DTZ Worldwide Limited v AIG Australia Limited

[2025] NSWSC 12

Supreme Court

New South Wales

Medium Neutral Citation:

DTZ Worldwide Limited v AIG Australia Limited [2025] NSWSC 12

Hearing dates:

4, 5, 6, 11, 12, 18 to 20 November 2024

Decision date:

04 February 2025

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

(1)   The plaintiff’s claim against the second, fourth, fifth, sixth and seventh defendants under the First Excess Policy, the Second Excess Policy, the Third Excess Policy and the Third Fourth Excess Policy (as those terms are defined in the Statement of Claim filed on 12 June 2020) (together, the Relevant Policies) is dismissed.

(2)   The plaintiff to pay the costs of the second, fourth, fifth, sixth and seventh defendants insofar as those costs relate to the plaintiff’s claim under the Relevant Policies.

Catchwords:

INSURANCE — miscellaneous indemnity insurance — buyer’s warranty and indemnity insurance policy — acquisition of international property services business with facilities management contract in Singapore — warranties given by sellers in share sale agreement — claim against first, second, third and fourth excess layer insurers for damages in respect of breach of warranties by sellers — breach of warranty established in relation to information disclosed and not disclosed about facilities management contract — assessment of damages — amount of any damages less than threshold of first excess layer policy — claim dismissed

CONTRACTS — breach of contract — breach of warranty — breach of warranty given by sellers in share sale agreement that Disclosure Materials were not misleading — proper measure of damage

Legislation Cited:

Insurance Contracts Act 1984 (Cth), s 57

Uniform Civil Procedure Rules 2005 (NSW), rr 31.21, 31.23

Cases Cited:

Commercial Union Insurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389

Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54

Davis v Perry O’Brien Engineering Pty Ltd [2023] QSC 243

Decision Inc Holdings Proprietary Ltd v Garbett [2023] EWHC 588 (Ch)

Dylan Mann & Co Pty Ltd as trustee for the Mann Family Trust v Tiejag Pty Limited as trustee for the Skeihy Khoury Family Trust [2018] NSWSC 1334

Fink v Fink (1946) 74 CLR 127; [1946] HCA 54

HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54

In the matter of Hair Industrie Penrith Pty Ltd, Hair Industrie Merrylands Pty Ltd [2015] NSWSC 1578

Ivy Technology Ltd v Martin [2022] EWHC 1218 (Comm)

Lifehealthcare Distribution Pty Ltd v Nicholas [2011] NSWSC 661

Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438

Millbrook Health Care Bidco Ltd v Croll [2023] EWHC 290 (Comm)

Potts v Miller (1940) 64 CLR 282; [1940] HCA 43

Robinson v Harman (1848) 1 Exch 850; 154 ER 363

The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842 (QB)

Troulis v Vamvoukakis [1998] NSWCA 237

Texts Cited:

A Akhigbe, R Kudla and J Madura, “Why are some corporate earnings restatements more damaging?” (2005) 15 Applied Financial Economics 327

McGregor on Damages (22nd ed, 2024, Sweet & Maxwell)

Category:

Principal judgment

Parties:

DTZ Worldwide Limited (CRN 09073572) (Plaintiff)
Tokio Marine Europe, S.A. Sucrusal En España (Branch in Spain), (Company No. (NIF): W0186736-E (Second Defendant)
Lloyd’s Syndicate 4000, where the sole corporate member is Liberty Corporate Capital (Two) Ltd (CRN: 06630334) (Fourth Defendant)
HDI Global Specialty SE (Fifth Defendant)
Hamilton Insurance Designated Activity Company (Formerly, Ironshore Europe Limited) (Company No: 484148) (Sixth Defendant)
Liberty Mutual Insurance Company (ACN 086 083 605) (Seventh Defendant)

Representation:

Counsel:
M Collins KC with F Roughley SC, P Strickland and T Barry (Plaintiff)
M Jones SC with E Kovacs (Second, Fourth to Sixth Defendants)
M R Elliott SC with O Jones (Seventh Defendant)

Solicitors:
Gilbert + Tobin (Plaintiff)
Norton Rose Fulbright (Second, Fourth to Sixth Defendants)
Clyde & Co (Seventh Defendant)

File Number(s):

2020/177998

Publication restriction:

None

JUDGMENT

Introduction

1. By a share sale agreement dated 14 June 2014 (the SSA), the plaintiff, DTZ Worldwide Limited (DTZ), agreed to buy from UGL Limited (later, UGL Pty Ltd), United Group Pty Ltd (later, MTCT Services Pty Ltd) and United Group Investment Partnership (a general partnership constituted under the laws of Delaware) (together, the United Group), a group of companies (the DTZ Group) that operated a property services business in 52 countries throughout the world (the DTZ Business) for a total price of $1.215 billion. The purchase price was subject to several adjustments on completion to reflect changes in working capital and any deviation in expected financial performance for the fourth quarter of the financial year ending 30 June 2014, as well as the retention for a period of time of an Escrow Amount to cover specific contingent liabilities of the group. The actual amount paid on completion was $1,179,506,172.84.

2. One of the companies in the DTZ Group was DTZ Facilities & Engineering (S) Limited (formerly, United Premas Limited) (Premas), which was the entity through which the United Group carried on business in Singapore, Thailand, Malaysia and the Philippines.

3. On 24 August 2010, Premas had entered into a facilities management agreement (the FM Contract) with Sports Hub Pte Ltd (SHPL) in respect of the Singapore Sports Hub Project (the Project). The Project involved the redevelopment through a public private partnership (PPP) between the Singaporean Government and SHPL of an existing indoor stadium and the construction of additional facilities comprising a national stadium, an aquatic centre, a multi-purpose indoor arena, a retail and commercial development, a sports museum, a sports medicine and visitors’ centre, offices and carparking. It also involved the provision of Facilities Management Services, including cleaning, security, estate management, helpdesk, utilities and carpark management, and “Life Cycle Management”, including planned and preventative maintenance services. Those services were provided by Premas to SHPL under the FM Contract. SHPL itself was a special purpose vehicle that had been established by a consortium consisting of HSBC Infrastructure Fund Management Limited (HSBC), Dragages Singapore Pte Limited (Dragages) (a subsidiary of Bouygues Construction, a multinational construction company based in France), Premas, and later Global Spectrum Asia Limited (Global Spectrum) (the Consortium). Premas had a 5% interest in SHPL. The balance was held by HSBC, Dragages and Global Spectrum. The Consortium had successfully tendered for the Project in 2007.

4. The United Group gave various warranties in the SSA about which more will be said shortly. Clause 11.4 of the SSA provides:

The Sellers indemnify the Buyer against any Loss suffered or incurred by the Buyer as a result of a breach of a Warranty, except to the extent that the Warranty or the Sellers’ liability for the Loss are limited or qualified under clause 12, and this will be the sole remedy of the Buyer in respect of any such breach.

5. By cl 12.7 of the SSA, DTZ was required to obtain warranty and indemnity insurance in the form of a policy issued by the defendants on the date of the SSA (the W&I Policy). That policy took the form of an insurance tower consisting of an underlying policy issued by the first defendant, AIG Australia Limited (AIG), and eight excess policies. Annexure A to this judgment shows the structure of the tower including the insurers who provided cover in each layer and the maximum amount for which each is liable. As is apparent from Annexure A, some of the policies of insurance were entered into by the insurers through their agents, who were also joined as defendants in the proceedings. More will be said about the terms of the W&I Policy later in this judgment.

6. Under cl 12.7(b)(2) of the SSA, DTZ agreed, subject to certain irrelevant exceptions, that “it will not be entitled to make, will not make, and waives any right it may have to make, any Claim against a Seller arising out of a breach of Warranty…”. The effect of this provision is that, subject to irrelevant exceptions, any claim for breach of the warranties contained in the SSA must be made against the insurers, not the United Group.

7. In these proceedings, DTZ claims that the United Group breached several of the warranties contained in the SSA in three principal respects. Each relates to the FM Contract.

8. First, DTZ says that the United Group breached the warranties because it incorrectly accounted for payments totalling SGD11.4 million that were paid to Premas by SHPL and Dragages in the 2011, 2012 and 2013 financial years (FY11, FY12 and FY13 respectively) (the Side Letter Payments), which had the effect of inflating Premas’s revenue, gross margins, EBITDA and EBIT for those years and understating its liabilities. It is common ground that the payments were received by Premas in the years in which they were brought to account. However, it is DTZ’s contention that those amounts should only have been recognised as revenue in later years. The reasons for that contention are explained later in this judgment.

9. Second, DTZ says that the United Group breached the warranties because Premas had suffered a net loss of SGD4.15 million on “mobilisation costs” (that is, costs incurred in connection with entry into the FM Contract, such as the preparation of procedure manuals) which it wrongly accounted for as capitalised expenses in its balance sheet rather than as an expense in its profit and loss statement for FY14, with the result that the FY14 accounts overstated Premas’s and the United Group’s profits and gross margins for that year. DTZ also claims that the amount of those costs was inflated.

10. Third, DTZ submits that Premas should have concluded that the FM Contract was an onerous contract (that is, a contract that was expected to make a loss over the life of the contract) with the consequence that those losses should have been capitalised and recognised in the profit and loss statement and balance sheet for FY14. The FM Contract is said to have been loss-making once the adjustments referred to earlier and several other adjustments were made to the expected income and expenses arising from the FM Contract, including expected increases in labour costs, the imposition of performance penalties and an increase in plant and equipment lifecycle costs.

11. Relying on expert evidence given by Professor Gordon Klein (who is a faculty member of UCLA’s Anderson School of Management), DTZ submits that it is entitled to recover damages totalling approximately $234 million plus interest. Essentially that amount has two components. First, is an amount of $213 million that is said to arise principally from the application to the projected cashflows of the business of a higher discount rate to the ones said to have been used by DTZ in calculating the purchase price for the DTZ Business. According to Professor Klein, the use of a higher discount rate was appropriate to reflect the additional risk associated with the forecast earnings to which the discount rate was to be applied to arrive at a net present value for the earnings generated by the DTZ Business. That additional risk was said to arise from the accounting errors identified by DTZ. Second, is an amount of $21 million that is said to arise from the need to provide for the losses expected to be incurred on the FM Contract in FY2014. Following an expert conclave between the expert accounting witnesses who prepared reports for the purposes of the case, Professor Klein accepted that that amount should be reduced to $17.82 million.

12. In its final submissions, DTZ put an alternative case. According to that case, the United Group breached the warranties by failing to disclose a number of problems with the FM Contract (the problems that are said to make it an onerous contract). If those matters had been disclosed, DTZ and a reasonable hypothetical purchaser would have made further enquiries (described in DTZ’s submissions as a “deep dive”) into the facts relevant to the FM Contract. Armed with information that those enquiries would have revealed, DTZ and a hypothetical purchaser would have discounted the purchase price by $146.8 million, representing the net present value of what are said to be the likely future losses associated with the FM Contract and a further amount of $100 million. That further amount corresponds numerically to an amount DTZ had agreed to pay in addition to the offer price it had derived by applying a multiple to DTZ Group’s future maintainable earnings.

