Chemeq Ltd v Shepherd Investments International Ltd - [2007] WASCA 117

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

TITLE OF COURT : THE COURT OF APPEAL (WA)

CITATION: CHEMEQ LTD -v- SHEPHERD INVESTMENTS INTERNATIONAL LTD & ORS [2007] WASCA 117

CORAM: WHEELER JA
McLURE JA
PULLIN JA

HEARD: 12, 21 & 22 MARCH 2007

DELIVERED : 30 MAY 2007

FILE NO/S: CACV 21 of 2007

BETWEEN: CHEMEQ LTD
Appellant
AND
SHEPHERD INVESTMENTS INTERNATIONAL LTD
First Respondent
STARK TRADING
Second Respondent
CENTAR INVESTMENTS (ASIA) LTD
Third Respondent
STARK ASIA MASTER FUND LTD
Fourth Respondent
JP MORGAN INSTITUTIONAL SERVICES AUSTRALIA LTD (now known as BTA INSTITUTIONAL SERVICES AUSTRALIA LTD) ABN 48002 916 396
Fifth Respondent
HARMONY INVESTMENT FUND LTD
Sixth Respondent

ON APPEAL FROM:
Jurisdiction              :  SUPREME COURT OF WESTERN AUSTRALIA
Coram  :TEMPLEMAN J
Citation  :CHEMEQ LTD -v- SHEPHERD INVESTMENTS INTERNATIONAL LTD & ORS [2007] WASC 16
File No  :CIV 2204 of 2006

Catchwords:

Contract - Interpretation - Compliance with milestone covenant - Interpretation and application of accounting standards - Recognition of revenue - Relevance of Framework for the Preparation and Presentation of Financial Statements - Admissibility of expert evidence - Admissibility of evidence of surrounding circumstances

Legislation:

Accounting Standard AASB 101, pars 11, 25, 26
Accounting Standard AASB 108
Accounting Standard AASB 110, pars 3, 8, 9
Accounting Standard AASB 118, pars 1, 7, 14, 16, 17, 18, 19, 20
Acts Interpretation Act 1901 (Cth), s 15AB, s 46
Australian Securities and Investments Commission Act 2001 (Cth), s 226, s 227
Corporations Act 2001 (Cth), s 9, s 286, s 292, s 295, s 295A, s 296, s 334

Result:

Appeal dismissed

Category: A

Representation:

Counsel:

Appellant:     Mr E M Corboy SC & Mr B D Luscombe
First Respondent           :     Mr C G Colvin SC & Mr M H Solomon
Second Respondent      :     Mr C G Colvin SC & Mr M H Solomon
Third Respondent          :     Mr C G Colvin SC & Mr M H Solomon
Fourth Respondent        :     Mr C G Colvin SC & Mr M H Solomon
Fifth Respondent           :     No appearance
Sixth Respondent          :     Mr C G Colvin SC & Mr M H Solomon

Solicitors:

Appellant:     Mallesons Stephen Jaques
First Respondent           :     Blake Dawson Waldron
Second Respondent      :     Blake Dawson Waldron
Third Respondent          :     Blake Dawson Waldron
Fourth Respondent        :     Blake Dawson Waldron
Fifth Respondent           :     No appearance
Sixth Respondent          :     Blake Dawson Waldron

Case(s) referred to in judgment(s):

Marsden v Ydalia Holdings [2006] WASCA 52
Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 33) (1996) 137 ALR 138
Australian Cement v Adelaide Brighton [2001] NSWSC 645
Batistatos v Roads and Traffic Authority of New South Wales (2006) 227 ALR 425
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337
CSR Ltd v Della Maddalena (2006) 80 ALJR 458
Fox v Percy (2003) 214 CLR 118
Home Building Society v Pourzand [2005] WASCA 242
Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR 444
Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449
Southern Equities Corp Ltd (in liq) v Arthur Andersen & Co (reg'd) (No 9) [2002] SASC 118
Stanilite Pacific Ltd (in liq) v Seaton (t/as Price Waterhouse) (2005) 55 ACSR 460
Van Reesema v Flavel (1992) 7 ACRS 225

WHEELER JA: I have had the advantage of reading in draft the reasons for decision of McLure JA. I agree with those reasons and have nothing to add.
McLURE JA: The appellant appeals from the judgment of Templeman J dismissing its action against the respondents for declaratory and injunctive relief relating to the redemption of convertible bonds.
The appellant is an Australian public listed company. It produces acrolein based polymer, a chemical which is used for the prevention and control of intestinal bacterial diseases in intensively reared livestock, particularly pigs and poultry.
Pursuant to a Convertible Bond Subscription Agreement dated 31 January 2005 ("Subscription Agreement") and a Convertible Bonds Deed Poll ("Deed Poll") the appellant issued convertible bonds to the value of $60 million to the first and second respondents and Mizuho International plc ("Mizuho"). Each outstanding convertible bond is a separate debt owed by the appellant to the holder of the bond who has the right to convert the bond to shares in the appellant.
The Subscription Agreement contained a "milestone covenant" (cl 12.2(c)) in terms that:
"The Issuer undertakes to each Subscriber, whilst that Subscriber is the holder of any Convertible Bonds:
…
(c)(purchase orders) by 30 September 2005, to provide evidence to the Subscribers satisfactory to the Subscribers (acting reasonably) of confirmed purchase orders at a price consistent with the Issuer's business plan for the combined sale of a minimum of 2,000 20 litre containers of CHEMEQ® polymeric antimicrobial for the 12 month period ending 30 June 2006."
On 20 September 2005 a South African company, Inviro Animal Health Solutions CC ("Inviro") signed sales order SO 1006 for the supply by the appellant of 2000 x 20 litre units of Chemeq solution at AUD$720 per 20 litre ("the sales order"). Inviro was owned and controlled by Dr Pieter Grimbeek, a specialist pig veterinarian. On 29 September 2005 the appellant and Inviro executed a distribution agreement which contained terms and conditions relating to the sale ("the distribution agreement").

On 27 October 2005 the appellant entered into a Heads of Agreement with the first and second respondents with a view to varying the Deed Poll to, inter alia, incorporate a new milestone covenant (cl 2.9) if, as was then proposed, Mizuho should transfer its convertible bonds to the second respondent or entities associated with it. Early in 2006 Mizuho transferred its convertible bonds. At all material times since then the convertible bonds have been held by the first, second, third, fourth and sixth respondents ("the bondholders"). The fifth respondent is a security trustee for the other respondents and holds a fixed and floating charge granted by the appellant over all its assets. The fifth respondent was not an active participant in the trial or the appeal.
In accordance with the Heads of Agreement, a Deed of Amendment and Restatement (Convertible Bonds Deed Poll) dated 12 April 2006 ("the amended Deed Poll") was executed and resulted in the inclusion of cl 2.9 which was in the following terms:
"Milestone covenants
While the aggregate Face Value of Convertible Bonds which the Initial Bondholders hold in aggregate is greater than 50% of the aggregate Face Value of all Convertible Bonds then on issue, the Issuer undertakes:
(a)to achieve total gross revenue from all sources of at least $4,000,000 for the financial year ending 30 June 2006; and
(b)to hold Liquid Assets of at least $24,000,000 on 30 June 2006."
The appellant claimed at trial that it had complied with cl 2.9(a) by achieving total gross revenue of over $4 million in the financial year ending 30 June 2006, the revenue comprising:
(a)sales revenue of $1.785 million, including sales of $1.452 million to Inviro;
(b)$2.333 million by way of interest on moneys held on deposit.
The bondholders contended at trial that the appellant had not complied with cl 2.9(a). In particular, they contended the appellant did not achieve the sale of product to Inviro in the amount of $1.452 million and that the expression "total gross revenue from all sources" excludes interest.
It was common ground that if the appellant failed to comply with cl 2.9(a) the bondholders would be entitled to require the appellant to redeem their convertible bonds by paying to the bondholder the Redemption Amount (the face value of the convertible bonds and interest accrued). The bondholders served notices of redemption in October and November 2006. The appellant responded by commencing action for declaratory and interlocutory relief. In order to obtain the relief the appellant had to succeed on both its contentions. It failed on both and the action was dismissed.
I propose to commence with the Inviro transaction. The appeal on that issue is complicated by the fact that the learned trial Judge made findings that were not contended for by either party and the respondent now seeks to travel partly down the path taken by the trial Judge notwithstanding a barrier posed by expert accounting evidence.

