and $875,494. The associated loss of revenue from 26 April 1989 to 31 July 1989 was said to be $191,136. This
element of the calculation was attacked by senior counsel for the respondents on the basis that it was not a loss of capital. The
funds raised under any placement would have been shareholders1 funds and the most that could be sald was that ADP would have lost the use of that money over the relevant period. when it was put to Gorey that the true loss was simply the loss of the use of the money, he agreed. In my opinion, the criticism is well founded
and only the revenue element of this loss should be included in the calculations. On this basis, the benefit foregone which may properly found the calculation of loss and damage arising out of non-entry into the Pagini agreement, is represented by the figures set out in the foregoing summary, less the capital loss of $4,001,981 attributed to ADP.
These figures are no more than a starting point for calculation of the loss of chance represented by the decision not to proceed with the Paginl transaction. The logic of loss of chance assessment, at first blush, does not to sit easily with the cause-effect logic of s.82. For if there be a flnite probability which is less than even, that a benefit would have been obtained but for the Impugned conduct, how can it be said that the loss of that benefit has been proved to the required standard? It is perhaps not an entirely satisfactory answer to say that the existence of the chance is proven to the required standard. That nevertheless seems to have been accepted in the cases. This form of reasoning is implicit in the recent judgment of the Full Court in David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 93 ALR 271 at 295:

"...as senior counsel for the third respondents

emphasised in his submissions on the present appeal, it was for the appellants to establish at the trial that on the balance of probabilities there was a real chance that if the third respondents had performed their duties to the appellants and had not been guilty of the breach of contract and breach of duty in tort, as was found against them, the appellants would have taken steps to avoid the loss allegedly sustained by them." (emphasis added)

The contingencies to be taken into account in relation to the loss of benefit of the Paglnl agreement are varlous and do not readily lend themselves to assignment of probabilities. The threshold contingency was that the parties might have failed to reach agreement. In my opinion, although there were matters unresolved between them, including the role of Schroders, the probability of an agreement being reached basically along the lines of the "Aide Memoire" and the draft of 27 Nay, was high. And as I have already found, there was at least an even chance that the necessary underwriting for the agreement to proceed would have been secured. The principal contingencies therefore relate to conditions precedent embodied in the draft agreement. Authorisation was required from the Bank of Papua New Gulnea, under the Central Banking (Foreign Exchange and Gold) Regulations, for the sale of shares in Paginl 011 and Gas and Pagini Nining and for the acquisition of shares and options in ADP. As to that, Ryan told Atkins he did not think there would be any problems. He also referred to an approach by Coopers and Lybrand to the PNG authorities and the fact that they were told an application would have a reasonable chance of success. This evidence was rightly criticised as secondhand and of little weight. In my opinion however, there is no ground for supposing that the Bank of PNG

would have been likely to block the transaction. There was	nothing on the face of the draft agreement to suggest that it
would excite any special attention from authorities in PNG. I consider that there was at least an even chance of fulfilling the first condition precedent. There is no basls for speculating that either of the parties would have breached any of the obligations, covenants or undertakings of the agreement, or that
any material breach or inaccuracy in warranties would have become apparent. Shareholder approval of various elements of the transaction was required. Greness of CML, which held 14% of the issued capital in ADP, favoured reconstruction. And given the difficult prospects otherwise facing ADP, it is unlikely that approval would have been withheld. Both Ryan and Atkins were confident of the Treasurer's consent under the Foreign Takeovers Act 1975 and I accept that such consent was likely. I am also satisfied that Pagini had a reasonable prospect of obtaining the financial accommodation required under the draft agreement.
In the event, there was more than a merely speculative possibility that the Pagini agreement would have been concluded and completed. Accepting that the discounting exercise associated with assessment of loss of chance is fundamentally of a qualitative nature, I assess that the benefit foregone as calculated by Gorey should be discounted to 40% to allow for the probability that the agreement would not have proceeded. In the case of the sale of ADP shares and options, I discount a further 10% to allow for the possibility that they would have yielded a controlled premium on sale to some other party. The total discount on that item is to 30% of the claimed loss. And in the case of the Australmin shares, I would discount the proposed loss to 20% to allow for the strong possibility that ADP would have had
to dispose of them before completion in order to meet its short term cash problems. I do not allow any figure for loss of capital for ADP for the reasons previously outlined and discount the revenue element to 40%.
In the circumstances, the loss of chance suffered as a result of the applicants' decision not to enter the Pagini agreement can be quantified as follows:

1.	Directors and Associated Entities (a) Capital and Revenue losses on ADP shares and options discounted to 30% of maximum
(b) LOSS of profit and revenue on sale of Australmin shares discounted to
20% $ 126,147
(c) Loss of capital and revenue loss in relation to termination of management agreements discounted to
40% $ 82,538
2.