13. The third defendant, Liberty Specialist Markets Australia Pty Ltd, which acted as agent for the second and fourth excess layer insurers, has been deregistered. Consequently, it ceased to be a party to the proceedings. Shortly before the hearing, DTZ settled its claim against AIG on terms that involved an admission of liability by AIG. It also settled its claim against the fifteenth defendant, Zurich Insurance Plc. As is apparent from Annexure A, the fourth excess layer was provided under three separate contracts. During the hearing, DTZ also settled its claims against the insurers who provided cover under the first and second of those contracts, and with the fifth and sixth excess layer insurers and their respective agents. Annexure A sets out the insurers against whom the proceedings are maintained and the layers or the proportion of the layers in respect of which those insurers provided cover. It is apparent from Annexure A that the claims are pursued against the insurers who provided the first, second and third excess layers together with the insurers who provided a proportion of the fourth excess layer cover under the third fourth excess layer policy. They are the second and fourth to sixth defendants (together, the Joint Defendants) and the seventh defendant, which was separately represented.

Background to the FM Contract

Formation of the Consortium

14. In early 2006, the government in Singapore, acting through the Ministry of Community Development, Youth and Sports and through the Singapore Sports Council (later, Singapore Sport) (the SSC), invited private sector bidders to submit prequalification responses for the Project, which Premas, Dragages and HSBC did on 22 February 2006. Subsequently, on 9 February 2007, the three bidders entered into a memorandum of agreement (the Consortium Agreement) under which they formed the Consortium to bid for the Project. Later, Global Spectrum joined the Consortium, and on 20 November 2007, the Consortium Agreement was amended to reflect its participation. In the meantime, the Consortium lodged its final bid on or about 8 November 2007.

15. The Consortium Agreement contemplated that if the parties’ bid was successful, they would establish a special purpose company (which became SHPL) to contract with the SSC. It was also agreed that SHPL would contract with Dragages to undertake the construction work for the Project and with Premas to undertake the management of the facilities over the life of the Project, which was expected to be 25 years. Under cl 2.1.2, Premas was responsible for the preparation of the submissions relating to “the management, maintenance and the life cycle of the Project” and the risks relating to those matters were to be allocated to what became the FM Contract. Clause 6.2 stated that it was the intention of the parties that each contract entered into with the project company (that is, SHPL) would be “back-to-back” with the Project Agreement between SHPL and the SSC.

16. A side letter dated 21 December 2007 (the Sports Hub Side Letter) recorded that each party would bear “its own costs arising in connection with the preparation, submission and negotiation of the Bid up to Financial Close, except as provided for in this Side Letter…”. The Sports Hub Side Letter also provided that external bid costs and certain of Dragages’s costs would be shared in the following proportions:

Dragages:	1/4
HIF [HSBC]:	1/2
UPREMAS [Premas]:	1/4
GS [Global Spectrum]:	0

Paragraph 1.3.2 of the Sports Hub Side Letter stated that the “costs to be incurred up to [the] preferred bidder stage … are a capped budget of SGD 3,000,000”. Paragraph 1.3.7 stated that:

The Parties intend to procure adequate funds in the financing of the Project as to allow the reimbursement of Parties’ Bid costs upon Financial Close, subject to the Bid being successful.

17. Before the Consortium submitted its final bid, there were negotiations between its members on the terms of the bid. As part of those negotiations, on 3 October 2007, Premas provided Dragages and HSBC with a pricing model for the services it would be responsible for providing, and on 5 October 2007 it provided a summary of the key features of that model. Relevantly, the model and letter contemplated that there would be two ways in which Premas’s fees would increase over the life of the contract. One was by reference to market every five years (which was described by the parties as a “benchmarked period”). The other was an annual increase which in the case of Labour was stated to be “CPI + 2.5% up to 1^st benchmarked period and CPI thereafter” and in the case of Material was stated to be “CPI + 1.0% up to 1^st benchmarked period and CPI thereafter”.

Appointment of the Consortium as the preferred bidder

18. In January 2008, the Consortium was appointed the preferred bidder. The terms of the Consortium’s final bid are not in evidence, but it seems clear from subsequent events that those terms did not include an increase beyond CPI for the annual increases in fees to be charged by Premas for the services it would provide. How that came about — that is, how it came about that the Consortium tendered on the basis that increases in the fees for services to be provided by Premas would be limited to increases in CPI in the first benchmarked period — is not explained by the evidence.

Developments leading to financial close

19. There was a substantial delay in finalising the terms of the contract between the SSC and SHPL, caused primarily by difficulties the Consortium was having in raising financing because of the global financial crisis that developed in 2008.

20. Two issues that came up between the Consortium members during the period from January 2008 to “financial close” (that is, the signing of a project agreement with the SSC), which occurred on 24 August 2010, were the recovery of bid costs and compensation that Premas sought because it would not be able to increase the fees for the services it provided in the first benchmarked period beyond increases in the CPI.

21. In relation to the compensation for bid costs, the SSC had agreed to make a contribution towards the bid costs at the time of financial close. However, it became apparent that the external bid costs to be shared between the members of the Consortium and Premas’s internal bid costs were and would be substantially more than budgeted for at the time the parties agreed the Sports Hub Side Letter and substantially more than the amount to be paid by the SSC in respect of them. The payment of the bid costs was the subject of discussion and correspondence between the members of the Consortium. As I have explained, it was originally anticipated that those costs would be reimbursed out of funding to be raised by the Consortium for the Project. However, the Consortium was successful in persuading the SSC to increase its contribution to the bid costs to the point where Premas thought that there might be a small surplus compared to budget, which would be shared by members of the Consortium in proportion to their contributions to external costs.

22. In relation to indexation, it is unclear how this topic came up. It appears to have been raised by Premas with the other members of the Consortium in negotiations concerning the financial adjustment that was to be made between the members of the Consortium at the time of financial close. It was Premas’s position that it had always sought indexation above CPI during the first benchmarked period, that because of the delay in financial close the amount it would forgo by giving up indexation on that basis had increased, and that it should be compensated by the other members of the Consortium for that loss.

19. The issue was apparently discussed at meetings on 9 and 14 December 2009, following which Premas circulated a note titled “FM Fee Indexation” to the other members of the Consortium in which it claimed that its total loss on indexation if financial close occurred in April 2010 was SGD17.41 million. That amount comprised an amount of SGD11.02 million, which was calculated on the basis that the 5-year period over which indexation above CPI would have been applied, if Premas had got its way, commenced on the day of “Final Clarification” of Premas’s position (to use Premas’s terminology), which was the day Premas sent its letter dated 5 October 2007. It also included an amount of SGD6.39 million, which was calculated as the additional loss that would arise on the assumption that the 5-year period ran not from 5 October 2007 but from April 2010 (the expected date of financial close).

20. There is no direct evidence that other members of the Consortium accepted Premas’s claim. However, in a United Group board paper dated 18 April 2010 seeking formal approval to enter into the relevant agreements, including the FM Contract, there is a table showing projected cashflows for the first five years of the FM Contract which shows an inflow in each of the first three years of SGD4.0m that is described as “FM Indexation”. A note to that item records:

FM Indexation has now been finalized and [SGD]12M will be paid in 3 tranches at months 6, 18 and 30 post FC vs earlier GTC amount of [SGD]11.02m at POD.

Financial close and the terms of the FM Contract

25. Financial close in fact occurred on 24 August 2010. As I have explained, for that purpose the Consortium established SHPL, which entered into a contract with the SSC (the Project Agreement) to construct the Project and to manage it for a period of 25 years. SHPL in turn entered into the FM Contract on 24 August 2010 with Premas to enable SHPL to discharge its obligations under the Project Agreement to manage the facilities over the life of that agreement.

26. The scope of the work to be undertaken by Premas was set out in a Services Specification: cl 20.1 of the FM Contract. Under cl 26.1, Premas was entitled to be paid a Monthly Payment for that work calculated in accordance with Schedule 19 together with an amount of SGD2,650,000 as a fee for equipment and an amount of SGD1,710,000 for set up costs. Both those amounts were payable in three equal monthly instalments immediately preceding the scheduled Project Operation Date (POD).

27. The monthly payment had several components including a Monthly Services Payment and a Monthly Lifecycle Payment (a payment in respect of Premas’s obligation to maintain and replace plant and equipment over the life of the FM Contract). The base annual service payment was stated to be SGD1,932,598 during the Transition Period (defined as the period between the date the conditions precedent to the FM Contract were satisfied and POD) and SGD14,891,449 thereafter. Schedule 19 to the FM Contract made provision for various deductions to be made from the monthly payment in respect of the unavailability of part of the facilities during the month or the failure of Premas to meet certain performance criteria set out in the FM Contract during that month. It also provided for annual increases in the monthly payment by reference to increases in the CPI.

28. Consistently with the basis on which the Consortium tendered for the Project, the FM Contract also contained a benchmarking regime in Schedule 17 which was to be applied every five years. The purpose of that regime was stated to be to determine whether Premas “is being paid a fair market price for the FM Benchmarked Services”: paragraph 2.2 of Sch 17. “FM Benchmarked Services” is defined to mean “the Car Park Management Services, Cleaning Services, Help Desk Services, Security Services, and any other Service or cost from time to time designated as such by the parties.” Paragraph 1 of Schedule 17 states that “[t]he parties agree that any Benchmarking shall be carried out in good faith and each party shall act reasonably in relation to any such Benchmarking.”

29. The benchmarking regime is complicated, but essentially it involves two stages. The first involves Premas comparing “the standards, specifications, scope and prices of the FM Benchmarked Services with the standards, specifications, scope and prices of the Comparable Services”: paragraph 2.3 of Sch 17. “Comparable Services” is defined to mean “(a) services delivered to the same or comparable standards as the FM Benchmarked Services; and/or (b) services carried out and performed under existing agreements between financially sound and reputable parties on comparable commercial terms to agreements made under or in accordance with the PPP or equivalent procedure.” Premas was then entitled to submit a proposal to SHPL for delivery of the Benchmarked Services “and the consequent adjustment of the Service Payment required to reflect” the results of the benchmarking. Under paragraph 3.2, SHPL is required to indicate which of Premas’s proposals in relation to the services the subject of benchmarking are acceptable to the SSC and which are to be “Market Tested”. In the case of the former, the Schedule provides a mechanism for amending the terms on which the services are provided. In the case of the latter, the Schedule provides a mechanism for the market tested services to be put out to tender and gives SHPL a right to accept a tender that is more favourable than the terms proposed by Premas based on benchmarking. In that event, the relevant services are excluded from the FM Contract and the fees payable under the FM Contract are adjusted accordingly. The Project Agreement contains corresponding provisions and, in practice of course, the outcome of benchmarking will be determined by the application of the provisions in that agreement.

The Sale Agreement

30. On 24 August 2010, SHPL and Premas also entered into an agreement (the Sale Agreement) by which Premas agreed to transfer “all its rights and obligations in respect of the Development Works, including the right to enter into the Project Agreement and the legal and economic ownership for the rights to the Development Works”. The “Development Works” were defined in Recital A as “certain development works [undertaken by Premas] in relation to the Project and to facilitate the entering into of the Project Agreement”. By cl 2.2, SHPL agreed to pay Premas a Development Fee of SGD6,396,337. Clause 3.1 provided:

In addition to the payment of the Development Fee, the Company [that is, SHPL] also agrees to reimburse Premas for all of its internally and externally incurred costs and expenses.

The Side Letters

31. The day after financial close (that is, on 25 August 2010), Premas was sent two letters (the Side Letters). One was from SHPL (the SHPL Side Letter) by which SHPL acknowledged that Premas “is entitled to be paid an outstanding amount of S$1,000,000 being reimbursement of costs incurred during the bid development phase of the Singapore Sports Hub.” The letter stated that that amount would be paid on an invoice to be issued by Premas “thirty months after Condition Satisfaction Date” subject to Premas not being in default under the FM Contract.