Inviro transaction

All parties contended and the learned trial Judge accepted that the question whether the total purchase price for the appellant's product the subject of the sales order was gross revenue for the financial year ending 30 June 2006 depended on whether the requirements of accounting standard AASB 118 ("Standard 118") had been satisfied. "AASB" refers to the Australian Accounting Standards Board. Standard 118 is applied in accounting for revenue arising from, inter alia, the sale of goods (par 1). The term revenue is defined (in par 7) as:
"[T]he gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants."
Paragraphs 14 to 19 of Standard 118 relate to sale of goods. Paragraphs 14, 16 and 18 materially provide:
"14.Revenue from the sale of goods shall be recognised when all the following conditions have been satisfied:
(a)the entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
(b)the entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
(c)the amount of revenue can be measured reliably;
(d)it is probable that the economic benefits associated with the transaction will flow to the entity; and
(e)the costs incurred or to be incurred in respect of the transaction can be measured reliably."
"16.If the entity retains significant risks of ownership, the transaction is not a sale and revenue is not recognised. An entity may retain a significant risk of ownership in a number of ways. Examples of situations in which the entity may retain the significant risks and rewards of ownership are:
(a) …
(b)when the receipt of the revenue from a particular sale is contingent on the derivation of revenue by the buyer from its sale of the goods;
(c) …
(d)…"
"18.Revenue is recognised only when it is probable that the economic benefits associated with the transaction will flow to the entity. In some cases, this may not be probable until the consideration is received or until an uncertainty is removed. For example, it may be uncertain that a foreign governmental authority will grant permission to remit the consideration from a sale in a foreign country. When the permission is granted, the uncertainty is removed and revenue is recognised. However, when an uncertainty arises about the collectibility of an amount already included in revenue, the uncollectible amount or the amount in respect of which recovery has ceased to be probable is recognised as an expense, rather than as an adjustment of the amount of revenue originally recognised" (emphasis added).
In general terms the primary issues for determination in this appeal are what is involved in "recognition" of revenue under Standard 118 and when revenue should be recognised. The appellant contends that the purchase price of the sale of product to Inviro was (and should have been) recognised as revenue on 1 June 2006 and any subsequent uncertainty in recovery of the debt should be recognised as an expense under par 18 of Standard 118. At the hearing of the appeal the respondents contended that the process of recognition does not take place until the time, and for the purpose, of the preparation of the appellant's financial report, at which time the question for determination is whether, having regard to matters known in September 2006 that reflect on the circumstances at 30 June 2006, the conditions in par 14 had been met as at 30 June 2006. Their alternative contentions were that the determination as to whether revenue should be recognised was to be made as at 30 June 2006 by reference to evidence that was available in September 2006, alternatively 30 June 2006. The issues emerged in this way because from early June 2006 Mr Grimbeek began to dispute the appellant's entitlement to payment of the purchase price for the product on the terms contained in the sales order and distribution agreement.
The trial Judge found that condition (d) of par 14 of Standard 118 had not been satisfied because it had not been established that it was probable that the economic benefits associated with the Inviro transaction would flow to the appellant and accordingly revenue from the sale of product to Inviro should not be recognised. There are a number of steps leading to the trial Judge's conclusion that condition (d) had not been satisfied. First, the trial Judge noted it was common ground between the parties that the standard of proof for determining whether a debt is recoverable is the balance of probability which he confirmed (at [165]) to be correct. Secondly, he found the decision to recognise Inviro's debt as revenue was taken by the appellant on 4 September 2006 at a meeting of the appellant's audit committee. The appellant contends and the respondents concede that the trial Judge erred in making this finding. At that meeting consideration was given to whether a provision should be made in respect of the Inviro debt in the appellant's financial statements for the year ended 30 June 2006. Thirdly, the trial Judge concluded (at [151]) that the appropriate date for determining whether Inviro would pay for the product was September 2006 when the appellant's financial statements were being prepared. Both parties agree that the trial Judge was wrong in this respect. In reaching his conclusion the trial Judge relied on an AASB document entitled "Framework for the Preparation and Presentation of Financial Statements" ("the framework"), par 85. The respondents rely on the framework in support of their primary contentions. Fourthly, the trial Judge held that it was for the court to determine whether "as at September 2006, prudent men of business in [the appellant's] position, possessed of the information relevant to the Inviro debt, would have regarded the debt as recoverable, on the balance of probabilities" (at [174]). Applying that test, the trial Judge concluded (at [175]) that the Inviro debt would not have been regarded as recoverable. His reasons for that conclusion are as follows.
First, the appellant's chief executive officer and managing director, Mr Williams, gave evidence that he felt in September 2006 that it would have been prudent to make some provision against the Inviro debt. Secondly, the auditors qualified the accounts in the appellant's annual report for the financial year ending 30 June 2006. The Inviro debt was included in the appellant's income statement and balance sheet for that period. The trial Judge referred in his reasons to the first of two relevant qualifications. The appellant's auditors, Ernst & Young, qualified their report in the following terms:
"1.We have been unable to verify whether it is probable that economic benefits associated with sales of goods disclosed in the company and consolidated income statement in the sum of $1,469,895 will be realised. There is currently a dispute as to whether the terms of the sales agreement has been varied, which raises doubt as to the appropriate timing for the recognition of these sales. There are no alternative audit procedures which can be employed to verify the timing of recognition of these sales transactions. We are therefore unable to determine whether the sales recognised by the company and consolidated entity of $1,469,895 are fairly stated for the year ended 30 June 2006. Furthermore, if these sales did not qualify for recognition, the company and consolidated entity would be in default of one of the Milestone Covenants under agreements with Bond Holders.
2.We have been unable to verify the recoverable amount of the receivable associated with the sales referred to in Qualification Paragraph 1 above. The Directors believe that it is appropriate to carry this asset at its stated value in the company and consolidated balance sheet. We have been unable to determine the recoverable amount of this receivable. In our opinion, the carrying value of this asset may exceed its recoverable amount and a provision for non recovery may be required up to the carrying amount of $1,469,895. Had this impairment loss been recognised to write down the receivable to recoverable amount during the current period, the company and consolidated operating loss after tax would have increased from $31,808,245 to $33,278,140."
As required by the accounting standards (Standard 108), the appellant identified its accounting policies for revenue recognition in its financial report for the year ending 30 June 2006. Under the heading "Sale of Goods" it states:
"Revenue is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Risks and rewards of ownership are considered passed to the buyer at the time of delivery of the goods to the customer."
Thirdly, the trial Judge concluded that it was improbable Dr Grimbeek would commit funds to Inviro to enable it to pay the amounts claimed by the appellant in relation to the sales order having regard to the attitude expressed by Dr Grimbeek since 2 June 2006. The background and reasons for this conclusion are as follows.
The appellant's sales manager James Geldart, visited South Africa between 25 May and 6 June 2006 and had a meeting with Dr Grimbeek on 31 May. On 1 June 2006 at the appellant's request, Dr Grimbeek sent a letter drafted by the appellant's financial controller stating that:
" … Chemeq Ltd's sales order SO 1006 is now complete, and that accepting delivery of the 2 000 20L units of [product] fulfils the terms and conditions of the sale."
After sending that letter Dr Grimbeek prepared a document dated 2 June 2006 referring to "business points" having been agreed including the following:
"2.[Inviro] is now the owner of the product and responsible for its keep but not the immediate payment therefore as previously discussed.
3.Due to the poor sales record of the product due to an excessively high trading price, (see previous correspondence) [Inviro] will only pay Chemeq for product as and when it is drawn from the UTi warehouse. UTi are the distribution agents. [Inviro] will pay the amount within 60 days of drawing the product."
On 4 July 2006 Mr Geldart sent an email to Dr Grimbeek seeking a letter confirming his intention to pay for the goods. Dr Grimbeek did not provide a letter in the terms sought by the appellant but one in the following terms:
"You will note that I have paid the VAT on this order and confirm my intention to pay for the goods as discussed in our marketing plan."
The trial Judge inferred that the reference to the marketing plan was to Dr Grimbeek's letter of 2 June 2006. Dr Grimbeek maintained his position in August 2006. In a letter dated 10 August 2006 Dr Grimbeek said:
"On numerous previous occasions and by mutual consent [Inviro] and Chemeq Limited have agreed that due to the poor sales record of the product and its excessively high trading price that [Inviro] will only pay Chemeq Ltd for product that it has drawn and sold in the market … "
Dr Grimbeek repeated this position in a letter to the auditors dated 20 September 2006. Neither Dr Grimbeek nor Mr Geldart (who had been retrenched by Chemeq) were called to give evidence. The trial Judge inferred that "Dr Grimbeek responded to a request from Mr Geldart to place the required order at a time when Chemeq apparently had no other prospect of satisfying the covenant". This is a reference to the milestone covenant in the Subscription Agreement. The trial Judge drew the further inference (at [180]) that Dr Grimbeek "appreciated that he was providing much‑needed assistance to Chemeq and expected to be safeguarded from loss" (emphasis added). The trial Judge continued:
"181 Mr Williams denies that Chemeq has made any other agreement with Inviro. Whether that is so, may have to be determined in litigation in South Africa. It is therefore inappropriate for me to express any view as to the likely outcome of any such litigation, particularly, when I have heard only Mr Williams' account of the various discussions involving Dr Grimbeek.
182However, even if it is assumed that Chemeq has a legal entitlement to the Inviro debt, and that it will obtain a judgment for the full amount of the debt, it seems to be more probable than not that the judgment would not be satisfied. That is because Inviro is apparently the South African equivalent of a two-dollar company, with no significant assets. Although Dr Grimbeek had arranged a facility of R 8,000,000 from his bank, there is no suggestion that the bank was under any obligation to make payments to Chemeq unless directed by Dr Grimbeek.
183Mr Williams' belief that Dr Grimbeek was an honourable man who would not want to be associated with a failed company must be set against Dr Grimbeek's belief that he has been treated very shabbily by Chemeq which, from his perspective, has reneged on at least an informal agreement to ensure that he did not suffer financially if the product could not be sold.
184As far as it is possible to tell from the correspondence, Dr Grimbeek's belief is genuine. It is true that in correspondence and in discussions with Chemeq's auditors in September and October 2006, he made some contradictory assertions … However, even though his defence to Chemeq's claim may not have been articulated precisely, his position remains unchanged: having regard to the agreement made between Inviro and Chemeq, Inviro will not be making the payment sought by Chemeq. In these circumstances, I think it likely that a proud and wealthy man such as Dr Grimbeek, is more likely to defend his position than to surrender to pressure."

The trial Judge did not make an express finding of a binding and enforceable agreement between the appellant and Inviro on the terms and conditions contained in the sales order and the distribution agreement. However, notwithstanding contrary indications in [181] and [182] there is an implied finding to that effect later in the reasons.
The respondents' case at trial was that the contract between the appellant and Inviro had been varied by agreement between Mr Geldart and Dr Grimbeek on 31 May 2006 to provide that Inviro would not be required to pay for the product unless and until it was on‑sold. The trial Judge concluded (at [201]) that there had been no such variation and, by implication, that conditions 14(a) and (b) of Standard 118 had been complied with. In any event, in the absence of any challenge by the respondents to the validity or enforceability of the contract, the trial Judge had no alternative on the evidence but to find that there was a binding and enforceable contract between the appellant and Inviro on the terms contained in the sales order and distribution agreement. The trial Judge also found that delivery of all the product the subject of the sales order occurred between 25 May 2006 and 7 June 2006 and that Inviro was obliged to pay for the product on or about 16 June 2006.

Grounds of Appeal and Contentions

The appellant relies on an umbrella ground of appeal challenging the correctness of the trial Judge's finding that the appellant ought not to have recognised the Inviro debt as revenue for the year ended 30 June 2006 and contending he ought to have held that the appellant was entitled under Standard 118 and the appellant's accounting policies for revenue recognition to recognise the revenue from the sale of product to Inviro in its financial statements for the year ended 30 June 2006, alternatively that it was open to the appellant to recognise the revenue in those statements. The specific errors relied on by the appellant are that the trial Judge erred:
(i)in holding that par 85 of the framework determined the date for considering whether revenue from the Inviro sale should be recognised in the appellant's financial statements for the year ended 30 June 2006 (ground 1.1);
(ii)in failing to find that the time for recognising the revenue from the Inviro sale was fixed by Standard 118 and the appellant's accounting policies for revenue recognition and that the time for recognising the revenue was when the requirements of Standard 118 had first been satisfied (ground 1.1);
(iii)in finding that the date for considering whether revenue from the sale of product to Inviro should be recognised was September 2006 when the appellant prepared its financial statements (ground 1.2);
(iv)in failing to find that under Standard 118 and pursuant to the appellant's accounting policies the date for recognition of the Inviro sale was 1 June 2006, being the date on which Inviro confirmed delivery and completion of the terms and conditions of the sales order (ground 1.2);
(v)in holding that it was for the Court to determine whether prudent men of business in the appellant's position possessed of the information relevant to the Inviro debt would have regarded the debt as recoverable on the balance of probabilities (ground 1.3);
(vi)in failing to hold that recognition of the revenue from the Inviro sale was a matter for the appellant to decide under Standard 118 and that the correct question was whether it was open to the appellant through a proper application of the accounting standards to reach a decision that all of the conditions in par 14 had been satisfied (ground 1.3);
(vii)in finding that Inviro was insolvent when there was no evidence upon which to make such a finding (ground 1.4);
(viii)in finding that the decision to recognise the Inviro sale was taken at a meeting of the appellant's audit committee on 4 September 2006. This ground (1.5) is conceded; and
(ix)in finding that Dr Grimbeek was more likely to defend his position than to surrender to pressure from the appellant in circumstances where Dr Grimbeek was not called to give evidence and the trial Judge had found that there had been no variation to the terms of the agreement and Mr Williams' impression of Dr Grimbeek was based on his dealings with him (ground 1.6).
The first to fourth and sixth respondents filed a notice of contention. They contend that:
"1.If 'revenue' as used in 2.9(a) … had the meaning expressed in … AASB118 … which is denied, the learned trial judge erred … in holding that the determination as to whether … the appellant had earned the total gross revenue of $4,000,000 … by 30 June 2006 was to be made as at September 2006. His honour should have found that the determination was to be made as at 30 June 2006 by reference to evidence available as at September 2006, alternatively 30 June 2006.
2. … [A]s at 30 June 2006, the requirements of the definition of revenue … had never been satisfied at any time in respect of the sale of the 2,000 units of product to Inviro.
3.In the case of the sale … of product to Inviro, the requirement that the significant risks and rewards of ownership be transferred to the buyer for revenue to be recognised … was not met until delivery in fact occurred and in respect of 325 units that was not until 7 June 2006 in that the acknowledgment of 1 June 2006 did not express a discharge of the appellant's obligation to deliver, was signed on the mistaken basis that delivery had actually occurred and therefore did not transfer the risks of ownership to Inviro … "
At the hearing of the appeal the respondents conceded that the trial Judge erred in concluding that the date on which the conditions in par 14 of Standard 118 had to be met was September 2006. The respondents contend that the date on which the conditions had to be met was as at 30 June 2006 but that recognition only occurs as part of the process of incorporation of the item in the financial reports. The respondents rely on provisions of the Corporations Act2001 (Cth) (s 295, s 296, s 303, s 304, s 334, and s 337) and pars 82 to 85 of the framework for that proposition.
In view of the respondents' concessions and their contention (ground 2) that at no time up to and including 30 June 2006 had condition (d) in par 14 of Standard 118 been satisfied, which was not the subject of express findings by the trial Judge, it is necessary to refer to further factual background.