ADP discounted to 40%

The Contract Claim

The applicants plead the agreement made on 10 June 1988 in two alternative forms as to parties, which it is not necessary to further consider here. It is said to have been partly written, as evidenced by the Heads of Agreement, partly oral and partly implied.

The only oral term pleaded was (at para.ll(c) of the statement of Claim) a term that on completion of the agreement, Poseidon would acquire control of and take over the management of ADP and would nominate and support the election of Zehnder, de Crespigny and webb as directors in place of Naughton, Clarke and Atkins. The conversations relied upon as giving rise to this term were those pleaded in support of the like representations in para.9 of the Statement of Claim. These conversations and the representations embodied in them were elements of the negotiation process. The test for determining whether an oral representation constitutes an express term of the contract is "... whether the proper inference is that the relevant statement or representation was, when viewed objectively and in context, offered and accepted as or as part of a contractual promise" - Hospital Products Llmited v United States Surgical Corporation (1984) 156 CLR 41 at

120 per Deane J. To like effect, although differently expressed,

is the following passage from the judgment of Gibbs CJ at 61: "A representatlon made in the course of negotiations which result in a binding agreement may be a warranty - i.e., it may have binding contractual	force - in one of two ways: it may become a term of	the agreement itself, or it may be a separate
collateral contract, the consideration for which is the promise to enter into the main agreement. In elther case the question whether the representation creates a binding contractual obligation depends on the intention of the parties."

There were, as I have found, representations on the appointment of Zehnder to the Board of ADP and that Poseidon would take over the management of the company after reconstruction. They were made as the evidence shows, in a welter of communications leading up to the execution of the Heads of Agreement. So far as those relating to Zehnder's appointment were concerned, in my opinion, they were not made in such a way or in such circumstances as to support the view that, notwithstanding the Heads of Agreement, the promise of his appointment was to be an express term with contractual force. As to the question of Poseidon's involvement in the management of ADP post-reconstruction, that really falls for consideration on the basis that it is an Implied term rather than one to be derived from express oral warranties.

The term pleaded in para. ll(c) of the Statement of Claim is also said to have been implied. The implication is founded upon cls. 4 and 7 of the Heads of Agreement and the fact that the primary purpose of the agreement was to permit Poseidon to obtain control and takeover the management of ADP. The terms of the various conversations relied upon in relation to the representation pleaded in para.9, are also invoked in support of the implication. The general principles governing the implication of a term in a contract are well established and were enunciated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire

of Hastings (1977) 52 ALJR 20 at 26:

' l . . . for a term to be implied the following

conditions (which may overlap) must be satisfied:
(1) it must be reasonable and equitable;

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that "it goes without

saying";

(4) it must be capable of clear expression;

(5) it must not contradict any express term of the

contract. "

The role of pre-contractual negotiations in the interpretation of contracts was considered by the High Court in Secured Income Real Estate (Australia) ~ t d v St. Martins Investments Pty Ltd (1979) 144 CLR 596. Mason J., with whose reasons the other members of the Court agreed, cited with approval at p.606 the following passage from the ludgment of Lord Wilberforce in Prenn v Simmonds [l9711 1 WLR 1381 at 1385:

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

The passage cited related to the interpretation of the terms of a written contract, rather than implication of a term. But it suggests a restrictive approach to the use of antecedent discussions in the implication of terms. In Codelfa Construction	Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at	352-353, Mason J. (Stephen and Wilson JJ. agreeing) said that
evidence of surrounding circumstances is admissible to assist in the interpretation of a contract when its language is ambiguous. Prior negotiations will be admissible to the extent that they tend to establish background oblective facts known to both parties and the subject matter of the contract. They are not receivable (as
part of the process of interpretation) to prove actual intentions and expectations. In making an inquiry whether a term is to be implied as his Honour said:

"...the court is no more confined than when it construes the contract. For the implication of a term is an illustration of the process of construction, though differing from the more orthodox ascertainment of the meaning of a contractual provision."