32. The second letter was from Dragages (the Dragages Side Letter). It was countersigned by Premas, which accepted that by counter-signing the letter it agreed “to also comply with and be bound by its terms.” The letter was in the following terms:

Terms defined in the Project Agreement between Singapore Sports Council and SportsHub Pte Ltd dated on or about the date of this letter have the same meaning when used in this letter.

Dragages Singapore Pte. Ltd (Dragages) acknowledges that United Premas Limited (Premas) has provided assistance to it in reaching financial close for the Singapore Sports Hub Project. The assistance provided by Premas includes design consultation, facilities management advisory services and review of documents and equipment. In consideration for this assistance, Dragages agrees to pay Premas the following amounts on or before the following dates:

•   S$3,400,000 to be invoiced to Dragages by Premas six months after the Conditions Satisfaction Date;

•   S$4,000,000 to be invoiced to Dragages by Premas eighteen months after the Conditions Satisfaction Date;

•   S$3,000,000 to be invoiced to Dragages by Premas thirty months after the Conditions Satisfaction Date.

These payments will be made unconditionally to Premas by Dragages twenty days after submission of an invoice from Premas to Dragages in respect of each payment with the addition of applicable GST, subject to the FM Contract between SportsHub Pte Ltd and Premas on or about the date of this letter (FM Contract) not being terminated or in default (in either case only for FM Contractor Events of Default (as defined in the FM Contract)) and there being no FM Contractor Events of Default subsisting at the time of invoicing, then that payment requirement of Dragages shall be deferred until the relevant default is cured or waived in accordance with the FM Contract.

Premas must promptly repay to Dragages, amounts paid to it under this letter to the extent the FM Contract is terminated for FM Contractor Events of Default on or prior to the first Testing Date (as defined in Schedule 17 of the FM Contract), in accordance with the following (up to a maximum of the amount it has received from Dragages pursuant to this letter to that date):

FM Contractor Events of Default termination date	Premas repayment
Pre Project Operation Date (POD)	S$8,000,000
Between POD and first anniversary of POD	S$7,500,000
Between first anniversary of POD and second anniversary of POD	S$6,000,000
Between second anniversary of POD and third anniversary of POD	S$4,500,000
Between third anniversary of POD and fourth anniversary of POD	S$3,000,000
Between fourth anniversary of POD and fifth anniversary of POD	S$1,500,000

…

33. The circumstances in which the Side Letters came to be sent are not entirely clear. It appears that the SHPL Side Letter was drafted by HSBC. As the Joint Defendants point out in their opening written submissions, there is a Premas Excel spreadsheet which indicates that Premas’s total expected bid costs up to financial close were SGD8.25 million of which it expected to recover SGD7.11 million at financial close, leaving a shortfall of SGD1.15 million, which may well explain the purpose of the letter. However, that explanation is not consistent with some of the correspondence in relation to the Dragages Side Letter.

34. As to the Dragages Side Letter, on 14 August 2010, Mr Zac Kerr, a senior associate with Freehills, the solicitors acting for Premas, sent an email to representatives of Dragages saying:

Apparently you are to pay us about $12m at close re indexation amounts. Is this correct? Do you have a form of side letter prepared for this or should we prepare?

The SGD12 million obviously corresponded to the amount that the United Group board had been told would be recovered in respect of indexation.

35. Mr Bruno Castaignet of Dragages responded that same day saying:

This is slightly different

3 equal payments at months 6, 18, 30

The money from DSPL is 10,390k only (the rest will come from the bid cost provision)

wrt DSPL, we need more than a side letter, we need a contract which should “justify” such an amount

36. In response to that email, Mr Stewart Walters, an employee of the United Group (who had been copied in on the earlier emails) sent an email on 16 August 2010 saying:

If a side letter will not suffice, what is proposed? Including this in the Interface? [a reference to a further agreement between the parties known as the Interface Agreement, which governed the rights and obligations of Premas and Dragages between themselves]

So the $10.39M Dragages will pay Premas $10.39M in 3 tranches as follows $2.39M 6 months post FC [financial close], $4M 18 months post FC and $4M 30 months post FC.

The balance of $1.61M will be, I understand, funded by PPP Co and Teresa has included this in the SHA Close out Costs.

Although it had initially been proposed that SHPL would pay Premas SGD1.6 million, that was reduced to SGD1 million shortly before financial close because of what was said to be a “double counting” that had been picked up by HSBC. It is apparent from the correspondence between the parties that the “double counting” related to an issue concerning the calculation of the value of indexation above CPI over the period in issue.

37. Following correspondence between the parties, on 22 August 2010, Mr Ludwig Reichhold, managing director of Dragages, sent HSBC and Mr Walters a draft of the Dragages Side Letter, which recorded that:

Dragages Singapore Pte Ltd acknowledges its commitment to confirm an order to Premas … to provide assistance with the review of documents and equipment and with attendance of testing and commissioning during the construction stage of the Singapore Sports Hub. This order will be placed within 45 days of the Conditions Satisfaction Date…

How the letter came to be drafted in those terms is not explained by the evidence.

38. An amended draft of the letter was circulated by Premas on 23 August 2010. That version simply recorded that:

Dragages Singapore Pte Ltd (DRAGAGES) acknowledges THAT UNITED Premas LIMITED (PREMAS) HAS provided assistance TO IT IN REACHING FINANCIAL CLOSE FOR the Singapore Sports Hub PROJECT. IN CONSIDERATION FOR THIS ASSISTANCE, DRAGAGES AGREES TO PAY PREMAS THE FOLLOWING AMOUNTS ON OR BEFORE THE FOLLOWING DATES …

39. Commenting on that draft, Mr Reichhold said in an email of the same date:

I am afraid that a payment of $10m for “assistance” is not something which can be credibly justified.

We have to put more meat into it. I don’t want to go to jail at my age…

40. Mr Walters responded to that email saying that he had had a conversation with Mr Castaignet nearly a week ago in which Mr Castaignet had “articulated a concern as to the level of documentation in order to meet Bouygues governance rules” and that he understood Dragages would “put together draft wording that was more comprehensive and would meet DSPL needs.”

41. On the same day, Mr Walters raised the question “why don’t you move the $10M to a payment by PPP Co [that is, SHPL] to Premas rather than the long hand PPP Co to DSPL to Premas?” The response to that query from HSBC was “[t]he money is in the capex”. Mr Walters accepted that response and indicated that the revised wording would be sent “any second now”. It appears from this exchange that the parties had allowed for the payment to Premas as part of the capital costs of Dragages undertaking the construction work.

Developments after financial close

42. Following financial close, work commenced on the Project and continued throughout the period from 2011 to 2014.

43. In early 2011 there was internal correspondence within Premas concerning the accounting treatment of the payments due to it under the Side Letters. It is apparent from that correspondence that the matter was also discussed with Premas’s auditors, KPMG. In an email dated 21 February 2011 from Mr John Chng, the Commercial Director of Premas, to Mr Walters, Mr Chng said:

Spoke to Jaslyn [that is Ms Jaslyn Chan, the chief financial officer of Premas].

She confirmed that KPMG has seen the Dragages letter as well as the HSBC letter.

Although the contents of the letter make no mention of indexation, Jaslyn says that KPMG are prepared to accept that the payments to Premas are with respect to indexation and facilitated thru the letter. KPMG have also met with Bruno (together with Jaslyn and Teresa) where Bruno also communicated to this [sic] to KPMG.

KPMG has also seen the one pager which we (Premas) had sent to the consortium where we provided our calculation of the indexation amount.

44. Mr Walters replied on the same day saying that “[t]his will make arguing a case for a different treatment with the auditors much harder.” In an email sent approximately one and a half hours later, Mr Walters said:

-   We should meet with KPMG sooner rather than later

-   We will argue that the letters represent the recompense we will get from Dragages for providing design input etc (ie linking past and future work during construction, hence the payments schedule)

-   We will note that the indexation was a negotiating tactic used by us but the core driver was to gain payment for our contribution to design etc - we can point to existing indexation provisions in the contract which should be sufficient - we can note that Jaslyn was not in the meetings (nor was Bruno) but was [sic] conducted between me and Cathy and Ludwig and Mark …

45. It appears that that position was put to, and was accepted by, KPMG. It was confirmed in August 2011 by Dragages in response to audit confirmation letters that KPMG sent it. In the meantime, in late February 2011, Premas sent Dragages an invoice for the first instalment of the amount payable under the Dragages Side Letter. The invoice was paid on or about 20 March 2011. The accounting ledgers are not available for the relevant years, but it is reasonable to infer that the Side Letter Payments were accounted for consistently with the terms of the Side Letters — that is, they were treated as income for services provided previously or in the relevant years.

46. Premas issued further invoices to Dragages on 24 February 2012 and 24 February 2013 for SGD4 million plus GST and SGD3 million plus GST respectively. The first of those invoices was paid on 7 March 2012, and the second was paid on 1 March 2013. On 24 February 2013, Premas also issued an invoice to SHPL for SGD1 million, which was paid on 22 March 2013.

Background to the SSA

47. DTZ was incorporated in the first half of 2014 by a consortium (the TPG Consortium) made up of TPG Global LLC (which, together with its affiliates including Asia VI SF Pte Ltd, is referred to as TPG), PAG Asia Capital (which, together with its affiliates including PAG Asia One LP, is referred to as PAG) and Ontario Teachers’ Pension Plan Board (OTPP) for the purpose of bidding for the shares in the DTZ Group with the intention of combining the DTZ Business with the business carried on by Cushman & Wakefield (C&W). C&W was a privately owned property services group which had a large operation in the United States and a smaller operation in Asia. TPG is a private investment firm and PAG is described as “alternative investment managers” with a focus on Asia. The project of seeking to acquire the DTZ Business was referred to by TPG and PAG as “Project Drone”.

Initial offers and due diligence

48. TPG and PAG had made an unsolicited offer in November 2013 to acquire the DTZ Business, but that offer had been rejected. However, in February 2014, the United Group announced that it would conduct a sales process for the DTZ Business.

49. On 13 March 2014, Goldman Sachs, the United Group’s financial adviser, invited TPG and PAG to submit a non-binding indicative offer for the DTZ Business by 21 March 2014. The letter enclosed a slide deck recording financial information about the DTZ Business.

50. On 21 March 2014, TPG and PAG accepted that invitation and submitted a non-binding indicative offer for “A$1.325 billion to A$1.375 billion, or 12.0x to 12.5x normalized FY14E EBIT”. The reference to “normalised FY14E EBIT” was a reference to the normalised FY14 EBIT in the slide deck provided by Goldman Sachs, which was stated to be $110.1 million.

51. Between 31 March 2014 and 16 May 2014, TPG and PAG conducted due diligence on the DTZ Business. At that time, OTPP joined the TPG Consortium.

52. As part of the due diligence, the TPG Consortium was provided with access to a physical data room (consisting of 12 documents) and a virtual data room (consisting of many more). There was also a management presentation on 12 April 2014 in Los Angeles which was attended by several representatives of the TPG Consortium. The management presentation was accompanied by a 136-page slide deck titled “DTZ management presentation”. The slide deck contained some information in relation to the FM Contract. Included in the virtual data room was a financial and tax vendor due diligence report prepared by KPMG titled “Project Fission” dated 2 April 2014 (the KPMG Report). The KPMG Report contained a reconciliation of the reported EBIT and EBITDA for FY13 to normalised EBIT and EBITDA for that year to remove certain non‑recurring items and add standalone costs reflecting costs that would be incurred by DTZ after it ceased to be part of the United Group. The due diligence material also contained consolidated management accounts for FY11, FY12, FY13 and FY14 to 31 March 2014. The data room also included a long question and answer document.