Further background

Much of what follows is taken from the trial Judge's reasons. Mr Williams and Dr Murdoch (the appellant's principal consultant veterinarian from 2001) gave evidence for the appellant. The trial Judge accepted Dr Murdoch's evidence in its entirety and formed the impression that Mr Williams was a generally reliable witness and accepted most of his evidence. No representative of Inviro gave evidence.
In late 2003 and early 2004 Dr Murdoch had discussions with Dr Grimbeek and two other specialist pig veterinarians, Drs Vervoort and Evans, with a view to them becoming the appellant's distributor in South Africa. As a result of those discussions Drs Grimbeek, Vervoort and Evans arranged for the incorporation of Inviro which occurred on 16 July 2004. A distribution agreement was signed on 24 August 2004.
In October 2004 Dr Grimbeek visited the appellant's production plant at Rockingham. In a subsequent email Dr Grimbeek said:
"The production plant in Rockingham is absolutely magnificent, probably overcapitalised, but it may be the best investment ever made by [the appellant] in years to come. The in‑house standards, quality assurance and other GMP standards are world class."
It is clear from Dr Grimbeek's correspondence around this time that he was enthusiastic about Inviro's appointment as the South African distributor of the product and very optimistic as to its prospects. However, by September 2005 the appellant had not obtained purchase orders sufficient to satisfy the milestone covenant in the Subscription Agreement. In mid‑September 2005 Mr Williams and Mr Geldart travelled to South Africa for discussions with Dr Grimbeek. In around August 2005 Dr Grimbeek had purchased Drs Vervoort and Evans interests in Inviro.
In mid‑September 2005 Dr Grimbeek was still optimistic about the prospects of the appellant's product replacing antibiotics. In an email to Mr Geldart, Dr Grimbeek said he was sure that with some concentrated effort he could sell 2000 x 20 L drums by June 2006, subject to the appointment of a dedicated marketing person. On 18 September Mr Williams and Mr Geldart met Dr Grimbeek at his home. Mr Williams was very impressed with what he saw and recognised Dr Grimbeek as "a man of obvious wealth". Dr Grimbeek had a number of businesses, including a cattle farm on a large acreage near his house.
Mr Williams' recollection was that the meeting with Dr Grimbeek commenced with a discussion about the market in South Africa. Dr Grimbeek said words to the effect:
"I've been through it all, done the calculations and I think I can place an order."
Mr Williams asked what sort of order. Dr Grimbeek said:
"I've been through the figures and subject to discussions with the bank, I would like to place an order for 2000 units."
Mr Williams asked how much would be conditional and how much unconditional to which Dr Grimbeek replied it would all be unconditional, subject to a further meeting with the bank to confirm its approval to finance the purchase. To this point of the meeting there had been no discussion about the price to be paid by Inviro. Mr Williams said the price would need to be about whatever was required by the milestone covenant in the Subscription Agreement. He told Dr Grimbeek he could not recall exactly but that it was about $720 per unit and the recommended retail price was to be the equivalent of $850 per unit. Dr Grimbeek thought it would be lower. Mr Geldart suggested that the appellant could "probably throw in product for marketing purposes". He told Dr Grimbeek that if he chose not to give the product away but to sell it, that effectively represented a lower price per unit. Dr Grimbeek said that sounded alright. Mr Williams then said he would advise Dr Grimbeek in due course of the exact price of the product and how much extra product would be given to him for marketing purposes.
The business side of the meeting ended with Mr Williams referring to the possibility that Dr Grimbeek might not sell all the product by 30 June 2006. This was not a matter to which Dr Grimbeek had referred. Mr Williams raised it out of concern for Dr Grimbeek's position. Dr Grimbeek said he did not think this would be an issue but that it would be good to make some provision to cover that eventuality.
Based on subsequent correspondence, the trial Judge inferred that some assurance was given to Dr Grimbeek at the meeting that he would be compensated for the fact that Inviro would be purchasing product from Chemeq at $720 per unit compared to $680 per unit under the existing distribution agreement.
By 20 September 2005 Dr Grimbeek had obtained an R8 million facility from his bank. It was accepted that Dr Grimbeek was the borrower. On the same day Mr Geldart sent an email to Mr Williams informing him that Dr Grimbeek had decided to place an unconditional order for 2000 units of product and would be formulating a letter to that effect. Mr Geldart inquired of Mr Williams as to the "selling price … you want me to charge [Inviro] in order to satisfy the covenant" to which Mr Williams replied that the appellant "need[ed] to achieve A$717 so I suggest you make it A$720".
The trial Judge said (at [74]):
"In my view, it is surprising that Dr Grimbeek was prepared to place an order for 2000 units of product without knowing precisely what price [the appellant] would be charging. The explanation, I think, lies in the fact that from Dr Grimbeek's perspective, his position was protected by the representation made to him that he would not suffer financially if he was unable to sell the product or if [the appellant] was obliged to sell to other customers in South Africa at a retail price less than $850 per unit, the price at which it was expected that Inviro would be selling."
On the same date, 20 September 2005, Mr Geldart sent an email to Dr Grimbeek copied to Mr Williams in which he said to Dr Grimbeek:
"Pieter, as discussed you will be compensated for the differential in the selling price AUD$680 (Distribution Agreement) vs. AUD$720 (sales order) either via product or a mutually acceptable method. The AUD$720 is what is required for the Bondholders as the base case scenario."
The appellant does not challenge the finding in [74] relating to the representations. However, it was no part of the respondents' case at trial that a representation in those (or similar) terms was part of the contract or that the contract was liable to be set aside or was a sham transaction.
On 20 September 2005 Dr Grimbeek signed the sales order. As soon as the sales order was placed, the appellant commenced preparing the new distribution agreement which was executed on 29 September 2005. Clause 5(4) refers to complimentary product. It provides:
"5(4)The Principal [the appellant] has agreed to deliver at the same time as Product is delivered under Sales Order # SO 1006, 134 (20 litre) units of Product on a complimentary basis to assist the Distributor [Inviro] with preliminary marketing of Product in the Territory."
Clause 6(2) deals with the sale of the 2000 units the subject of the sales order by 30 June 2006. It provides:
"6(2)It is anticipated that the Distributor will be able to sell at least 2,000 units of Product between the Commencement Date and 30 June 2006. Accordingly, the parties acknowledge that the Distributor has already placed an Order (being sales order #SO1006 for 2,000 units) which is intended to be governed by the terms of this Agreement, unless otherwise provided for in schedule 3. However, if by 30 June 2006:
(a)the Distributor has not been able to sell or place orders for 2,000 or more units of Product and;
(b)the Distributor has demonstrated to the Principal it has used its best endeavours to sell such Product,
the Principal agrees that it will provide the Distributor with Product on a complimentary basis ('Complimentary Product') to assist the Distributor to develop or increase the market for the Product in the Territory. The Distributor will be entitled to receive in 300 (20 litre) units of Complimentary Product if it has not been able to sell (or take orders for) any Product by 30 June 2006. The amount of Complimentary Product to be supplied will reduce on a pro‑rata basis for any actual sales of (or orders for) Product by the Distributor prior to 30 June 2006 … The Complimentary Product will be supplied by the Principal to the Distributor in 12 equal monthly instalments commencing in July 2006."
The express terms of the distribution agreement are consistent with the negotiations detailed by the trial Judge. Schedule 3 of the distribution agreement states that the sales order was made upon and subject to the terms of the distribution agreement other than that the price per unit to be paid by Inviro was AUD$720.
By cl 9(4) of the distribution agreement, Inviro was to pay the purchase price within 30 days from the date of a statement generated by the Principal.
Clause 11 of the distribution agreement relates to risks and title to the products. It provides:
"11(1) Risk shall pass to the Distributor upon delivery of the Product to the Distributor or its nominated carrier in accordance with this agreement.
(2)Title and ownership of the Products does not pass to the Distributor until the Distributor has paid all monies owing to the Principal under this agreement … "
In early December 2005 Inviro appointed a marketing agent. By February 2006 Dr Grimbeek was seeking a price reduction for the product. There was further communication on that subject in March 2006. In a status report dated 15 March Dr Grimbeek said (inter alia):
"What to do about our deal? I have to purchase 2000 drums @ 720AUD by 30 June 2006.
Remember, if the 2000 unit order does not move and the product expires on [Inviro], Chemeq Ltd will inherit a bankrupt distributor. [Inviro] will have to discount product into the market whether it likes it or not."
Mr Williams was concerned about the lack of success in marketing the appellant's product in South Africa. However, he did not agree to a price reduction because he was not convinced that course was justified commercially. In addition, he was concerned to ensure the appellant did not prejudice its position in relation to its milestone covenant with the bondholders. Further, Mr Williams believed that Dr Grimbeek was attempting to renegotiate both the distribution agreement and the sales order, despite the fact that Inviro was bound to take delivery of the product and pay for it.
The appellant arranged for the product to be shipped to South Africa and for Inviro to be invoiced. Inviro's order for 2000 units of product was shipped in four consignments (which contained some additional units) as follows:
(1)576 units on 31 March 2006 under invoice 63
(2)640 units on 7 April 2006 under invoice 66
(3)480 units on 22 April 2006 under invoice 70
(4)325 units on 6 May 2006 under invoice 71.
The consignments were all shipped to a bonded warehouse in Durban from where, after release by South African customs, they were trucked to the warehouse of UTi Worldwide Inc ("UTi") in Johannesburg.
The first three consignments arrived at the UTi warehouse on 25 May 2006. The last consignment of 325 units was released from Customs on 2 June 2006 and arrived at the UTi warehouse on 7 June 2006.
A statement relating to the invoices for the product was produced on or about 17 May. It followed, according to the unchallenged finding of the trial Judge, that Inviro was obliged to pay for the product on or about 16 June 2006.
As at April or May 2006 Inviro had only sold about $10,000 worth of product. Shortly before 23 May 2006 the appellant decided to reduce the wholesale price of its product in South Africa to $480 per unit. The price reduction was to take effect for the following 12 months. According to Mr Williams, this would have left Inviro in the position of holding much more expensive stock that it would then be unable to sell which situation could be avoided by the appellant supplying to purchasers from Inviro one free unit of product for every two purchased. Dr Grimbeek confirmed in his letter of 2 June 2006 that the appellant had made that offer to Inviro.