And in the immediately preceding passage his Honour said:

"Once it is accepted that in the construction of the contract account is taken of the presumed intention of the parties it naturally follows that account should also be taken of thelr presumed intention when the court is called upon to decide whether a term is to be implied."

A consideration of the terms of agreement supports the finding of a presumed intention that Poseidon would, upon completion of the agreement, take responsibility for the management of ADP. The agreement related essentially to a change of control in ADP and its assumption by Poseidon. The handover of management responsibility was fundamental to the transaction. It was perhaps so obvious that no one thought to Include it	expressly. In my opinion, it answers all five criteria laid down	in the BP Refinery (Westernport) case. The obligation so imposed
on Poseidon could be discharged in various ways. It does not follow that the appointment of particular directors was an element of that obligation and to that extent there was no implied term that de Crespigny, zehnder and webb would be nominated.
In para.ll(d) of the Statement of Claim, the further implied term was pleaded that the parties would:

(i) act in good faith;

(ii) co-operate and do all things necessary to ensure that the terms of the Agreement were implemented and performed;

(iii) not do anything whlch would frustrate the performance of the Agreement or prevent fulfilment of the conditions precedent contained in it.

This implication 1s supported in part by the observations of 1-Sason Investments Pty Ltd (supra) at 607, where he cited with approval what Lord Blackburn said in Mackay v Dlck (1881) 6 App. Cas. 251 at 263:

"...as a general rule...where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectively be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect."

Mason J. went on to observe that this rule of construction is not

party to co-operate in doing all that is necessary to be done for	confined to the imposition of an obligation on one contracting
the performance by the other party of his obligations under the contract. And he referred to the dictum of Griffith CJ. in Butt v McDonald (1896) 7 QLJ 68 AT 70-71:

"It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the

contract. "

There was in the agreement therefore, a term to be implied as pleaded that the parties would co-operate and do all things necessary to enable the agreement to be completed. It is the obverse of that term, reflected in the obligation, also implied, that neither would do anything to frustrate the performance of the agreement or prevent fulfilment of its conditions precedent.

When de Crespigny and Atkins met on 7 July in Adelaide, as I have found, de Crespigny said that Poseidon would not manage the company, neither he nor Zehnder would join the Board and that Poseidon would not assist Horgans (SA) with the capital raising contemplated by the agreement. He said that he would make it clear to Morgans (SA) that if they proceeded to underwrite the agreement, they would be on their own. This position was reinforced by his subsequent memorandum to the Board of Poseidon and in part by the letter of 18 July 1988 from Mollison Lltchfield to Allen Allen & Hemsley. In my opinlon, that letter and de Crespignyls statements on 7 July, evidenced a clear intention not to perform the agreement according to the implied terms to which

this conduct as a repudiation of the agreement and to terminate,	reference has been made. The applicants were entitled to treat
which they did.
The issue of damages under the contract claim can be dealt with quite shortly, Any damages recovered would have to be set off against those awarded under the Trade Practices Act 1974.
The latter award is made on the hypothesis that the applicants lost a chance to enter the Pagini transaction, Instead of the ADP/Poseidon contract. Any damages recoverable under the contract must be an offsetting benefit. Those damages are to be assessed on the basis of loss of chance, having regard to the contingencies, including the possible failure to secure an underwriting agreement with Morgans (SA). The applicants submitted that the respondents' repudiation discharged them from the requirement that the conditions precedent be performed and that it was therefore unnecessary for the Court to decide or speculate on whether the condition would have been fulfilled. Reliance was placed on Peter Turnbull and Co. Pty Ltd v Mundus Trading Co. (Australasia) Pty Ltd (1954) 90 CLR 235. But the condition precedent in that case was something the wronged party would have been required to do itself. As Dlxon CJ said at
246-247 :

"...a plaintiff may be dispensed from performing a condition by the defendant expressly or impliedly intimating that it is useless for him to perform it and requesting him not to do so."

See also Mahoney v Lindsay (1980) 55 ALJR 118 at 119.