The final offer

53. On 16 May 2014, the TPG Consortium submitted its “final” offer to acquire the DTZ Business from the United Group on a debt and cash free basis for a price of $1.1 billion. The offer letter explained that that amount was calculated as 12.6 times the projected FY14 maintainable EBIT of $87.1 million. The figure of $87.1 million had been derived by PricewaterhouseCoopers (PwC), who had been retained as financial advisors to the TPG Consortium. The offer letter explained that that figure was arrived at by taking management’s projected normalised EBITDA for FY14 and making several specific adjustments (that had been recommended by PwC) to arrive at a projected EBITDA of $111.6 million and projected EBIT of $87.1 million. The specific adjustments are not relevant to the issues in this case.

54. The letter also explained that the offer had assumed that the maintainable EBITDA for the quarter ended 30 June 2014 was $47.7 million and that, to the extent that that was not achieved, “the purchase price would be adjusted in the SPA [that is, the SSA]”. The letter also made it clear that the price would need to be adjusted for “movements in working capital against a target working capital and target retained cash at completion pursuant to a completion accounts process”.

55. Following negotiations between the parties, the bid price was increased by $15 million and then, in discussions on 24 May 2014 and the morning of 25 May 2014 involving Mr Trevor Rowe, the Chairman of UGL Limited, and Mr Ed Wittig, the managing director of Goldman Sachs, among others, by a further amount of $100 million. Following those discussions, Mr Ben Gray, who at the time was the joint Head of Asia at TPG, sent an email on 25 May 2014 in response to an email he had received from Mr Wittig confirming that a price of $1,215 million was acceptable to the United Group. There is no suggestion that the additional amount had a logical foundation, other than that it was a price that the TPG Consortium was willing to pay and the United Group was willing to accept if the details of the agreement could be sorted out, although as internal TPG Consortium documents reveal, that price represents 10.9 times the projected maintainable EBITDA for FY14 of $111.6 million.

The SSA

56. The SSA was signed on 14 June 2014.

57. By cl 10.1 of the SSA, completion was to occur on the later of 30 June 2014 or five business days after satisfaction or waiver of the conditions in cl 2.1. Completion, in fact, occurred on 5 November 2014.

58. Clause 11.1 provides:

Warranties by the Sellers

Subject to the qualifications and limitations in clause 12, the Sellers represent and warrant to the Buyer that each Warranty is true in all respects:

(a)   in respect of each Warranty that is expressed to be given on a particulate date, on that date; and

(b)   in respect of each other Warranty, on the date of this agreement and immediately before Completion.

59. Clause 12.1 states that “[t]he Buyer acknowledges and agrees that … the Buyer is aware of, and will be treated as having actual knowledge of, all facts, matters and circumstances that … are fairly disclosed in the Disclosure Materials or fairly disclosed in the Disclosure Letter”. “Disclosure Materials” is defined to include the material contained in the physical and virtual data rooms and all written answers to written questions submitted by DTZ.

60. Under cl 12.1(c), “the Buyer must not make a Claim under the Warranties … and the Sellers will not be in breach of a Warranty … if the facts, matters or circumstances giving rise to such Claim are disclosed or are deemed to have been disclosed under clause 12.1(a).”

61. Clause 12.2 provides:

Awareness

Where a Warranty is given ‘to the best of the Sellers’ knowledge’, or ‘so far as the Sellers are aware’ or with a similar qualification as to the Sellers’ awareness or knowledge, the Sellers’ awareness or knowledge is limited to and deemed only to include those facts, matters or circumstances of which a Specified Executive is actually aware as at the date on which the Warranty is given and of which they would have been aware had they made reasonable enquiries.

“Specified Executive” is relevantly defined to include Mr Henry Arundel, who is described as “Chief Executive – Asia Pacific”.

62. Clause 12.4 provides:

Opinions, estimates and forecasts

The parties acknowledge that no Seller Group Member is under any obligation to provide any Buyer Group Member or its advisers with any information on the future financial performance or prospects of the Target Group Entities. If a Buyer Group Member has received opinions, estimates, projections, business plans, budget information or other forecasts in respect of the Target Group Entities, the Buyer acknowledges and agrees that:

(a)   there are uncertainties inherent in attempting to make these estimates, projections, business plans, budgets and forecasts and the Buyer is familiar with these uncertainties;

(b)   the Buyer is taking full responsibility for making their own evaluation of the adequacy and accuracy of all estimates, projections, business plans, budgets and forecasts furnished to it; and

(c)   the Sellers are not liable under any Claim arising out of or relating to any opinions, estimates, projections, business plans, budgets or forecasts in respect of the Target Group Entities.

Nothing in this clause 12.4 limits or derogates from the Buyer's representations and warranties in clause 12.3 or the Sellers' reliance on those representations and warranties.

Clause 12.3 contains extensive warranties given by DTZ to the effect that it has not relied on any representations apart from the warranties contained in the SSA.

63. Clause 12.5 states that “[t]he Sellers are not liable under a Claim arising from a breach of Warranty … unless the amount finally agreed or adjudicated to be payable in respect of that Claim … exceeds $500,000 … and either alone or together with [other amounts] exceeds the retention under the W&I Policy”.

64. Clause 9 requires the parties to cause “Q4 2014 EBITDA Accounts” to be prepared in accordance with Schedule 19 to the SSA and “Completion Accounts” to be prepared in accordance with Schedule 20. The SSA and Schedules contain provisions for adjustment to the purchase price to be made depending on the final EBITDA for the fourth quarter of FY14 (compared to the projected EBITDA for that quarter), the extent to which the Completion Accounts Working Capital is different from the Target Working Capital (as defined), and whether Retained Cash (as defined) is less than or greater than zero. Schedules 19 and 20 set out how the two sets of accounts are to be prepared, including relevant materiality limits. Both schedules provide a mechanism for either party to challenge the accounts, and both provide that neither party may challenge an individual line item where the amount of the dispute is less than $200,000.

65. The warranties given by the United Group under the SSA are set out in Schedule 2. They include the following:

3.1   Basis of Preparation

The Accounts:

(a)   have been prepared with due care and attention and there is no material misstatement in:

(1)    the financial position and state of affairs of the Target Group Entities at the Accounts Date [31 March 2014]; and

(2)    the financial performance of the Target Group Entities for the period from 1 July 2013 to the Accounts Date [31 March 2014];

(b)   were prepared in accordance, [sic] with the same accounting policies as were applied in the preparation of the management accounts of the Target Group Entities in the previous 12 months; and

(c)   are not misleading or deceptive in any material respect (but having regard to the fact that they were prepared for management purposes and are unaudited and do not contain the notes and other inclusions that would be included in audited accounts).

3.2    Position since Accounts Date

Since the Accounts Date [31 March 2014]

(a)   …

(b)   so far as the Sellers are aware, there has been no event, occurrence, fact or circumstance affecting the business, assets, condition (financial or otherwise), liabilities, results of operations of the Target Group Entities which may have a Material Adverse Effect upon the Target Group Entities or the Business;

…

3.3   KPMG Report

(a)   All information that the Sellers provided to KPMG for the purposes of the reports in Data Room folder 0.1.07 [sic] (KPMG Reports) is factually accurate.

(b)    The Sellers have reviewed the contents of the KPMG Reports for any factual inaccuracies or the omission of any material facts or information.

(c)    So far as the Sellers are aware, the reports in Data Room folder 01.07 are true and accurate in all material respects.

…

3.5   Basis of Preparation

The Historical Accounts:

(a)   have been prepared with due care and attention and there is no material misstatement in:

(1)   the financial position and state of affairs of the Target Group Entities at the relevant dates as at which the Historical Accounts were prepared; and

(2)   the financial performance of the Target Group Entities for the relevant periods in respect of which the Historical Accounts were prepared; and

(b)   are not misleading or deceptive in any material respect (but having regard to the fact that they were prepared for management purposes and are unaudited and do not contain the notes and other inclusions that would be included in audited accounts).

…

13.1   Disclosure

(a)    So far as the Sellers are aware, the historical and factual information concerning the Business prepared by or on behalf of the Sellers and contained in the Disclosure Materials is accurate in all material respects.

(b)   The Sellers have not included any such information in the Disclosure Materials that they are aware is misleading in any material respect, and, so far as the Sellers are aware, no such information has been omitted from the Disclosure Materials that would render the Disclosure Materials misleading in any material respect.

(c)   The Disclosure Material was prepared in good faith for the purpose of informing prospective buyers of the Sale Securities about the Sale Securities, the Target Group Entities and the Business.

(d)    The Sellers have not knowingly withheld material information from the Disclosure Materials.

66. “Accounts” is defined in the SSA to mean “the consolidated management balance sheet of the Target Group Entities as at the Accounts Date [31 March 2014] and the consolidated management profit and loss account of the Target Group Entities for the period ended on [31 March 2014]”. “Historical Accounts” is defined to mean “the consolidated management balance sheets of the Target Group Entities as at 30 June 2012 and 30 June 2013, and the consolidated management profit and loss accounts of the Target Group Entities for the period ended on 30 June 2012 and 30 June 2013.”

67. “Material Adverse Effect” is relevantly defined to mean “… any event, change, circumstance or effect that, either alone or in combination with other such events, changes, circumstances or effects, has a material adverse effect on the business, operations, prospects, assets, liabilities, financial condition or results of operations of the Target Group Entities taken as a whole…”.

The W&I Policy

68. The substantive terms of the W&I Policy are set out in the primary policy dated 14 June 2014 between AIG and DTZ (which is referred to in the policy as “Drone Bidco Limited”).

69. Under the term of the W&I Policy, the insurers agreed to “indemnify the Insured for, or pay on its behalf, any Loss”: cl 2.1. “Loss” is relevantly defined in cl 4.1(a) of the policy to mean:

[T]he amount of any loss, cost, charge, damage, liability, expense, damages or diminution in value of any kind which the Insured or any member of the Buyer Group or Target Group: (i) is entitled to claim against any Seller pursuant to the Acquisition Agreement in respect of that Breach or to recover under the Insured Indemnity; or (ii) would have been entitled to claim against any Seller pursuant to the Acquisition Agreement in respect of a Breach or to recover under the Insured Indemnity if the Seller had been liable to the Insured under the terms of the Acquisition Agreement, notwithstanding any materiality qualifier in the Acquisition Agreement and in each case disregarding the qualifications and limitations on liability set forth in the Limitation Provisions.

“Limitation Provisions” is defined to mean certain provisions of cl 12 of the SSA, including cl 12.5. However, cl 4.9 of the W&I Policy provides that “the Insurer shall have no liability under this Policy in respect of a Loss unless the amount of that Loss is in excess of the De Minimis in which case the full amount of such Loss shall be recoverable and not merely the amount which exceeds the De Minimis”. “De Minimis” is relevantly defined to mean $500,000.

70. The effect of these provisions is that the insurers are liable, subject to a deductible of $12.5 million and to their respective policy limits, to pay the amount that DTZ would, but for the limitations contained in cl 12 of the SSA, have been entitled to recover under the SSA from the United Group provided the amount claimed under the W&I Policy exceeds $500,000.