Accounting standards

The Australian Accounting Standards Board is established under s 226 of the Australian Securities and Investments Commission Act 2001 (Cth). Its functions are set out in s 227(1) and include:
"(a)to develop a conceptual framework, not having the force of an accounting standard, for the purpose of evaluating proposed accounting standards and international standards; and
(b)to make accounting standards under section 334 of the Corporations Act for the purposes of the corporations legislation … ; and
(c)to formulate accounting standards for other purposes."
Section 334(1) of the Corporations Act provides:
"(1)The AASB may make accounting standards for the purposes of this Act. The standards must be in writing and must not be inconsistent with this Act or the regulations."
Chapter 2M of the Corporations Act deals with financial reports. By s 286(1) a company must keep written financial records that:
(a)correctly record and explain its transactions and financial position and performance; and
(b)would enable true and fair financial statements to be prepared and audited.

The term "financial records" is defined in s 9 of the Corporations Act to include:
(a)invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b)documents of prime entry; and
(c)working papers and other documents needed to explain:
(i)the methods by which financial statements are made up; and
(ii)adjustments to be made in preparing financial statements.
Documents of prime entry include journals and ledgers: Van Reesema v Flavel (1992) 7 ACRS 225 at 229 per King CJ.
A financial report must be prepared for each financial year by all public companies: s 292(1) of the Corporations Act. Financial report is defined in s 9 to mean an annual financial report or half‑year financial report.
The financial report for a financial year consists of inter alia, the financial statements: s 295(1) of the Corporations Act. The financial statements for the year are the financial statements in relation to the entity reported on that are required by the accounting standards: s 295(2) of the Corporations Act. By s 296, the financial report for a financial year must comply with the accounting standards.
The requirement in s 286(1) that the financial records must correctly record the company's transactions to enable true and fair financial statements would, in the context of s 295 and s 296, have the consequence that the financial records would need to be kept in accordance with relevant accounting standards.

The framework

The framework was developed by the AASB pursuant to its powers in s 227(1) of the ASIC Act. The framework sets out the concepts that underlie the preparation and presentation of general purpose financial reports which are for external users. However, the concepts in the framework are not set out as requirements for preparing general purpose financial reports (AUS1.1).
The purpose of the framework is to, inter alia, assist preparers of general purpose financial reports in applying Australian accounting standards (par 1(d)) and to assist users of financial reports in interpreting the information contained in financial reports prepared in conformity with Australian accounting standards (par 1(f)). The framework is concerned with general purpose financial reports which are presented at least annually and are directed towards the common information needs of a wide range of users (par 6).
Paragraph 22 of the framework refers to the accrual basis of accounting. It provides:
"In order to meet their objectives, financial reports are prepared on the accrual basis of accounting. Under this basis, the effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial reports of the periods to which they relate … "
The respondents rely on pars 82 to 85 of the framework for their contention that recognition is solely related to accounting for revenue in financial reports (as that term is defined in the Corporations Act). The particular aspects relied on are in italics. Paragraph 82 deals with the recognition of elements of financial statements. It provides:
"Recognition is the process of incorporating in the balance sheet or income statement an item that meets the definition of an element and satisfies the criteria for recognition set out in paragraph 83. It involves the depiction of the item in words and by a monetary amount and the inclusion of that amount in the balance sheet or income statement totals. Items that satisfy the recognition criteria should be recognised in the balance sheet or income statement … "
The elements directly related to the measurement of an entity's financial position in a balance sheet are assets, liabilities and equity and elements directly related to the measurement of performance in the income statement are income and expenses (par 47). Income encompasses both revenue and gains (par 74).
Paragraph 83 deals with when an element should be recognised. It provides:
"An item that meets the definition of an element should be recognised if:
(a)it is probable that any future economic benefit associated with the item will flow to or from the entity; and
(b)the item has a cost or value that can be measured with reliability."
Paragraph 84 is also relied on. It provides:
"In assessing whether an item meets these criteria, and therefore qualifies for recognition in the financial statements, regard needs to be given to … materiality considerations … The interrelationship between the elements means that an item that meets the definition and recognition criteria for a particular element, for example, an asset, automatically requires the recognition of another element, for example, income or a liability."
Paragraph 85 deals with the probability of future economic benefit. It provides:
"The concept of probability is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. The concept is in keeping with the uncertainty that characterises the environment in which an entity operates. Assessments of the degree of uncertainty attaching to the flow of future economic benefits are made on the basis of the evidence available when the financial statements are prepared. For example, when it is probable that a receivable owed by an entity will be paid, it is then justifiable, in the absence of any evidence to the contrary, to recognise the receivable as an asset. For a large population of receivables, however, some degree of non‑payment is normally considered probable; hence an expense representing the expected reduction in economic benefits is recognised."

Standard 118 (and associated standards)

Standard 118 is made under s 334 of the Corporations Act and applies to (AUS 1.1):
(a)each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;
(b)general purpose financial reports of each other reporting entity; and
(c)financial reports that are, or are held to be, general purpose financial reports.
Statement of Accounting Concepts ("SAC") 1, a current statement, defines reporting entities (in par 40) as follows:
"Reporting entities are all entities (including economic entities) in respect of which it is reasonable to expect the existence of users dependent on general purpose financial reports for information which will be useful to them for making and evaluating decisions about the allocation of scarce resources."
Paragraph 41 of SAC 1 requires reporting entities to prepare general purpose financial reports in accordance with accounting standards. A SAC, like the framework, is not an accounting standard.
Standard 101 defines and prescribes the basis for the presentation of general purpose financial reports. It defines a general purpose financial report to mean a financial report intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to satisfy, specifically, all their information needs (par 11).
Paragraphs 25 and 26 of Standard 101 relate to the accrual basis of accounting and provide:
"25.An entity shall prepare its financial report, except for cash flow information, using the accrual basis of accounting.
26.When the accrual basis of accounting is used, items are recognised as assets, liabilities, equity, income and expenses (the elements of financial statements) when they satisfy the definitions and recognition criteria for those elements in the [f]ramework."
Paragraph 14 of Standard 118 (set out above) is to be contrasted with par 20 which relates to the rendering of services. In that situation recognition can only occur at the reporting date. It provides:
"When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the reporting date."
An appendix to Standard 118 contains examples of particular transactions. The appendix is not part of Standard 118 and the examples generally assume that (1) the amount of revenue can be measured reliably; (2) it is probable that the economic benefits will flow to the entity; and (3) the costs incurred or to be incurred can be measured reliably. The examples do not modify or override the Standard. Item 6 of the appendix refers to "Sales to intermediate parties, such as distributors, dealers or others for resale" and provides:
"Revenue from such sales is generally recognised when the risks and rewards of ownership have passed. However, when the buyer is acting, in substance, as an agent, the sale is treated as a consignment sale."
A consignment sale is one where the entity retains significant risks of ownership with the result, under par 16 of Standard 118, that conditions (a) and (b) of par 14 have not been satisfied in which event the revenue cannot be recognised under that paragraph. The appellant's accounting policy for recognition of revenue for the sale of goods identified in its annual report for the financial year ending 30 June 2006 is consistent with Item 6 in the appendix to Standard 118. That raises the appropriateness in the circumstances of this case of relying on an assumption that it was probable economic benefits would flow.

Standard 110

Standard 110 deals with events after the balance sheet date. It has the same application clause (AUS 1.1) as Standard 118. Standard 110 distinguishes between two types of events after the reporting date. The first type of event is that which provides evidence of conditions that existed at the reporting date and the second type of event is that which is indicative of conditions that arose after the reporting date. The standard requires the amounts recognised in the financial statements to be adjusted to reflect the first type of event but not the second type of event.
The phrase "events after the reporting date" is defined in par 3 as follows:
"Events after the reporting date are those events, favourable and unfavourable, that occur between the reporting date and the date when the financial report is authorised for issue. Two types of events can be identified:
(a)those that provide evidence of conditions that existed at the reporting date (adjusting events after the reporting date); and
(b)those that are indicative of conditions that arose after the reporting date (non‑adjusting events after the reporting date)."
Paragraphs 8 and 9 of Standard 110 are relevant for present purposes. They provide:
"8.An entity shall adjust the amounts recognised in its financial statements to reflect adjusting events after the reporting date.
9.The following are examples of adjusting events after the reporting date that require an entity to adjust the amounts recognised in its financial statements, or to recognise items that were not previously recognised:
(a) …
(b)the receipt of information after the reporting date indicating that an asset was impaired at the reporting date, or that the amount of a previously recognised impairment loss for that asset needs to be adjusted. For example:
(i)the bankruptcy of a customer that occurs after the reporting date usually confirms that a loss already existed at the reporting date on a trade receivable and that the entity needs to adjust the carrying amount of the trade receivable; and
(ii)the sale of inventories after the reporting date may give evidence about their net realisable value at the reporting date;
(c)the determination after the reporting date of the cost of assets purchased, or the proceeds from assets sold, before the reporting date;
(d) …
(e)the discovery of fraud or errors that show that the financial statements are incorrect."
Paragraph 8 refers to adjusting "the amounts recognised in its financial statements". I construe that phrase to mean that post balance date adjusting events require an adjustment to the amount which would otherwise be recognised in the financial statements at the balance date. It is clearly not intended to apply to amounts already included in earlier authorised financial statements. Further, there is nothing in the language or purpose of Standard 110 to suggest that it does not apply to adjusting the amount to be recognised as revenue in the financial statements.
Mr P Robertson, an accountant with KPMG, was called by the appellant. He gave expert opinion evidence without objection on the meaning and application of the relevant accounting standards, including Standard 118. However, Mr Robertson was cross‑examined about matters going to the admissibility of his opinions. The respondents did not call their expert accounting witness. At the hearing of the appeal the respondents contended that the proper construction of the accounting standards was not a matter on which Mr Robertson could give expert opinion evidence. The reason for this position is that the respondents wish to advance a proposition in the appeal that was not pressed at trial namely that "recognition" is confined to the process of incorporating an item into a financial report. The appellant opposed this course on the ground that it was a matter for expert opinion evidence and should have been put to Mr Robertson. It is necessary to refer to his evidence.