Assessment of damages for breach of the Heads of Agreement in the present case must proceed on the basis that the applicants lost the chance to enjoy the benefits deriving from that transaction. Mr Goreyrs evidence provlded a calculation of the loss of benefit reflecting the same approach that he took in relatlon to the Pagini transaction. Excluding again any allowance for capital losses to ADP by reason that the proposed placements did not proceed, his calculation of benefit foregone as at 26 August 1989 showed capital and revenue losses to the ADP directors and their associated entities, and revenue losses to ADP, amounting in total to $1,983,289. Assuming, without determining, the correctness of his calculations, the probability of the condition precedent relating to the underwriting in that case being fulfilled was, as I have found, very low. That was the principal contingency in the way of completion of that agreement, but I would not have allowed a figure for loss of chance at more than 20% of the overall benefit. The damages recoverable on that basis could not exceed $396,657 and plalnly would not exceed those awarded for the breach of the Trade Practices Act. In the circumstances, it is not necessary to embark upon a closer consideration of the loss arising from breach of the Heads of Agreement.

Interest

Gorey's calculation of revenue losses on the Pagini
transaction took them through to 31 July 1989. In my oplnion, I

should allow interest at the rate of 14% on the various sums

awarded from 1 August 1989 to judgment. On this basis the damages

and interest assessed to the various applicants are as follows:

1.	Adelaide Petroleum NL LOSS Interest TOTAL
2.	Topend Resources NL LOSS Interest TOTAL
3.	Lytton Nominees Pty Ltd Loss equal to half of $82,538 Interest TOTAL
4.	Moublon Pty Ltd Loss - half of $82,538 Interest TOTAL

5.    Paul Geoffrey Naughton, David Brian Clarke, Plichael William Atkins,

Gulnevere Nominees ~ t y ~ t d , Macquarie

Bank Ltd, South Australian Industrial

I-llnerals Pty Ltd, Windamurah Pty Ltd

Loss	$756,265
Interest	$124,027
TOTAL	$880,292

There will be judgment against Poseidon Limited and Sellars in favour of the various applicants in the amounts indicated. By reason of the findings I have made on the contract claim, that claim and the cross-claim will be dismissed. I propose to allow the parties fourteen (14) days in which to file written submissions as to the orders for costs that should be made. I will also allow the same time for written submissions on the question of payment of moneys due under the Stamp Act in relation to the Heads of Agreement. The latter issue depends in part on the construction of an undertaking glven in relation to the agreement by the respondents and whether it extends to cover fines for late lodgement as well as payment of the relevant duty.

CONCLUSION

Poseidon Limited and Mark Sellars have been found liable to pay damages for engaging in misleading or deceptive conduct in contravention of the Trade Practices Act 1974. That finding is substantially attributable to Sellars' attempts at commercial gamesmanship, unfettered by effective supervision on the part of

could effect a major reconstruction of Adelaide Petroleum NL and the Poseidon Board. What he did, was done in the belief that he	the hiving off of the Poseidon Groupsp oil interests into that new
vehicle. There is nothing to suggest that he stood to gain personally in any pecuniary sense. The lack of effective supervision of his activities by de Crespigny and other members of the Board may be explained by the pending changes in Poseidon's leadership in the first half of 1988 and the fact that de

I '
L.

Crespigny, as Chairman-in-waiting, was feeling his way. In the

r- '

event, the minimum standards of commercial probity imposed by 5.52

I i	were breached by Poseldon as a result of Sellars' conduct and they
! [ ,
!	must make good the resulting losses.

I certify that the preceding
two hundred and sixteen (216) pages
pages are a true copy of the
Reasons for Judgment of his Honour

Justice French.

~ssociate: 4 ~ 5

Date:  OL-d 1440

Counsel for the Applicants: Mr S. Archer with Mr P. Tottle

Solicitors for the Applicants: Robinson Cox

Counsel for the Respondents: Mr M.J. McCusker QC with MrJ. Gilmour

Solicitors for the Respondents: Claudio Russo Shaw

Dates of Hearlng: 31 July 1989; 1-4, 7-9, 22-25, 28-31 August 1989

1, 4-7, 18, 21, 22 September 1989; 3-6 October
1989; 27-30 November 1989; 1 December 1989

Date of Judgment: 4 October 1990