71. “Breach” is defined to mean:

(i) any breach or inaccuracy of any of the Insured Warranties or (ii) any circumstance which gives rise to [a] right of recovery under an Insured Indemnity (including any New Breach other than any Excluded New Breach), provided that any reference to materiality or Material Adverse Effect in any Insured Warranty or Insured Indemnity shall be disregarded and the Insured Warranties and Insured Indemnities shall be construed without regard to any such materiality or Material Adverse Effect qualifiers contained therein.

“Insured Warranties” is relevantly defined to include all the warranties set out in Schedule 2 to the SSA, other than Warranty 3.3(a) and one other warranty (Warranty 8.7(g), which is irrelevant for present purposes).

Relevant developments with the Sports Hub Project

72. POD for the Project was expected to occur in March 2014, but it was delayed for several months and did not in fact occur until 2 July 2014, shortly after the SSA was signed.

Capitalisation of mobilisation costs

73. In anticipation of POD in March 2014, Premas, in the second half of 2012, put together a senior management team “to provide an interface with Dragages over the design and construction of the facilities, as well as, [sic] develop operating policies and procedures” (to quote from a memo dated 16 July 2013 prepared by Mr Vivienne Selzer, who at the time was the Executive General Manager, Finance, Australia, New Zealand and South East Asia of UGL Pty Limited). According to Mr Selzer’s memo, KPMG Singapore had advised Premas that the costs incurred in developing policies and procedures should be capitalised, on the basis that their purpose was “to mitigate abatements that DTZ may potentially suffer”. Mr Selzer’s memo says that, for the purposes of estimating those costs, the “Sports Hub team” had been asked to estimate the time spent developing and documenting policies and procedures. The estimate was they had spent SGD503,000 worth of time between October 2012 and June 2013 “purely on documenting Procedures & Policies”. In addition, members of the team estimated that for every hour they spent documenting policies and procedures, they spent a further hour in “reading operating manuals & building plans, interacting with stakeholders and researching best practice”. On that basis, Mr Selzer sought approval to capitalise SGD1,006,000 of total staff costs of SGD1,932,000 in the period October 2012 to June 2013 in the FY13 accounts (with the rest to be “booked in FY2013 P&L”). In addition, Premas expected to be reimbursed an amount of SGD1,710,000 for its mobilisation costs under the FM Contract of which SGD926,000 was brought to account in FY13. Mr Seltzer’s memo also indicated that Premas expected to incur total staff costs between October 2012 and March 2014 of SGD5,069,000, of which it was proposed to capitalise SGD2,639,000.

74. In fact, according to extracts of a general ledger balance, by 31 March 2014 Premas had capitalised a total amount of SGD3,226,390.94 described as “Sportshub mobilisation”. It capitalised a further amount of SGD23,835.09 in April 2014.

Cleaning

75. Another issue that had to be addressed in advance of the commencement of operations was cleaning. At some stage in 2013 the cleaning work was put out to tender. On that topic, Mr Jun Sochi, who was the Chief Executive of Premas between mid-December 2012 and early 2020 and who gave evidence for DTZ (he is still employed by DTZ’s now parent, C&W), sent an email to Mr Arundel dated 17 December 2013 in which he said:

… The revised bids from cleaning suppliers are S$2.5M per year higher than the financial model (including indexation). And this is after renegotiations, clarifications, and scope adjustment with each supplier. Essentially, this would put the PPP at a loss. The team will continue to work to get the bids lower by looking at further reduction of scope by focusing the cleaning efforts in public areas where cleanliness will be more visible. By reducing the cleaning scope too much, we start risking KPI penalties. Most of the other bids for other services – ie security, landscape, etc. have been close or within the financial model estimates. There have been changes in the labor regulations and the government has increased the monthly levies for foreign labor that are impacting the bids, therefore, we will appeal to the consortium for adjustment in our cleaning fee due to changes in government regulations.

76. What, however, became of this issue is not entirely clear from the evidence. A cleaning contract was signed. It appears that costs were reduced substantially so that they were close to budget by reducing the number of cleaners from a budgeted 81 to 48. However, on 2 October 2014 Mr Sochi sent Mr Arundel an email in which he said:

[We] [w]ill need to increase the number of cleaners to achieve the required cleaning standard. In order to stay close to our cleaning budget, we have requested 44 cleaners to be assigned to the Sports Hub. In 2010, DTZ had estimated that we require upwards of 80 cleaners, however, levy increases and progressive wage scheme has significantly increased the cost of cleaners. We have re-submitted a request to SHPL to re-consider our change in law case. Also, we have applied [for] and received a grant from the government for a subsidy to offset some of the increased cost for cleaning due to the new progressive wage scheme. We will phase-in the increased cleaning manpower and ramp back down once we can get the Sports Hub venues and precincts to an acceptable cleaning standard. John Kennedy will also provide insight on the appropriate cleaning headcount for the Sports Hub; efficient use of unskilled labor; and productivity gains through machinery and cleaning strategies. We are likely to see deductions in our monthly fee for not achieving some of the KPIs related to cleaning in August and September.

The reference to a “change in law case” was a reference to a claim that Premas had made under cl 31.2 of the FM Contract for an adjustment of the Monthly Service Payment based on a “Relevant Change in Law” arising from a change in Singaporean labour regulations. The SSC had rejected a claim under that clause in June 2014.

77. Cleaning continued to be an issue at least up until the time of completion of the SSA on 5 November 2014. So, for example, a presentation dated 31 October 2014 for the “DTZ PPP Australia Team”, which outlined a strategy to improve performance in relation to the FM Contract, stated: “DTZ Supervision to be implemented of the cleaning contractor, a review of the resourcing model to be undertaken…”.

Preparation of assets register

78. A third issue was the preparation of an assets register. That register was important to enable Premas to track the assets comprising the Project and to plan maintenance and replacement schedules, which were also important for budgeting. According to Mr Sochi, he was involved in establishing the TAM [Total Asset Management] Singapore Sports Hub Steering Committee in or around February 2013, which met monthly and was responsible for overseeing the creation of a database to track and manage the Sports Hub assets for which Premas was responsible. Mr Sochi points to presentations to the committee in October 2013 and March 2014 which indicate that there were delays in undertaking that work. For example, the report for March indicated that Premas was still waiting to receive (from Dragages) information concerning the ELV System (which included the CCTV and card access systems), the plumbing system and what is referred to as Venue Specified Equipment. According to evidence given by Mr Sochi, the absence of an asset list from the Dragages team “throughout 2014 and into 2015” meant that he could not be confident that the budget for lifecycle costs was adequate, which was a matter that he discussed informally with Mr Arundel from time to time.

Pitch quality

79. A fourth issue that arose was the poor quality of the pitch in the main stadium. The pitch was delivered late, the quality of the grass was poor, as was its maintenance, which, to quote from an email Mr Sochi sent to Mr Arundel on 19 October 2014, included the use of “the wrong concentration of paint to mark the lines for rugby and football, damaging the grass at the line markings; rolling grass cutting machinery that left tire marks in the pitch; an errant water irrigation spout that damaged the pitch; etc”.

80. The problems with the pitch came to the attention of TPG in September 2014 when Mr Gray was told of them by Mr Richard Seow, the then Chairman of the SSC and, according to Mr Gray, “a long-term advisor to TPG”. Mr Gray raised the issue with Mr Richard Leupen, the Managing Director and CEO of UGL, following which TPG was provided with a substantial amount of information by Premas concerning the problems with the pitch and the steps Premas was taking to address them. It appears that TPG raised the question whether the problems with the pitch gave rise to a breach of warranty claim under the SSA. Mr Simon Harle, a partner of TPG at the time, gives evidence that the issue “was resolved post-completion without a warranty claim”, although he says that he does not know the details. One step Premas did take to resolve the problems with the pitch about which the TPG Consortium was not informed was to buy a number of ventilation fans, which had not been budgeted for.

Imposition of performance penalties by the SSC

81. A fifth issue, which was connected to some of the others, was that SHPL imposed performance penalties on Premas under the FM Contract, reflecting penalties that had been imposed on SHPL by the SSC. However, the significance of this issue is unclear. As Mr Sochi points out in his affidavit evidence, the most significant deduction before completion of the SSA was a deduction of SGD805,000 that SSC had notified SHPL in October 2014 that it proposed to deduct from the July payment because there were delays in answering questions it had raised. But the email chain notifying Mr Sochi of the deduction suggests that the amount was withheld pending answers to the questions. It was not a permanent deduction because of a failure to achieve a benchmark. The formal notice dated 4 November 2014 that was issued by SHPL to Premas notified it of a deduction from the July fee of SGD81,925.40 (excl GST). It is apparent from Mr Sochi’s email to Mr Arundel dated 2 October 2014 (quoted above) that Premas thought that it was likely that some deduction would be made from the monthly fees for August and September 2014 because of issues with the cleaning, but there was no reason to think that other deductions would be continuing.

Relevant events following completion of the SSA

82. Premas continued to experience problems with the FM Contract following completion of the SSA. On 15 January 2015, SHPL sent Premas a letter stating that SGD113,549.29 would be withheld in deductions from the October “Monthly Unitary Payment”. On 27 February 2015, it sent Premas a letter stating that the deduction for November would be SGD109,313.35.

83. In mid-January, Premas prepared a 2015 calendar year forecast for the FM Contract, which forecast revenues of SGD19.452 million, total costs of SGD25.211 million (compared to an estimate of SGD17.517 million at financial close), and a total gross loss of SGD4.137 million (compared to an estimate of a profit of SGD2.893 million at financial close). The forecast also forecast losses of a similar order in 2016, 2017 and 2018 and a loss of SGD1.196 in 2019.

84. In January and February 2015, Mr Selzer and Mr Arundel developed a five-year plan (the Five Year Plan) to improve the performance of the FM Contract. Their final views were set out in a document dated 9 February 2015. The Executive Summary of that document relevantly recorded the following:

[I]t is forecast that there will be an EBITDA loss in CY15 of USD$1.3m, break even in CY16, and then steadily recover from CY17 through to CY19 on an EBITDA basis.

It also explained that:

The proposed 5-year financial plan includes the impact of a market testing exercise that is contractually scheduled to take place in the fifth anniversary year of the Project Operational Date. This market test is an opportunity to reset the costs to market and refresh the commercial performance of the contract…

85. In September 2015, DTZ was acquired by C&W.

86. On 21 March 2017, Ms Jodi Swinburne, the then Chief Financial Officer of Asia Pacific at C&W, prepared a paper dealing with the purchase accounting implications of the acquisition of DTZ so far as the FM Contract was concerned. Ms Swinburne describes the purpose of the paper in these terms:

The purpose of this paper is to address the following issues:

1.   What information was available about the FM contract at the DTZ acquisition date?

2.   If an unfavorable [sic] contract should have been identified in purchase accounting, what amount should have been recorded for the unfavorable [sic] contract?

3.   …

It is apparent from the paper that the reference to “the DTZ acquisition date” is a reference to completion — that is, 5 November 2014.

87. Ms Swinburne concludes that “an unfavorable [sic] contract existed as of the acquisition date”. She gives a number of reasons, including that “[i]n the 3 years leading up to the acquisition (2011-2013) SSH’s [that is Singapore Sports Hub’s] annual gross margin was positive only after taking into account the upfront recognition of [a] $12.4m (SGD) fee payment received in three installments [sic] from Dragages ($11.4m SGD) and SHPL ($1m SGD)”; the FM Contract had made a loss of SGD1.9m in 2014 and SGD2.55 m in 2015; the imposition of performance penalties demonstrated that staff levels were insufficient and would need to be increased and budgeted for, thus increasing the costs of the FM Contract; the introduction of the Singapore Progressive Wage Scheme in 2012 was known and would have caused “[a] market participant [to have] included the statutorily mandated increases in wages in the pricing to service the contract”; the Lifecycle Fund was deficient “due to insufficient cost projections for the maintenance and replacement costs for fixed assets”, which failed to account for “construction quality, design changes and early equipment failures”, about which information was available to management before and at the acquisition date.