Evidence of Mr P Robertson

Mr Robertson had prepared a written report that was tendered in evidence. The report discloses that Mr Robertson was asked whether, assuming the sales to Inviro were governed by the sales order and the distribution agreement and that delivery took place as acknowledged in the letter from Inviro to the appellant of 1 June 2006, the sales were properly recognised as revenue by the appellant in its financial statements for the period ending 30 June 2006. He considered each of the conditions in par 14 of Standard 118 and answered the question in the affirmative.
In his consideration of condition (d), being the probability of the flow of economic benefits, he said it was relevant to consider whether there was uncertainty at the time of "initial recognition" and subsequent to that date. He said that the invoicing and delivery of the invoiced stock would generally coincide with revenue recognition in accordance with accrual accounting. That is, on the happening of those events, there should be revenue recognition in accordance with Standard 118. That is consistent with Item 6 in the appendix to Standard 118 and the appellant's accounting policy. However, in reaching this conclusion Mr Robertson also had regard to Dr Grimbeek's letter of 15 March 2006. He interpreted the letter as an acknowledgement of Inviro's obligation to purchase and pay for the stock although suggesting it may not be in a position to do so without the proceeds of the sale of stock to its customers. Mr Robertson states in his report:
"In itself, I do not consider this speculative suggestion is grounds to conclude that the sales would not be achieved or the debt settled."
Mr Robertson then considered events subsequent to the date of "initial recognition", referring to Standard 110 which requires the adjustment of financial statements to reflect the effect of adjusting events but not non‑adjusting events.
Mr Robertson states (par 4.2.40):
" … Inviro's assertions that the terms were varied to a consignment stock arrangement and the lack of sales in South Africa is relevant to Inviro's ability and willingness to settle its debt and as such may constitute a condition existing at balance sheet date that requires adjustment in the financial statements at 30 June 2006."
Mr Robertson then referred to the Inviro correspondence of 2 June, 6 August, 10 August and 20 September 2006 in which Inviro stated in effect that the contract had been varied to a consignment sale arrangement and that it did not have a present obligation to pay for the product. He continued (at par 4.2.43 to par 4.2.46):
"The Distribution Agreement may afford Chemeq legal rights to enforce payment. However, the fact that monies were still outstanding, issues with enforcing collection in an overseas jurisdiction, claims about the parties [sic] intentions and the lack of information on Inviro's ability to pay the amounts outstanding creates uncertainty as to whether economic benefits will flow and, if so, when and to what extent.
This doubt relates to a condition existing at the balance sheet date as there was correspondence prior to 30 June 2006 that discuss[ed] [these] issues … Accordingly, it would constitute an adjusting event that should be reflected in the financial statements for the year ending 30 June 2006.
AASB118 states that an expense should be recognised for uncertain amounts of previously recognised revenues. This expense adjustment would be recognised in the form of a doubtful debt provision. When a doubtful debt provision is made, the trade receivable balance in the balance sheet is adjusted for the provision amount. The other side of the accounting entry is to recognise this as a doubtful debt expense within operating expenses in the income statement.
If a doubtful debt provision was made against the Inviro sales, they would still be recognised at their invoiced amount in the revenue line of the income statement for the year ending 30 June 2006. The related doubtful debt expense would be recognised within the operating expenses line of the income statement and not as an offsetting item to the related revenue."
Mr Robertson was cross‑examined about his approach to the formation of his opinions as follows (T 290):
" … Firstly, in forming the opinions you've expressed, you have not acted on any special or technical meaning given to the words in the standard?---No, Mr Colvin. As far as I'm aware, I've given them the ordinary meaning that accountants would understand in interpreting the standard.
And by that, you mean you simply read the words in the accounting standard according to their ordinary meaning and apply them to your instructions?---As best I can.
And when you say the meaning to accountants, there isn't any special or technical meaning to accountants that you have identified in your report?---I haven't, that's correct, Mr Colvin. I am aware that the distribution agreement between the parties, for example, referred to accounting terms, and I understood that my instructions related to interpretation on some reflection of that.
That is, whether words used were an accounting term. You have expressed an opinion about that?---That's right.
But on the question of whether revenue should be recognised, in the opinions you've expressed you have not acted on any special meaning applied by accountants; rather, you have given the words there their ordinary meaning?---As far as I'm aware, yes."
Mr Robertson was then cross‑examined about pars 82 and 85 of the framework. He had relied on par 85 of the framework for his approach based on "initial recognition" with any subsequent uncertainty reflected in a doubtful debt expense.
Mr Robertson accepted as correct that the process of recognition relates to the inclusion of an amount in the balance sheet or income statement. It was then put to him that par 85 requires the assessment of probability of future economic benefit to be made on the basis of evidence available when financial statements are prepared. Mr Robertson rejected that proposition, observing that the assessment to which par 85 refers is the assessment as to whether a provision should be made under par 18 of Standard 118. The cross‑examination is as follows (T 292 ‑ 293):
"So the standard requires, would you accept, that there is an assessment to be made on the basis of evidence available when the financial statements are prepared in deciding whether revenue should be recognised?---I think, Mr Colvin, perhaps if we read the following sentence as well that we would see that there might be some justification for the different times that I mentioned on Friday when I said that I thought that the recording entity had to make a decision about recognition at a point where the transaction occurred as well as at the point when the financial statements were prepared.
Yes. What I want to put to you though is it's certainly the case that there has to be a probability that future economic benefits associated with the transaction would flow from the transaction before revenue can be recognised?---There has to be that expectation, that probability, before the transaction can be recognised, yes.
Yes, and if at the point in time where it was first thought that that requirement had been satisfied, it is demonstrated by information available when the financial statements are prepared that that probability did not actually exist, then the revenue was not properly recognised. Do you accept that?---No, Mr Colvin. I think that there is a provision in the revenue standard which specifically addresses the circumstances you are seeking to deal with at the moment which I would have understood as representing a change in the understanding of the probability between the point at which the transaction occurred and when the financial statements were prepared."

Mr Robertson was then cross‑examined about a situation where at the time the financial statements were being prepared it had emerged that the requirements for revenue recognition had not been met, using by way of example, evidence demonstrating that delivery had not in fact occurred. The following exchange occurred (T 294 ‑ 295):
"Consider the case where goods are required to be delivered before there is an obligation to pay for them, so there is no obligation to pay until delivery has occurred, and the goods are to be delivered by sea and a person within the company enters income associated with the sale as revenue, believing that the goods have been delivered, but at the time the income statement is being prepared it is known that at the time the entry had been made, in fact the goods had not arrived and the ship had sunk and the goods were at the bottom of the ocean. Now, in those circumstances the requirement of the revenue standard had not been met at the time the revenue was first recognised. Do you accept that in that example?‑‑‑Yes.
Had not been met, in fact?‑‑‑Yes.
And what I want to put to you is that paragraph 85 requires that that additional piece of information about what the position was when the revenue was first identified has to be brought to account in deciding whether revenue should be recognised?‑‑‑Yes, I can understand the assumptions on which I'm being asked to respond, and it's clear in that case that objective information demonstrates that the condition for recognition was not achieved at the point that you've invited me to assume the entry was initially made.
And you would not recognise revenue in that circumstance because it was ‑ in fact, the requirements had not been established at the time when the company had thought for a time that they had been established?‑‑‑In the example you've invited me to assume, it's clear from information available either before or after balance date, up to the point of preparing the financial statements, that the fact of delivery was never satisfied.
Yes. And it's the fact that has to be established in order for there to be revenue recognised?‑‑‑The factual conditions need to be satisfied, yes.
And your evidence about an expense is dealing with a situation where the evidence, after initial revenue recognition, relates to a change in circumstances, and in that case you expense; you don't alter the revenue?‑‑‑It's certainly the case that if the situation changes and the probability of recovery is diminished, then there's a reassessment of the recoverability of the receivable, and if that leads to an impairment of the receivable, that's an expense, that's correct.
But you would accept, given the exchange we've just had, that there's a distinction between a change in circumstances and new information about what the circumstances were at the time revenue was first identified?‑‑‑I would to the extent that the change in circumstances ‑ sorry, that the new information is able to identify a conclusion that conditions required were not satisfied in the first place."
Mr Robertson was not asked whether the analysis relating to non‑delivery applied to the probability of economic benefits flowing. There is a distinction between the non‑delivery example used in cross‑examination and condition (d) of par 14. Whether or not there has been delivery is a historical (past) fact. Either it has occurred or it has not. Whether or not there has in fact been delivery is not altered by subsequent information and events. If delivery has not occurred, a condition of recognition has not been satisfied even if at the time of purported recognition an inference of delivery could be drawn on the balance of probabilities. As I understand Mr Robertson's evidence he accepts that in those circumstances the revenue from the sale should not be recognised in the financial statements for that reporting period.
By contrast condition (d) is satisfied if it is probable that a future event will occur. The probability of a future event occurring involves a matter of judgment that can vary depending on the information available as to relevant matters and events at the time the assessment is made. Thus, the timing of recognition under Standard 118 may be significant. Whether or not it is will be considered below.
The respondents did not challenge in cross‑examination the correctness of Mr Robertson's conclusion that all the conditions of par 14 were satisfied as at 1 June 2006 nor was it put to Mr Robertson that, on the basis of the post 1 June events, condition (d) of par 14 was not satisfied on 7 June 2006 or at any other time up to and including 30 June 2006.

Revenue recognition

The parties seem to agree on three matters. First, the conditions in par 14 of Standard 118 had to be satisfied by 30 June 2006 at the latest for revenue to be recognised. Second, the process of recognition involves an assessment of whether the conditions have been fulfilled. Third, that assessment is to be made by the company.
The appellant contends that, regardless of when the assessment is made, revenue is to be recognised at the earliest time when all the conditions in par 14 have been met, determined solely by reference to the evidence available at that time and any relevant subsequent events before or after balance date which reduce the probability of economic benefits flowing would be recognised as an expense.
When and how the appellant recognised the revenue from the Inviro sale transaction was not focussed on at trial. The appellant relied in the appeal on a Board paper dated 20 March 2006 prepared by an officer of the appellant which forecasts the revenue to be recognised by 30 June 2006, sets out par 14 of Standard 118 and comments on each condition. In relation to condition (d) the author refers to a credit check that had been completed on Inviro "which indicated that there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable". The credit check was obtained in September 2005. The Board paper was part of an information package provided to the Board for its scheduled meeting on 30 March 2006. However, there is no evidence of any Board consideration of or resolution on the subject.
The appellant contended that the Inviro revenue was recognised in a trial balance for the period 1 July 2005 to 30 June 2006. I understand a trial balance to be a listing of all the balances of all the accounts in the appellant's ledgers. The trial balance shows that the amounts in the invoices for each consignment of product to Inviro were posted in the appellant's books on 5, 20 and 28 April 2006. That was well before the conditions in par 14 had been satisfied. I will proceed on the basis that the purchase price of the goods the subject of the sales order was treated as revenue in the internal accounting records of the appellant prior to 1 June 2006 and before the conditions in par 14 had been satisfied.
The respondents contend that revenue is to be recognised if the conditions in par 14 of Standard 118 have been satisfied as at 30 June 2006 by reference to evidence available in September 2006 (but excluding non‑adjusting events after the reporting date), alternatively by reference to the evidence available as at 30 June 2006 because that is the time expressed in the milestone covenant. The claim made for the first time in the appeal ("the additional claim") was that the time for considering and determining whether revenue should be recognised under Standard 118 was at the time and for the purpose of the preparation of the appellant's financial statements (September 2006), any earlier "initial" recognition being irrelevant. If the additional claim is correct, it affects who must make the assessment and determination. If Standard 118 only applies to recognition for the purpose of financial reports, the determination must, in the case of a public listed company, be made by the chief executive officer, the chief financial officer and the Board who must each declare that in their opinion the financial statements in the financial report comply, inter alia, with the accounting standards (s 295(4)(d) and s 295A of the Corporations Act).
Before going further, it is necessary to determine whether the respondents should be permitted to pursue the additional claim. The respondents submitted in closing at trial that regard had to be had to all the evidence available as at 29 September 2006 to determine whether the revenue recognition criteria had been satisfied at or before 30 June 2006, relying on pars 82 to 85 of the framework. They did not develop a submission, relying on the provisions of the Corporations Act, that recognition of revenue occurs as part of the process of incorporation into the financial reports of an entity and not before. However, the respondents contend that the substance of the additional claim was put to Mr Robertson and in any event raises a matter of construction that is not a matter for expert opinion evidence.
The appellant submits that the alternative view to the additional claim is that a financial statement is an historical report of transactions that have already occurred during the accounting period. On this view, a financial statement records and reports on the effect of transactions at the end date of the relevant reporting period. The act of reporting does not constitute the act of recognition but rather the financial report records and reports on transactions that have already been recognised. According to the appellant, the competing views raise a question about the nature of financial reports that is not answered by construing the Corporations Act but by expert accounting evidence.
I am satisfied that the respondent should be permitted to advance the additional claim in the appeal for the following reasons. First, although the precise proposition was not put to Mr Robertson, essential aspects of it were. In particular, it was put to him that regard must be had to relevant evidence available as at September 2006 for the purpose of determining whether the conditions for recognition of revenue in the financial reports had been satisfied by 30 June 2006. Secondly, the resolution of the competing views ultimately depends upon the proper construction of the Corporations Act, the accounting standards and associated material rather than on matters of accounting practice. Thirdly, the appellant's challenge to the trial Judge's finding as to the construction and application of Standard 118 and the framework covers largely similar ground. Finally, and most importantly, this Court cannot properly resolve the issues for determination in the appeal if it excludes consideration of an arguable construction of the accounting standards.
The respondents also submitted that the proper construction of the accounting standards was a matter upon which Mr Robertson could not assist as an expert because he simply applied his own view as to the natural and ordinary meaning of the words used. Of equal significance is the fact that the substance of Mr Robertson's evidence went to the correctness of the accounting treatment of the Inviro transaction in the appellant's financial report for the year ending 30 June 2006. On that subject, Barrett J said in Australian Cement v Adelaide Brighton [2001] NSWSC 645 at [9]:
"In the end, it seems to me that the correct accounting treatment or, perhaps, the range of correct accounting treatments comes down to the operation of the accounting standards in the context of the corporations legislation including, of course, the provisions of that legislation requiring adherence to approved accounting standards and the addition of any note that may be required by the 'true and fair' override. In other words, we are really dealing here with what is ultimately a question of law."
Lindgren J observed in Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No 33) (1996) 137 ALR 138 at 142 that evidence by a financial expert that answers a question of law may well be inadmissible because it will not be wholly or substantially based on the expert's specialised knowledge or even because it is irrelevant. On the other hand, Bleby J in Southern Equities Corp Ltd (in liq) v Arthur Andersen & Co (reg'd) (No 9) [2002] SASC 118 at [54] concluded that an objection to admissibility cannot be sustained merely because an expert expresses an opinion on a matter of law or about the interpretation of an accounting standard.
Insofar as Mr Robertson's evidence concerned the natural and ordinary meaning of the words of the standards it would be inadmissible and should be given no weight. However, I am not satisfied that is a correct characterisation of much of his evidence. In substance his evidence concerned accountancy concepts, practices and principles that could properly inform and assist the Court in its task of construing the standards. As to Mr Robertson's opinion concerning the appropriate accounting treatment of the Inviro transaction, that falls within the ultimate issue rule and is objectionable although the reasoning towards the conclusion which is based on accounting concepts, practices and principles is not.
Grounds of appeal 1.1 and 1.2, ground of contention 1 and the additional claim raise for determination the proper construction of Standard 118. The logical first question is the relevance of the framework to the proper construction of par 14 of Standard 118. The trial Judge rejected the appellant's contention that the appropriate date for the application of Standard 118 was 1 June 2006 and did so on the basis that the Standard had to be applied in accordance with the framework. Relying on par 85 of the framework, the trial Judge concluded that the appropriate date for considering whether Inviro would pay for the product was in September 2006 when the appellant's financial statements were being prepared. The respondents concede this conclusion is incorrect but rely on par 85 of the framework in support of the construction for which they contend.
The appellant's expert, Mr Robertson, relied on the framework in support of his approach of identifying the earliest date on which the conditions in par 14 were satisfied without reference to subsequent information and events (which he refers to as "initial recognition") and his treatment of events after that date. However, the appellant contended in the appeal that the framework cannot influence the interpretation of accounting standards, which have statutory force, relying on Stanilite Pacific Ltd (in liq) v Seaton (t/as Price Waterhouse) (2005) 55 ACSR 460 at [84] per Hodgson JA. Hodgson JA said he did not place significant weight on SAC 4 (a statement of accounting concept with arguably the same status as the framework) because it had no statutory force and could not influence the construction of the relevant standard. I am not persuaded that the reasoning applies to the framework.
The framework relates (and is confined) to general purpose financial reports and one of its purposes is to assist preparers of such reports in applying the accounting standards. Mr Robertson used the framework for its intended purpose. However, the framework expressly provides that it does not define standards for any particular measurement or disclosure issue, does not override any specific accounting standard and in the event of a conflict, the Standard prevails over the framework. There is no relevant conflict between the purpose and scope of the framework and Standard 118.
In identifying the purpose and scope of Standard 118, regard must be had to the accounting standards as a whole. Each accounting standard (of which there are currently around 44) relates to different aspects of the content or presentation of financial information and can be likened to a piece of a jigsaw that combines to produce a coherent structure with a common purpose. The common purpose is to regulate the content and presentation of general purpose financial reports for external users. It is apparent from the application provision of Standard 118 (set out above) and its relationship with other accounting standards that the purpose of Standard 118 is to set out the requirements for the recognition, measurement and disclosure of revenue in specified transactions in general purpose financial reports (as the term is defined in Standard 101). Standard 118 does not itself establish requirements for recognition of revenue in an entity's internal accounts.
Further, as the body responsible for the preparation of the accounting standards (the AASB) also prepared the framework pursuant to its statutory function, I am satisfied the framework is extrinsic material that can be used in the interpretation of Standard 118 pursuant to s 15AB(1) of the Acts Interpretation Act 1901 (Cth). Section 15AB applies to the interpretation of delegated legislation made under a Commonwealth Act (Acts Interpretation Act, s 46). The accounting standards are made under s 334 of the Corporations Act.
The next question is what is meant by "recognition", whether it be of revenue, expense or any other item included in general purpose financial reports. The term refers to the inclusion of an item in a relevant category (in this case revenue) in a general purpose financial report. On the facts in this case that report is the financial statements in the appellant's annual report for the year ending 30 June 2006. But as is clear from par 82 of the framework, recognition also includes the process of deciding whether an item should be included as revenue in the relevant financial report.
A further issue is whether that is an assessment de novo as to whether the conditions for recognition of revenue had been satisfied in the relevant accounting period or whether its earlier inclusion as revenue in the internal accounts of the company constitutes binding recognition for the purpose of the financial report. A de novo assessment is consistent with the scope and purpose of Standard 118, enables errors to be corrected before inclusion in the financial statements and is consistent with Standard 110 which deals with events after the balance date that require adjustment of amounts which would otherwise be recognised at the balance date. As previously noted there is nothing in the language or purpose of Standard 110 to suggest that it does not apply to the adjustment of revenue.
Thus, the reporting entity is not bound by the accounting treatment of the item in its internal books of account that must be maintained pursuant to s 286 of the Corporations Act. That is so notwithstanding the effect of s 286 is to require the company's accounting records be kept on the accrual basis of accounting and in accordance with the accounting standards. Any errors of fact or approach in the internal accounts would require adjusting journal entries. There is no reason in principle or policy to conclude that the treatment of the transaction in the company's internal accounts or elsewhere binds the company in the preparation of its financial report.
There being an assessment de novo at the time of preparing the financial report, the next issue is whether recognition of revenue is fixed (and by inference unalterable) by reference to the earliest date on which the conditions have been satisfied, determined solely by reference to the evidence at that time. The consequence of that approach in this case was to ignore evidence on 2 June that bore on the probabilities of economic flow as at 1 June. That cannot be correct. Paragraph 85 of the framework relied on by Mr Robertson does not justify that approach which is inconsistent with Standards 118 and 110. Indeed so much was conceded by Mr Robertson in cross‑examination in relation to the delivery example where the recognition of the revenue would be reversed.
There remains the question whether there is any material distinction for these purposes between delivery and the probability of economic benefits flowing. If subsequent information discloses that at no material time prior to the balance date was it probable that the economic benefits would flow, there is no distinction between the two. There would only be a distinction if, on the facts, there had been a change in circumstances that materially altered the objective probabilities (as distinct from knowledge of information that altered the company's assessment of the probabilities). However, if the assessment of probability is to be made as at the balance date (as contended for by the respondents relying on Standard 110) a change in circumstances prior to that date which materially altered the objective probabilities would also be taken into account in determining recognition of revenue. In my view, Standard 110 does not have that effect. The accounting standards are based on the accrual basis of accounting which requires that transactions be recognised if and when the conditions have been satisfied (pars 25 and 26 of Standard 101 and par 22 of the framework). Standard 110 has to be construed in that context. The definition of adjusting events after the reporting date (which refers to conditions at the reporting date) includes events that reflect on conditions prior to and which continue until the balance date.

In grounds 4 to 6 of the respondents' notice of contention they claim that:
(a)the trial Judge erred in finding that the surrounding circumstances to be considered in construing cl 2.9(a) did not include the fact that representatives of the parties had discussed sales figures that excluded interest;
(b)the definition of revenue in Standard 118 does not apply to the term revenue in cl 2.9(a) because it uses the compendious phrase "total gross revenue from all sources" which is not an accounting term;
(c)if it is impermissible to have regard to the surrounding circumstances if there is no ambiguity, there was ambiguity as to whether the term revenue was used in a context that required it to be read in a different sense to the definition in Standard 118.