88. In calculating the figure for future operating losses, Ms Swinburne then considers three scenarios, which she describes as a base case and scenario 1 and scenario 2 for future losses. She assigns a probability weighting to each to come up with a probability weighted estimate of future losses of SGD179.4m. Applying a discount rate of 5.2%, she concludes that the present value of those losses was SGD92.7m. In reaching that conclusion, Ms Swinburne considers the price adjustment mechanism in the FM Contract by reference to benchmarking every five years. In relation to that, she says:

In summary, the Company did not include a scenario where revenue rates are varied from the current contract through benchmarking or market testing, as these are outside the Company’s control.

89. Ms Swinburne also concluded that there was a shortfall in the Lifecycle Fund of SGD45.9 million and adds to that SGD92.7 million for “future operating losses” and SGD21.1 million for “a market participant 8% profit margin” to arrive at a total liability of SGD159.7 million or USD110.5 million.

90. However, Ms Swinburne’s conclusion was that it was unnecessary to restate the earlier accounts to reflect that liability:

The Company has determined that a liability for an unfavorable [sic] contract should have been recorded in purchase accounting. As the measurement period for recording DTZ purchase accounting adjustments has lapsed, identification of the liability represents a prior period error. C&W management has analyzed this error concluding that it is not material to previously issued financial statements on a quantitative or qualitative basis.

Instead, it was proposed to include a non-current liability in C&W’s current accounts of USD110.5 million, with a corresponding deferred tax asset of USD17.85 million.

91. On 7 July 2017, DTZ issued a preliminary notification of claim under the W&I Policy. It served a formal claims notice on 3 November 2017.

92. In early 2019, Ms Swinburne (it appears) prepared a note as at 31 December 2018 addressing the question whether any change needed to be made in the accounting for the FM Contract in the financial statements for the year ended 31 December 2018. The note deals with the question whether any adjustment was necessary to take account of benchmarking under the FM Contract. It points out that Premas had taken steps ahead of time to achieve an increase in fees through the benchmarking provisions of the contract. It states that, if Premas’s benchmarking submission were accepted, “this would return the FM contract to profitability”. However, the note identifies two difficulties with benchmarking. One was the scope of the services the subject of the benchmarking regime. The other was “methodology”, which is a reference to the fact that the SSC was not obliged to accept benchmarking and was likely, instead of market testing, to pursue “a more commercial negotiation of the benchmarking submission to reach a negotiated outcome”. The note concludes:

As at December 19, 2018, C&W Management’s opinion is that it will be very difficult to get [the SSC] to agree to the full uplift proposed, in particular with respect to the increase for management costs. However, we are going to maintain our position that these costs are part of the “service line”.

93. The final recommendation in the note included the following:

Based on C&W Management’s assessment, there are no significant developments that C&W Management deem to require a revision to the existing provision model. The Company has assessed the remaining provision and believe that due to the continuing uncertainty related to the future of the contract a decision to reserve at a level below the existing provision would not be appropriate.

94. Ms Swinburne does not say what the final outcome of benchmarking was. She does give evidence that every year the onerous contract provision is re-assessed and any changes to the onerous contract provision are taken up in the balance sheet and gives some examples. She points out that in 2020 the onerous contract provision for the remainder of the contract was reduced by SGD8,310,000. DTZ did not lead evidence of more recent developments with the FM Contract. It commenced these proceedings on 12 June 2020.

DTZ’s case on breach

95. As I have explained, DTZ’s case on breach of warranty has two main aspects. First, it submits that Premas and therefore the United Group (1) incorrectly accounted for the Side Letter Payments; (2) wrongly capitalised mobilisation costs in the FY12 and FY13 accounts; and (3) failed to recognise the FM Contract as an onerous contract and make provision for it in the FY14 accounts. Each of those accounting errors is said to have breached several of the warranties in the SSA. The most obvious ones are the warranties contained in Schedule 2, paragraph 3.1 (that the Accounts have been prepared with due care and attention and there is no material misstatement in the financial position and state of affairs of the Target Group Entities at 31 March 2014 or the financial performance of those entities in the period from 1 July 2013 to 31 March 2014) and paragraph 3.5 (which contains similar warranties in relation to the Historical Accounts — that is, the FY12 and FY13 accounts).

96. Second, DTZ submits that the United Group failed to disclose problems with the FM Contract on the date the SSA was signed and the date that completion occurred. When taken with what was disclosed, that failure is also said to have breached several of the warranties. The main warranties are those contained in Schedule 2, paragraph 3.2 (that since 30 June 2014, so far as the United Group is aware, there has been no Material Adverse Effect upon the Target Group Entities or the Business), paragraph 3.3(b) and (c) (that the United Group has reviewed the contents of the KPMG Reports for any factual inaccuracies or the omission of any material facts of information and the reports are true and accurate) and paragraph 13.1(b) and (d) (that so far as the United Group is aware, no information has been omitted from the Disclosure Materials that would render those materials misleading in any material respect and that the United Group has not knowingly withheld material information from the Disclosure Materials).

Accounting for the Side Letter Payments

97. DTZ submits that the correct characterisation of the Side Letter Payments is that they were payments made in consideration for Premas foregoing the indexation of the fees payable to it under the FM Contract above increases in the CPI in the first 5 years of that contract (that is, from 2014 to 2019). On that basis, it submits that the amounts paid were not earned until the relevant increases were foregone and should only have been recognised as income at that time, rather than at the time they were paid. Recognising them at the time they were paid had the effect of significantly increasing Premas’s profits for the relevant years.

98. One argument advanced by the defendants in relation to this aspect of the case is that DTZ has not established precisely how the relevant amounts were accounted for. As Ms Swinburne points out at the time she prepared her paper dated 21 March 2017, the accounting system used by Premas in 2010-2013 had been replaced, with the result that full transaction details are no longer available. According to Mr John McGuiness, an expert accountant called by the Joint Defendants, and Mr Tony Samuel, an expert accountant called by the seventh defendant, the information that is no longer available includes journal entries, subsidiary ledgers, a general ledger, trial balances, consolidation work papers and schedules for the management accounts. Mr McGuiness expressed the view that, in the absence of that material, it was not possible to express a concluded view on the accounting for the payments.

99. I do not accept that opinion. It is reasonable to infer that the Side Letter Payments were accounted for in the way described in the documents that are available and that discuss the accounting treatment of those payments. As I have explained, the issue was given some attention in 2011. The conclusion that was reached at that time was that the payments were made for services provided to Dragages. It is not plausible that having reached that conclusion, Premas accounted for them in some different way. Nor is it plausible that on consolidation those amounts would have been treated differently in the consolidated accounts.

100. A second issue raised by the defendants is that the warranties are given in relation to the group management accounts, not general purpose financial statements of Premas. That raises at least two questions. One concerns the materiality of the Side Letter Payments in the context of the group accounts. The other concerns the fact that no records now exist which state clearly what accounting policies were applied in preparing the management accounts.

101. In my opinion, however, neither of these points is an answer to DTZ’s case. Materiality is not an issue, since (oddly) “Breach” in relation to warranties contained in the SSA is defined in the W&I Policy so that “the Warranties … shall be construed without regard to any … materiality or Material Adverse Effect qualifiers contained therein”. The precise effect of this clause may be open to some doubt. However (and this appears to be common ground), the effect in the present context is to eliminate any requirement of materiality in relation to misstatements in the Accounts or Historical Accounts (as those terms are defined in the SSA). Any misstatement in the consolidated financial statements amounts to a breach of the warranties contained in paragraphs 3.1 and 3.5 of Schedule 2 of the SSA for the purposes of the W&I Policy. It must follow that any misstatement in the management accounts of Premas that is carried through to the consolidated accounts is sufficient for the warranties to be breached, even if the misstatement was not material in the context of the consolidated accounts.

102. As to the second point, although it may be true that there is no evidence concerning the precise accounting policies that were applied by the United Group, it is apparent from the correspondence between Mr Chng and Mr Walters in 2011 that Premas (or, at least Mr Walters) recognised that the correct characterisation of the payments would affect their accounting treatment. As Professor Klein explains, it is a general principle of accounting that revenue is only recognised at the time that the goods and services in respect of which it is paid are supplied. Absent any evidence to the contrary, it is reasonable to conclude that the United Group applied that accounting principle in preparing its management accounts. Neither Mr McGuiness nor Mr Samuel gave any reason for thinking that the United Group applied a different accounting policy. Moreover, if it had, that is something that might have been expected to be the subject of comment by KPMG in the KPMG Report and, in particular, its calculation of normalised EBIT and EBITDA for FY13.

103. However, that still leaves open the correct characterisation of the Side Letter Payments. The SHPL Side Letter states that the payment of the SGD1 million was for “reimbursement of costs incurred during the bid development phase of the Singapore Sports Hub.” The Dragages Side Letter states that the payment of SGD10.4 million was for “assistance to [Dragages] in reaching financial close for the Singapore Sports Hub Project.” DTZ’s case must be that those letters falsely recorded the purposes of the payments and in that sense were shams. That is a serious allegation. In my opinion, it is not one made out by the evidence.

104. Premas obviously wanted the fee payable to it under the FM Contract to increase annually by more than increases in the CPI during the first benchmark period. However, it seems plain that neither the SSC nor the other Consortium members agreed to that proposal. How and when the parties reached a resolution of that issue is not explained by the evidence, other than that Premas agreed to a contract that provided for increases in line with increases in the CPI only.

105. At the time the members of the Consortium were negotiating the final division of costs between them, following an unexpected increase in those costs which was caused at least in part by the delays in the Project, Premas raised the issue of increases above CPI again and claimed that it should be compensated for the fact that it had foregone increases of that type (presumably in order to secure the contract with the SSC). But in making that claim Premas could not be understood as making a claim for a payment of what was then said to be SGD17 million in exchange for giving up a right to increases above CPI. Premas never had any such right. Rather, all that can be said is that Premas raised its decision not to insist on increases above CPI as a reason why the other Consortium members should pay it an additional sum of money as part of the finalisation of the accounting between them, and eventually HSBC and Dragages agreed to pay Premas an additional SGD12 million (which was subsequently reduced because of an error in the original calculations that was picked up by HSBC) on the basis that that amount would be shared between Dragages and SHPL and would be paid for the services that were identified in the Side Letters. Again, how that came about is not explained by the evidence.

106. However, two points can be made about the ultimate resolution of the issue.

148. The question remains whether Mr Arundel knew that the Disclosure Materials were misleading in the ways that I have identified.

149. I am not satisfied that Mr Arundel appreciated that the Disclosure Materials were misleading in the first respect I have identified. There is no material at all to suggest that Mr Arundel appreciated that by providing some information in relation to the FM Contract, the United Group was required to disclose other information in relation to that contract. There are no documents which shed light on what consideration Mr Arundel did or did not give to the United Group’s disclosure obligations. And no inference can be drawn either way from the fact that Mr Arundel did not give evidence. He could not fairly be said to have been either in DTZ’s or the defendants’ camp. In the absence of anything more, I am not prepared to infer that Mr Arundel appreciated that further disclosure was required in order to make the Disclosure Materials not misleading.

150. The position, however, is different in the case of the answers to the specific questions included in the Disclosure Materials. So much is implicit in the findings I have already made. It is reasonable to infer that Mr Arundel was involved in preparing the answers to those questions or was at least aware of the answers. Given what he had been told by Mr Sochi, he must have appreciated that those answers were misleading because they suggested that there was not an issue with the FM Contract whereas there was an issue with the costs of cleaning which meant that the upside of the contract could not be expected to come to fruition (at least immediately) and which meant that Premas was and would be liable to at least some performance deductions relating to inadequate cleaning. He may have thought that the respects in which the answers were misleading were immaterial. But that is irrelevant.

Damages

Relevant legal principles

165. The general principle for the assessment of damages for breach of contract is that the award of damages should, so far as money can do it, place the injured party in the position it would have been in if the contract had been performed according to its terms: Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 at 365; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 (Amann Aviation) at 80 (Mason CJ and Dawson J); at 98 (Brennan J); at 116-117 (Deane J); at 134 (Toohey J); at 148 (Gaudron J); at 161 (McHugh J).

166. Where the relevant contractual promise relates to the existence of a fact or state of affairs which is relevant to the value of what is being sold or provided under the contract, the usual measure of damages is the difference between the true value of what is being sold or provided if the representation was true and its actual value as at the date of breach: Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 at 1441. Where what is being sold are shares in a company (as in this case), that requires the Court to make an assessment of the true value of the shares on the hypothetical basis (that is, on the basis that the representation was true) and an assessment of the actual value of the shares: McGregor on Damages (22^nd ed, 2024, Sweet & Maxwell) at [30-008]; Dylan Mann & Co Pty Ltd as trustee for the Mann Family Trust v Tiejag Pty Limited as trustee for the Skeihy Khoury Family Trust [2018] NSWSC 1334 at [90]; Davis v Perry O’Brien Engineering Pty Ltd [2023] QSC 243 (Davis) at [447]. Contrary to some of the submissions made by DTZ, damages are not assessed by comparing the true value of the shares with the price paid. That involves a confusion between the assessment of damages for breach of contract and the assessment of damages for misrepresentation, where the measure of damages is the difference between the actual value of the shares and the price paid: Potts v Miller (1940) 64 CLR 282 (Potts) at 289 (Starke J); at 297-298 (Dixon J); at 307 (Williams J); [1940] HCA 43; see also HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54 (HTW Valuers) at 656-657 [35]. That said, the actual price paid may be and is often used as a proxy for the value of what is being sold or provided, on the basis that it is reasonable to infer that the price paid represents fair value assuming the contractual representations were true: Davis at [458]-[459]; see also Ivy Technology Ltd v Martin [2022] EWHC 1218 (Comm) at [561] and Millbrook Health Care Bidco Ltd v Croll [2023] EWHC 290 (Comm) at [143]. As Applegarth J explained in Davis at [458]ff:

[458] In oral submissions, counsel for the Sellers agreed that the price the Buyers paid is reasonable evidence of what they would have paid if the warranties had not been breached and the supplied information had been true.

[459] On this basis, the measure of damages is the difference between what the shares would have been worth if the earnings and other financial information given to the Sellers had been true and accurate in all material respects, in accordance with the warranties, particularly the warranty in Item O, and what the shares were actually worth. Absent other evidence about what the shares would have been worth had the financial information given to the Buyers been true and accurate, the contract price may be taken to reflect their worth on this hypothesis.

[460] The measure of damages again is the difference between the price the Buyers paid for the shares and the shares’ true value, being the amount that I have previously assessed.

167. The assessment of value is an objective exercise undertaken for the purpose of ascertaining “[t]he estimated amount for which an asset … should exchange on the valuation date between a willing buyer and a willing seller in [an] arm's length transaction, after proper marketing where the parties had each acted knowledgeably, prudently and without compulsion”: The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842 (QB) at [180(2)]. The method of valuation adopted by the parties is not necessarily determinative, but where the parties have agreed a basis of valuation (such as an agreed multiple of future maintainable earnings or the net present value of the expected future cashflows of the company), the Court may use that methodology in calculating the value of the shares on the two required bases: Decision Inc Holdings Proprietary Ltd v Garbett [2023] EWHC 588 (Ch) at [200(iii)-(iv)]. In other cases, it will be necessary for the Court to select an appropriate basis of valuation. Although value is to be determined as at the date of breach, the Court will have regard to all matters known at the trial that shed light on value as at that date, giving due consideration to possible causes of the decline in value of what has been bought that are “independent”, “extrinsic”, “supervening”, or “accidental”: Potts at 298-299 (Dixon J); HTW Valuers at 658-659 [39]-[40].

168. There is one other principle relevant to the assessment of damages for breach of contract on which DTZ placed particular reliance in this case. That is that where there has been actual loss, mere difficulty in estimating that loss in monetary terms does not defeat an award of damages: Fink v Fink (1946) 74 CLR 127 at 143 (Dixon and McTiernan JJ); [1946] HCA 54; see also Lifehealthcare Distribution Pty Ltd v Nicholas [2011] NSWSC 661 at [164]. The Court must do the best it can on the evidence before it and award damages that are appropriate in the circumstances, even where no precise evidence is available: Amann Aviation at 83 (Mason CJ and Dawson J). However, where damages are susceptible of evidentiary proof, but there is an absence of raw material to which good sense may be applied, “[j]ustice does not dictate that … a figure should be plucked out of the air”: Troulis v Vamvoukakis [1998] NSWCA 237 (Gleeson CJ, with whom Mason P and Stein JA agreed); see also In the matter of Hair Industrie Penrith Pty Ltd, Hair Industrie Merrylands Pty Ltd [2015] NSWSC 1578 at [20].

169. It is convenient to consider the application of these principles first to DTZ’s pleaded case (which has largely failed) and then to consider what damages if any DTZ is entitled to recover in respect of that part of the case on which it has succeeded.

DTZ’s claim

170. As I have said, DTZ puts its claim for damages in two ways. First, relying on expert evidence given by Professor Klein, it claims the present value (at the time of breach) of the losses which are said will arise from the FM Contract. In addition, it claims what in effect is said to be the difference between the value of the DTZ Business on the assumption that the warranties were true and the actual value of the business. The value of the DTZ Business on the assumption that the warranties were true is taken to be the price paid for the business. The actual value of the business is taken to be the present value (as at the time of breach) of the projected cashflows of the business which is obtained by the application of a discount rate which is said to reflect the risks associated with those cashflows arising from the breaches of warranty. Professor Klein also makes adjustments to the expected cashflows to take account of the accounting errors identified by him.

171. In the alternative, DTZ submits that its loss should be calculated as the difference between the amount DTZ paid for the DTZ Group and the amount that DTZ or a hypothetical reasonable purchaser (there is no difference between the two, according to DTZ) would have paid for the DTZ Group if it had known the true facts relating to the FM Contract. According to DTZ, the difference between those amounts is the net present value (at the time of breach) of the losses associated with FM Contract, which are said to be $146.8 million, together with the additional $100 million that DTZ agreed to pay as part of the final negotiation of the purchase price.

The approach adopted by Professor Klein

172. The first element of the damages calculated in accordance with the approach adopted by Professor Klein is relatively uncontroversial. It is common ground that an appropriate way of calculating the value of the DTZ Group was by using a discounted cash flow (DCF) analysis — that is, by estimating future cashflows and applying an appropriate discount rate to arrive at a present-day value of those cashflows. If the future cashflows from the FM Contract, and therefore the future cashflows of the DTZ Group, were less than they would have been if the warranties had been true, then DTZ is entitled to recover as damages the present-day value (as at the date of breach) of the difference between those amounts.

173. For the purpose of determining what provision should have been made in the FY2014 accounts in respect of the FM Contract (because it was an onerous contract), Professor Klein understandably only seeks to calculate the present-day value of losses arising from the FM Contract. His calculations make no allowance for any profit that could have been expected to be earned from the FM Contract if the warranties were true. But in that respect, using Professor Klein’s calculations of the provision as an estimate of the damages arising from the failure to disclose the loss-making nature of the FM Contract is a conservative estimate of those damages, since it assumes that in the counterfactual world in which the warranties were not breached, the FM Contract would have broken even. That is clearly a conservative assumption. There is no suggestion that the FM Contract would have been loss-making even if the warranties had been true. The analyses performed by Premas at the time, including the analysis contained in the Five Year Plan, suggest the opposite.

174. The final conclusion reached by Professor Klein was that the net present value of the losses arising from the FM Contract were $17.82 million. On the assumption that there was a breach of warranty because of the failure to recognise the FM Contract as an onerous one, there does not appear to be a serious dispute that that amount at least would be recoverable as damages for the breach of warranty. Obviously, however, it is not an amount that would be recoverable from any of the remaining defendants.

175. The second element of Professor Klein’s calculation of damages takes as its starting point the financial analyses undertaken by TPG and PAG, which sought to determine an offer price by the application of a multiple to future maintainable earnings of the DTZ Group. Using those analyses, Professor Klein derives the discount rate to be applied to estimated cashflows to arrive at the same known purchase price of $1,215 million. As Professor Klein explained in his original report at paragraph 201:

Plaintiff presented the valuation of the DTZ Business using a multiplier model based on estimated FY2014 EBITDA, not a Discounted Cash Flow (“DCF”) framework. Therefore, Plaintiff’s valuation did not directly provide me with an estimated discount rate associated with the then-projected future cash flows from the DTZ Business. However, using the projected cash flows presented in Plaintiff’s Model combined with the known purchase price of $1,215 million AUD, I am able to infer the discount rate that is mathematically equivalent to the multiplier utilized by Plaintiff.

176. Applying that approach, Professor Klein calculates that the assumed cost of equity derived from TPG and PAG’s models was 24.86% and that the assumed discount rate was 12.46%. Professor Klein then makes two adjustments to his model. First, and more significantly, he adjusts the discount rate to take account of what are said to be the additional risks associated with the cashflows to be discounted. That adjustment is based on academic research which investigates the effect on the share price of publicly listed companies of restatements of their accounts. As Professor Klein explains in paragraph 196 of his first report:

Unsurprisingly, academic studies unequivocally document that accounting restatements trigger a significantly negative stock price response, especially when they are indicative of reckless or intentional wrongdoing. Figure 15 above shows that, on average the price reaction to a restatement is negative 11.54% [the range shown in the figure is between negative 4.23% to negative 20.00%]. This means that market participants, on average, adjust their valuation of a company downward by 11.54% upon learning that previously disclosed financials needed to be restated.

177. Based on those studies, Professor Klein concludes that in calculating the true value of the DTZ Business, the cost of equity in his model must be adjusted by the “midpoint” of 12% derived from the research he refers to to reflect the increase in risk arising from the accounting errors to arrive at a cost of equity of 27.85%, which on his calculations produces a discount rate of 13.54%. He also says that the cost of debt must be adjusted because a lender would charge a higher interest rate (for the same reason a shareholder would discount the value of the shares). The result is that Professor Klein expresses the opinion that the discount rate must be adjusted from the implied rate of 12.46% derived from TPG and PAG’s models to 13.76%. The effect of that adjustment when applied to the expected cashflows is to reduce the value of the DTZ Group from $1,215 million to $1,024.73 million, producing a claim for damages of $190.27 million.