Background

By cl 2.9(a) the appellant undertook "to achieve total gross revenue from all sources of at least $4,000,000 for the financial year ending 30 June 2006".
Clause 1.3(e) of the amended Deed Poll provides:
"In these Terms and Conditions, unless the context requires otherwise, a reference as [sic, to]:
…
(e)an accounting term is a reference to that term as it is used in accounting standards under the Corporations Act, or, if not inconsistent with those standards, in accounting principles and practices generally accepted in Australia."
It was not in dispute that interest is included in the definition of revenue in Standard 118.
After a survey of the relevant authorities, the trial Judge concluded that evidence of relevant surrounding circumstances was admissible as an aid to construction even if the language of the contract was unambiguous.
The negotiations between the appellant and the bondholders in relation to the Heads of Agreement were principally conducted by Mr Williams for the appellant and Mr Wyatt and Mr Cullinane for the bondholders. The surrounding circumstances relied on by the trial Judge which he concluded were known to the parties when they entered into the Heads of Agreement and which were relevant to the true construction of cl 2.9(a) were:
(a)the terms of the milestone covenant in the Subscription Agreement requiring the appellant to obtain confirmed purchase orders for the 12 month period ending 30 June 2006;
(b)Mizuho disputed that the Inviro sales order satisfied that covenant;
(c)the appellant's management accounts for August 2005 forecast net revenue from sales for the year to 30 June 2006 of $9,308,288 and interest income in the same period of $2,377,658. The appellant's management accounts in that form (separating sales revenue from interest) were sent to the bondholders;
(d)Mr Williams' evidence that he had been exploring ways to commercialise the appellant's technology by means other than sales of product including milestone fees, signing up fees, royalties and Mr Williams had informed Mr Wyatt of that;
(e)the convertible bonds had been issued to raise funds to enable the appellant to commercialise its products globally. This conclusion was said to be based on information provided to the appellant's shareholders by its former Chairman and CEO, Dr Graham Melrose, when seeking approval to authorise the issue of convertible bonds. The trial Judge continued (at [233]):
"Thus, the subscribers to the convertible bonds must be taken to have been concerned not only to earn interest on moneys advanced to Chemeq, but also, to see its revenue increase through commercialisation of its products. As Mr Williams accepted, the investment of money was not Chemeq's principal business undertaking."
The trial Judge concluded that if interest was to be included as revenue, the appellant had effectively satisfied the covenant by October 2005 with the result that from a commercial perspective the covenant would be of little, if any, utility.
Evidence was admitted as to the content of discussions between Messrs Williams, Wyatt and Cullinane in the course of negotiating the milestone covenant cl 2.9(a). Mr Wyatt's evidence was that there was negotiation about the amount of revenue to be included in the covenant and said because the appellant expected to achieve sales revenue of about $2.6 million down to 30 June 2006 and because the sale to Inviro was in an amount of about $1.4 million, the revenue target should be set at $4 million, this being the sum of the two figures. Mr Williams gave conflicting evidence as to the content of the discussions. The trial Judge preferred the evidence of Mr Wyatt to that of Mr Williams. However, he concluded that whatever was said in the course of the conversation between Mr Wyatt and Mr Williams was in the course of negotiations and was therefore inadmissible in any event.
However, the trial Judge accepted and took into account Mr Wyatt's evidence that in October 2005 when considering the Heads of Agreement, the meaning of the term "revenue" under the Australian Accounting Standards was not discussed and there was no suggestion in Mr Williams' evidence to the contrary. The trial Judge then concluded (at [242]):
"In these circumstances, I consider that the term 'revenue' is not used in cl 2.9(a) as an accounting term, but rather as a reference to revenue from all the sources which might become available to [the appellant] through the commercialisation of its product. This construction is, I think, supported by the fact that [the appellant] was to achieve total gross revenue. The earning of interest on funds on deposit can hardly be said to be an achievement. Further, because there is little or no cost involved in earning interest, it would be inappropriate to refer to income of that kind as gross revenue" (emphasis in original).

Analysis

If consideration is confined to the relevant agreements, being the Subscription Agreement, the Heads of Agreement and the amended Deed Poll, the objectively determined common intention of the parties understood as referring to what a reasonable person would understand by the language in which the parties expressed their agreement, including about its scope and purpose, the meaning of cl 2.9(a) is unambiguous.
Interest is included in cl 2.9(a) whether or not revenue is an accounting term to which cl 1.3(e) applies. In the context of the agreements as a whole, the natural and ordinary meaning of the term revenue corresponds with the description of revenue contained in Standard 118 as "income that arises in the course of ordinary activities of an entity including sales, fees, interest, dividends and royalties". There is nothing in the immediate context in which the term revenue is used in cl 2.9(a) or the broader context of the amended Deed Poll and other relevant agreements to narrow the meaning of revenue to exclude interest. Revenue "from all sources" is intended to cover all the different types of revenue and the word "gross" goes no further than indicating an intention that the revenue of all different types is not to be net of associated expenses. The word "achieve" is, as the appellant contends, a reference to what follows as the target.
I do not agree with the trial Judge's conclusion that from a commercial perspective cl 2.9(a) would be of little, if any, utility. At the time the Heads of Agreement was executed the appellant had secured the Inviro sales order. However, as subsequent events have so dramatically revealed, there is a substantial gap between entering into a contract in September 2005 that remained wholly executory at the time of entry into the Heads of Agreement and the subsequent performance of that contract.
Further, there is nothing in any of the surrounding circumstances relied on by the trial Judge to expose ambiguity where none exists in the language in which the parties have expressed their agreement. In summary, there is no patent or latent ambiguity in the terms in which the parties have expressed their agreement. In these circumstances it is unnecessary to determine whether or to what extent evidence of surrounding circumstances is admissible where the objectively determined common intention of the parties is unambiguous. That subject was discussed in Home Building Society v Pourzand [2005] WASCA 242 at [25] ‑ [33]. The reconciliation of the High Court authorities referred to in Pourzand may lie in a clearer delineation of what is intended to be caught by the expression of "surrounding circumstances" for the purposes of the Codelfa rule. I doubt that the matters referred to in (a), (b) and (c) above would fall within any exclusionary rule. Matters (d) and (e) concern details as to the purpose of the relevant agreements that go beyond what can be gleaned from the terms in which the parties have expressed themselves. Evidence to add to or vary the terms of the written agreements may be thought to be within the exclusionary rule (or the closely related parol evidence rule). Since Pourzand the Full Federal Court in Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 59 ACSR 444 has concluded that evidence of surrounding circumstances is admissible regardless of whether there is ambiguity (at [45] ‑ [53] per Weinberg J, [98] ‑ [100] Kenny J and [238], [250] ‑ [254] Lander J).
As to the content of the discussions between Messrs Williams and Wyatt, they are correctly characterised as being in the course of negotiations. However, that does not determine the question of admissibility. If extrinsic evidence concerning the conduct of the parties prior to the making of a contract is admissible, the fact that the evidence relates to prior negotiations does not itself render the evidence inadmissible. This matter was addressed by Mason J (as he then was) in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales

(1982) 149 CLR 337. After stating the rule that evidence of surrounding circumstances was admissible to assist in the interpretation of a contract if the language was ambiguous or susceptible of more than one meaning he continued (at 352):
"It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself."

The only relevance of the discussions in this case was as evidence of the actual intentions and expectations of the bondholders and thus was correctly excluded. For these reasons I would uphold ground of appeal 2 and dismiss grounds 4 to 6 of the notice of contention.

Conclusion

As to the appeal, I would uphold grounds of appeal 1.3, 1.4, 1.5 and 2 and dismiss the remaining grounds. However, the trial Judge's errors do not affect the outcome of the action in which event the appeal should be dismissed. I would uphold ground 3 of the notice of contention and dismiss the remaining grounds.
PULLIN JA: The critical issue in this case is whether par 14 of Standard 118 was satisfied. I agree with McLure JA's reasons in relation to whether or not par 14 was satisfied, save for her Honour's conclusion that there is no basis for interfering with the trial Judge's reasoning concerning par 14(d).

The sales contract

As McLure JA points out, there is no express finding that there was a binding and enforceable contract between the appellant and Inviro, but there is an implied finding to that effect. The uncontradicted evidence of Mr Williams is that there was a contract. In fact, the respondents do not contest that there was a binding contract. Instead, their argument was that the contract had been varied, however the trial Judge found that it had not

been varied (see [201]) and this finding is not challenged. The consequence is that the issues have to be considered on the basis that there was a binding contract between Chemeq and Inviro.

Was the sales contract a sham?

It is necessary then to clear away a veiled suggestion that the contract was a sham (as to which see Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 per Lockhart J at 454). There was such a veiled suggestion by the respondents during the trial. This may be seen in the submissions by the bond holders (and recorded by the trial Judge at [178]) that:
"[I]t was no mere coincidence that Dr Grimbeek proposed to place an order for 2000 units at $720, for delivery by 30 June 2006, when this was precisely what Chemeq required in order to satisfy the covenant then in place. The bondholders submit that the inference should be drawn that Dr Grimbeek responded to a request from Mr Geldart to place the required order at a time when Chemeq apparently had no other prospect of satisfying the covenant."
It is clear that the appellant was anxious to enter into the contract to help it progress towards satisfaction of the milestone covenant. It may even be inferred that Inviro was prepared to enter into the agreement partly motivated by a willingness to help the appellant progress towards satisfaction of the milestone covenant. However, the existence of the appellant's anxiety, or Inviro's willingness in that regard, does not make the contract a sham. The evidence referred to, and the finding made by the trial Judge in pars [178] to [180], were used by the trial Judge to draw the "inference" which the bondholders suggested he should draw. In my view, nothing follows from the fact that such inference was drawn. Whether Dr Grimbeek from this "expected to be safeguarded from loss" ([180]) is a separate point which I will refer to later. I return to consider whether the veiled suggestion that the sales contract was a sham should be entertained. The respondents did not expressly contend that the contract was a sham. Indeed, counsel for the respondent at the hearing of the appeal expressly disclaimed any such contention, as appears from the transcript of proceedings, where the following exchange occurred between McLure JA and counsel for the respondent:
"McLURE JA: … What you are suggesting without going directly where you have to go is to say, 'This was a sham for the purposes of complying with the milestones in the agreement,' and the two parties got together and came up with this idea. That's what you are suggesting but didn't ever put.
COLVIN, MR: We are not suggesting that, your Honour. We didn't run such a case because, in our submission, the only issue was - the only issue that remains and still being agitated here is about the likelihood of payment, payment by Inviro, … "
In view of that unequivocal statement, it can be accepted that the sales contract was not a sham and was a contract enforceable against Inviro.

Other facts bearing on whether it was probable that economic benefits would flow from the contract

Although Inviro was a two dollar company, Dr Grimbeek had arranged finance so that payment could be made to Chemeq. The uncontradicted evidence of Mr Williams was that Dr Grimbeek represented, on 18 September 2005, that the order he would place would be "unconditional, subject to a further meeting with the bank on Monday to confirm they will approve the finance for it", and on the day the order was placed by Inviro (20 September 2005), Dr Grimbeek advised Mr Geldart that finance approval had been given so that the order was unconditional. Mr Williams' uncontradicted evidence was that on 22 September 2005 he sent an email to Mr Geldart in which he authorised Mr Geldart "to sign the sales order on behalf of Chemeq".
By 7 June 2006 the goods had all been delivered by Chemeq to Inviro. Also of considerable importance is the uncontradicted evidence that Mr Williams considered Dr Grimbeek to be "an honourable person", a man of "obvious wealth", a man "of high standing", a man who "valued his reputation", a man who would not want his reputation "tarnished" (see trial Judge's reasons [162]) and an "honourable man who would not want to be associated with a failed company" [183].
Now while it is true that Dr Grimbeek made statements to the effect that he would not honour the contract, Chemeq (or prudent men of business in Chemeq's position) was or were not obliged to reach a conclusion that it was not probable that economic benefits will flow merely because Dr Grimbeek made those statements. In deciding whether it is probable that economic benefits will flow, Chemeq was entitled to take into account numerous factors which included the strength of its legal claim, the likelihood it would obtain judgment and whether by various means the money due under the covenant would be recoverable.
On 24 September 2005 Dr Grimbeek approved the Stock Exchange announcement referred to in [86] of the trial Judge's reasons. Before the announcement was made to the Stock Exchange an email, dated 22 September 2005, was sent by Chemeq to Dr Grimbeek, who was asked to approve, amend or reject the announcement proposed to be made. In an email of the same date, Dr Grimbeek said he was "comfortable" with the announcement. If Inviro defended an action by Chemeq to enforce payment on the basis that the "agreement he [Dr Grimbeek] had with Chemeq was not defined only by the Sales Order and the Distribution Agreement" (reasons [180]) then Dr Grimbeek would be rightly criticised for misleading the Australia Stock Exchange. That would damage his reputation.
In my opinion, viewed objectively from Chemeq's point of view (or from that of prudent men of business in Chemeq's position), Chemeq would have been entitled to conclude that once Dr Grimbeek was advised that the contract was binding, that it was not a sham, that it had not been varied and that if there was litigation judgment would be entered for Chemeq against Inviro, then he (Dr Grimbeek) would have employed the bank finance to meet the judgment. Prudent men of business in Chemeq's position would have been entitled on 7 June 2006 to conclude that Dr Grimbeek would not have wanted to be held up to adverse comment in a judgment, or to be held up as a director of a failed company which refused to meet its legal obligations. Prudent men of business would be entitled to conclude that economic benefits would have flowed to Chemeq.
The learned trial Judge found that he thought it likely "that a proud and wealthy man such as Dr Grimbeek" was "more likely to defend his position than to surrender to pressure" [184]. However, to say that Dr Grimbeek was likely to "defend his position" does not mean that Chemeq or prudent men of business in its position must, or would have, reached a view that the defence would have been carried through to a trial and judgment or to the point of resisting payment after judgment. If prudent men of business in Chemeq's position believed that Dr Grimbeek had the qualities referred to above then, in my view, they would have concluded that Dr Grimbeek would not persist with Inviro's defence, would not expose Inviro to judgment, would not risk being held up to be a director of a company forced into liquidation and would not risk a tarnishing of his reputation by adverse comment about misleading the stock market. As a result, it is open to conclude that prudent men of business, apprised of all those facts, would have formed the view that economic benefits would flow.

An evaluative decision

However, as McLure JA says, the conclusion on this point is a matter of judgment. The trial Judge's conclusion that Chemeq ought not to have recognised the Inviro debt as revenue ([185]) is an "evaluative [sometimes called 'discretionary'] decision". See Batistatos v Roads and Traffic Authority of New South Wales (2006) 227 ALR 425 at [150]. The mere fact that this Court might reach a conclusion different from that of the trial Judge is not any basis for allowing the appeal and setting aside the judgment. There are statements in Fox v Percy (2003) 214 CLR 118 and CSR Ltd v Della Maddalena (2006) 80 ALJR 458 which might be read as suggesting that the task of this Court is to conduct a rehearing and to substitute its conclusion for that of the trial Judge if it comes to a different conclusion. However, in Marsden v Ydalia Holdings [2006] WASCA 52; (2006) Aust Torts Reports 81-840, I said, after reviewing the authorities, that:
"If no error is alleged and found to exist, then the Appeal Court cannot interfere with the judgment below. So much is clear from Fox v Percy, where Gleeson J, Gummow and Kirby J said, at [27], that if the Court concludes that an error has been shown, the Court is then (and in my opinion, only then) 'authorised and obliged' to discharge appellate duties in accordance with the statute."

Did the trial Judge err?

The question is therefore whether the appellant has identified any error in the trial Judge's reasoning which led him to the conclusion that Chemeq ought not to have recognised the Inviro debt as revenue.
In my opinion there is an error in the trial Judge's reasoning. It is in the form of a lacuna between the finding the trial Judge made in [184], namely that:
"I think it likely that a proud and wealthy man such as Dr Grimbeek, is more likely to defend his position than to surrender to pressure."
and the conclusion which is immediately thereafter stated at 185] that:
"I consider that Chemeq ought not to have recognised the Inviro debt as revenue."
The learned trial Judge proceeds from Dr Grimbeek's attitude directly to his conclusion. As the appellant points out in its written submissions, the trial Judge failed to take into account the possibility that was open to Chemeq via Mr Williams (or more accurately prudent men of business) "to have reasonably formed the view … Grimbeek would ensure that Inviro had sufficient to meet its debts". His Honour was not required to decide the issue merely by forming a view about what he thought Dr Grimbeek would do, although Dr Grimbeek's attitude was relevant to the real issue. What his Honour failed to do was to consider what prudent men of business in Chemeq's position would think Dr Grimbeek would do. His Honour did not reject Mr Williams' evidence, which he gave at t/s 241 ‑ 242, that, for all the reasons he listed, he believed Dr Grimbeek would "succumb and pay the money". His Honour did not consider whether prudent men of business in Chemeq's position would, or would not, not have reached the same view as Mr Williams. In my opinion, the failure of the trial Judge to consider whether prudent men of business would or would not have concluded in all the circumstances that Dr Grimbeek would "succumb" to legitimate legal pressure "and pay the money" reveals error. That error having been revealed, it is then open to this Court to substitute its own conclusion based on an evaluation of the evidence.

What would prudent men of business in Chemeq's position have concluded?

McLure JA refers, at [126] of her reasons to seven matters relied upon by the respondents to support their submission that condition (d) of par 14 of standard 118 had not been satisfied. I comment on each of those matters.
The first was that Dr Grimbeek had provided no indication to Mr Williams that he would become personally liable to provide funds to Inviro to purchase the product and no request was made to get from his bank a document relating to Dr Grimbeek's bank facilities. As to that point, it seems clear, on the uncontradicted evidence, that Dr Grimbeek represented that he had arranged finance before the sales contract was finally concluded. This was a representation either that Inviro had arranged finance or, alternatively, that Dr Grimbeek had arranged finance and that he would make the finance available to Inviro so that it could fulfil its contractual obligations. If Dr Grimbeek had the finance and did not then intend to fulfil the representation, then he would expose himself to a finding by a court that he was guilty of misrepresentation. Such a finding, or the possibility of such a finding, would have been unpalatable to a person who wished to preserve his reputation.
The second matter, and the related fourth matter, is that Mr Williams was aware, in March 2006, that Inviro was complaining about problems in moving the product and that, when the appellant indicated it was sending 2000 units, Inviro sent its letter of 15 March relating to the prospect of bankruptcy. What Dr Grimbeek actually said in a letter dated 15 March 2006, in which he proposed that Chemeq reduce its sale price of the product to Inviro to enable a lower retail price to be offered, was:
"What to do about our deal? I have to purchase 2000 drums @ 720AUD by 30 June 2006.
Remember, if the 2000 unit order does not move and the product expires on IAHS, Chemeq Ltd will inherit a bankrupt distributor. IAHS will have to discount the product whether it likes it or not."
What this reveals is that there is no doubt about the existence of a binding sales contract. The threat that the appellant would inherit a "bankrupt distributor" was not accepted as a serious threat. Mr Williams said in his evidence:
"The reason I did not treat Grimbeek's threats regarding Inviro's solvency seriously was because, although Inviro may not have any significant assets and was a single purpose company, it had a line of credit with a bank. Apart from that I believe Grimbeek would fund Inviro if necessary. My view of Grimbeek was that he was a person of high standing and substantial means in South Africa and someone who would not want to be associated with a failed company."
The third matter relied on by the respondent was that the appellant did not inquire into the prospect of payment by Inviro when it committed to delivery of the product. That is true, but there was no need for it to do so, given that a representation had been made that there was a binding contract, that Dr Grimbeek had said that Inviro had a line of credit or, alternatively, that Dr Grimbeek had a line of credit and would provide the funds to Inviro.
The fifth matter was that, from February 2006, Inviro complained about the high retail price of the product and its effect on its ability to sell the product. That was so, but that did not affect the validity of the contract and, in view of the representations about finance, did not oblige Chemeq to consider other than that the funds for payment were available.
The sixth matter is that as about April or May 2006, Inviro had only sold about $10,000 worth of product. Again, that is true, but just because a debtor makes a bad commercial decision, does not mean that the debtor does not have to meet its contractual commitments.
The seventh matter was that the letter of 2 June 2006 from Dr Grimbeek was said to reflect an agreement reached on 31 May 2006 that Inviro would only pay for product as and when it was drawn from the UTI warehouse. Mr Williams strenuously denied that there was any agreement reached. He did not see the letter of 2 June 2006 until around 7 August 2006. He denied authorising or being aware of the existence of any variation to the terms of the sales order. The trial Judge made a finding that there was no such variation and thus Chemeq was entitled to treat this letter as posturing by Dr Grimbeek, who was endeavouring to negotiate Inviro's way out of a binding contract.
McLure JA also refers to the respondent's reliance on the trial Judge's finding that, as a result of discussions on 18 September 2005, Dr Grimbeek "expected to be safeguarded from loss" (see [127] McLure JA's reasons). McLure JA notes that, in view of the unchallenged finding that the contract was not varied, the respondent's remaining claim was that, notwithstanding Inviro's legal liability to pay for the product, the evidence supported an inference that Dr Grimbeek would not put Inviro in funds to enable it to fulfil its contractual obligation to the appellant. I agree with McLure JA when she said that all that the respondents could properly rely on was Dr Grimbeek's genuinely held belief that the appellant had reneged on an informal agreement to ensure that he did not suffer financially if the product could not be sold. It must be stressed that this may have been Dr Grimbeek's genuinely held belief, but there is no evidence of any binding legal agreement to ensure that he did not suffer financially if the product could not be sold and no evidence that such a representation was made. Chemeq was entitled to conclude that once Dr Grimbeek was given proper legal advice he would abandon this genuine but unfounded belief and then arrange for Inviro to use the bank finance and meet its contractual obligations.
The existence of a strong legal claim that Chemeq had against Inviro, the finding that the goods had all been delivered into Inviro's possession in South Africa, the uncontradicted evidence that Dr Grimbeek represented that a line of credit had been arranged before the contract was concluded between Chemeq and Inviro and the uncontradicted evidence of Mr Williams' opinion about Dr Grimbeek's keenness to preserve his reputation and his wish not to be associated with a failed company, make it probable that prudent men of business in Chemeq's position would have concluded on 7 June 2006 that Dr Grimbeek would eventually have succumbed to legitimate legal pressure and would have caused Inviro to pay what was due, and that in consequence economic benefits associated with the transaction would have flowed to Chemeq and that, as a result, par 14(d) was satisfied. The events after 7 June 2006 only bear on whether a provision for a doubtful debt should be made or not.

Conclusion

I would therefore uphold grounds of appeal 1.3, 1.4 and 1.5 and 2 for the reasons given by McLure JA. For the reasons given above, I would uphold ground 1.6.
I would uphold ground 3 of the Notice of Contention for the reasons given by McLure JA. However, that does not affect my conclusion that par 14(d) was satisfied on delivery of the last consignment. Apart from the different view I hold about par 14(d), I otherwise agree with McLure JA's reasons.
I would therefore allow the appeal, set aside the judgment of the trial Judge and make declarations and orders sought by the appellant.