178. Second, Professor Klein also expresses the opinion that the cashflows derived from TPG and PAG’s models must themselves be adjusted to take account of the accounting errors arising from the treatment of the Side Letter Payments and the capitalisation of mobilisation costs. The actual adjustments made by Professor Klein are contained in Excel spreadsheets attached to his report and are not easy to follow. They largely arise from the fact that mobilisation costs were capitalised rather than expensed at the time they were incurred (with the result that expenses were reduced and profit was increased in FY14) and, in Professor Klein’s view, it was appropriate to carry forward adjustments made in the FY14 accounts to future years because, absent any other material, the past was the best guide to what would happen in the future. Professor Klein concludes by saying that, after taking into account the necessary adjustments, he estimates the “fair value” of the DTZ Business was $1,015 million, which was $200 million less than the amount paid. Adding that figure to the figure of $17.82 million gives a total damages claim of $217.82 million.

179. There was a great deal of debate between the experts on the approach taken by Professor Klein and on some of the details of his analysis which caused Professor Klein to make some adjustments in his reply report and in his oral evidence, which explains why the figures attributed to DTZ’s damages claim in this judgment are not always the same. However, it is not necessary to deal with many of the issues raised by Mr Samuel and Mr McGuiness. In my opinion, Professor Klein’s approach suffers from several basic flaws which make it unnecessary to consider the details of his approach.

180. In considering the approach taken by Professor Klein, and at the risk of some repetition, it is important to bear in mind the issue he was required to address (as opposed to the issues he was asked to address). That issue was what damages were recoverable as a consequence of the breaches of warranty identified by him. Professor Klein identified three accounting errors that were said to give rise to breaches of various warranties in the SSA. They were (1) the incorrect accounting for the Side Letter Payments, (2) the incorrect accounting for what Professor Klein ultimately accepted was half the costs of preparing policy and procedure manuals, which according to Professor Klein had the effect that EBITDA and EBIT were overstated in the accounts for the nine months ending 31 March 2014 by SGD647,195 and in the FY14 accounts by SGD659,113, and (3) the failure to include a provision in the FY14 accounts of $17.82 million in respect of the FM Contract. Consequently, damages are to be assessed by assessing the true value of the DTZ Group assuming the accounting for those matters was correct and comparing that amount with the value of the DTZ Group after making those accounting adjustments.

181. Professor Klein does not attempt the first task. Rather, he assumes that the actual price paid is an appropriate proxy for true value on the assumption that there has been no breach of warranty. Although that approach was criticised by the defendants, as I have explained it is consistent with the approach taken and accepted in many cases, and I do not think that the conclusions reached by Professor Klein are flawed for that reason.

182. In relation to the second task, Professor Klein says that it is necessary to adjust the expected cashflows of the DTZ Group to take account of those errors. More importantly, he also says that the accounting errors were so egregious that it is necessary to adjust the discount rate to be applied to those cashflows because the risks associated with those cash flows would be regarded as greater by a hypothetical purchaser than would otherwise be the case. Professor Klein has no expertise himself in assessing that risk. Instead, he relies on the academic literature referred to earlier.

183. Professor Klein does not give a satisfactory explanation for why the accounting errors he identifies would have any effect on the DTZ Group’s cashflows. Both the Side Letter Payments and the capitalisation of mobilisation costs may have affected the historical accounts. However, as Mr Samuel and Mr McGuiness pointed out in their evidence, they had no effect on future cashflows. When giving oral evidence, Professor Klein sought to answer that criticism in this way:

My colleagues have said, essentially, that which is historical, they used the slightly more elegant word, “Sunk costs”, are irrelevant to the projection of affirmed future prospects. I believe that observable behaviour in the commercial marketplace tells us that is, of course, incorrect and I cite within my report various pronouncements from the parties that have propounded IFRS in the Australian corresponding standards indicating time and time and time again why accrual accounting as opposed to cashflow is important. Why accuracy of historical financial account statements are important.

Because they assist a valuer, they assist an investor, they assist a lender in anticipating future outcomes and the risks inherent in those future outcomes. We all stipulated that there are two components to the valuation process, the prospective running and/or cashflows, and an assessment of the discount rate inherent in achieving those cashflows. That's a statement which I think I have paraphrased straight out of Mr Samuel's report.

184. Professor Klein appears to be accepting in this passage that historical accounting errors are not relevant to future cashflows, only the discount rate that is to be applied to future cashflows. In any event, in my opinion, the point made by Mr Samuel and Mr McGuiness is correct.

185. Of course, acceptance that the FM Contract is an onerous contract says something about the future cashflows associated with that contract. However, those losses are already covered by the first limb of the claim for damages based on Professor Klein’s evidence.

186. An underlying assumption of Professor Klein’s methodology is that Premas’s conduct was fraudulent or at least suggestive of fraud. It was that fact which was said to justify the use of a higher discount rate in calculating the present day value of future cashflows on the assumption that the warranties were breached. In his evidence, Professor Klein frequently suggested that the accounting errors were fraudulent or egregious and pointed to facts which he said supported that conclusion. However, that was not an assumption that could be proved through the evidence of Professor Klein and it was not an assumption otherwise proved by the evidence led by DTZ. In my opinion, there is no basis for suggesting that the accounting errors were fraudulent. Even if I am wrong in my conclusions that the accounting errors did not exist, the reasons for those conclusions stand as reasons for rejecting the view that the errors were fraudulent or indicative of fraud.

187. A further problem with Professor Klein’s view is that the academic literature he points to is not relevant in determining an appropriate discount rate to be applied to the expected cashflows of the DTZ Group. The analyses relied on by Professor Klein were concerned with identifying the discount minority shareholders in publicly listed companies applied where the companies in which they held shares were forced to restate their accounts, often as a consequence of the fact that the initial accounts contained errors resulting from fraud or reckless conduct. The analyses demonstrate that a broad range of discounts are applied depending on the particular circumstances of the case. The figures relied on by Professor Klein are averages taken from each of the studies he refers to. The figure he uses (a discount of 12%) is an average of those averages. In fact, the articles demonstrate that in some cases, the misstatements have no effect on share price at all. For example, according to the study undertaken by Akhigbe et al (A Akhigbe, R Kudla and J Madura, “Why are some corporate earnings restatements more damaging?” (2005) 15 Applied Financial Economics 327), of the 542 announcements considered by them, 40% had no negative effect on share price, although the average effect (used by Professor Klein) was negative 4.23%.

188. The studies are irrelevant to the discount rate that should be used in this case. At most, they reflect risks looked at from the point of view of a minority shareholder whose information is limited to what is publicly available and who has no control over the future operations of the company. Those risks are of two main types. The first is the risk that not all problems with the company were identified at the time the accounts were restated. The second is the risk that similar problems will occur in the future. Neither of those risks exists in this case, or at least not to the same extent. DTZ and any hypothetical purchaser had or would have had extensive information concerning the DTZ Group besides the accounts and was in a much better position to assess the first type of risk than a shareholder in a listed company. As to the second risk, DTZ obtained complete control of the DTZ Group in 2014. Consequently, it was in a position to control any future risk.

189. At most, the studies relevantly demonstrate that it is necessary to consider the particular circumstances of the individual company to determine whether any adjustment should be made to the discount rate in valuing the company to take account of accounting errors. So much seems to be common sense. In contrast, Professor Klein’s approach appears to be akin to a valuer of a particular property in Sydney valuing the property by reference to the median price of all houses in Sydney. Plainly, such an approach to valuation is not an assessment of value at all.

190. There was a suggestion in some of DTZ’s submissions that the Court could make its own determination of an appropriate adjustment to the discount rate. However, in my opinion, the Court could not do so unless it was provided with a proper foundation for the adjustment. No such foundation has been provided in this case. The evidence, however, suggests that no adjustment is appropriate. The relevant accounting errors are small compared to the size of the DTZ Business. Despite the passage of a number of years, no further accounting errors have been identified. The original accounting errors were confined to the accounts of Premas. All of those matters suggest that, in calculating damages, the same discount rate should be used in determining the present value of DTZ Group’s cashflows assuming that the warranties were true and assuming they were incorrect in the ways alleged.

The alternative damages case

191. The alternative damages claim advanced by DTZ, which appears to be put as its primary claim in its final written submissions, is said to have five steps. First, it is said to be necessary to ask what information ought to have been disclosed to make the warranties true. The second step is to ask what additional information the deal team or a hypothetical reasonable purchaser (according to DTZ, the former serves as a proxy for the latter) would have sought. The third step is to identify what a hypothetical purchaser would have paid for the DTZ Business knowing that information. The fourth step is to identify what the United Group or a hypothetical reasonable seller (again, the former is said to serve as a proxy for the latter) would have been prepared to accept in light of the disclosure. The fifth step is to identify whether the “true value” or “inherent” value of the DTZ Business at the time of purchasing was in fact any different from the price worked out using steps one to four.

192. DTZ submits that the Court should find that the price offered (and presumably accepted) would have been reduced by an amount “in the order of”:

(a)   $141.8m (for the NPV of the likely future losses associated with the FM Contract as at 14 June 2014);

(b)   plus approximately a further $100m (for adjustments to the multiple/normalised earnings and/or uplift).

193. This approach seems to be somewhat convoluted and to confuse the assessment of damages for breach of warranty and the assessment of damages for misleading and deceptive conduct.

194. Plainly, to the extent that it is alleged that the United Group breached a relevant warranty concerning the disclosure of information, it is necessary to ask what information ought to have been disclosed in order to comply with the warranty. It is then necessary to compare the value of the DTZ Business on the basis that the relevant warranty was complied with and the actual value of the business. Where the warranty is a warranty concerning the knowledge of particular persons concerning the disclosure of information, it is necessary to compare the true value of the business taking into account the facts that ought to have been disclosed but weren’t with the actual value of the business on the assumption that those facts did not exist. That comparison involves an objective assessment of the value of the business on two hypotheses. It does not invite an enquiry into what the parties would or might have done.

195. Moreover, it is unclear what purpose the five-step process advanced by DTZ is intended to achieve. The reference to the “deep dive” that DTZ (or, more accurately, the TPG Consortium members) would have undertaken appears to be an attempt to expand the information that ought to be taken into account in assessing the true value of the FM Contract beyond what was actually known to Mr Arundel (and other named executives). But ultimately those details do not appear to matter. DTZ’s case is that the true value of the DTZ Business must reflect the fact that the FM Contract was a loss-making contract whereas the effect of what was promised was that the contract would at least break even. It claims as damages the net present value of those losses. Its alternative case involves a submission that in assessing the net present value of those losses, the Court should accept the assessment carried out by Ms Swinburne.

196. DTZ also submits that it suffered other losses, which it characterises Delphically in the summary of its claim as “adjustments to the multiple/normalised earnings and/or uplift”. The written submissions do not elaborate on what those losses are in the context of the alternative claim. But it seems apparent from DTZ’s oral submissions what they are. In oral submissions, Dr Collins KC, who appeared for DTZ, described them as “other risks, risks not related to the FM Contract, but about which any hypothetical purchaser or this plaintiff would have been concerned having regard to the extent of the nondisclosures”. That, in essence, is a reference to the matters that caused Professor Klein to apply a higher discount rate. The suggestion appears to be that even if the Court does not accept Professor Klein’s calculations, the Court should accept the logic behind them and make some allowance for itself.

197. I do not accept the alternative approach advanced by DTZ. Ms Swinburne’s conclusions appear to be inconsistent with those reached by Professor Klein, DTZ’s own expert. DTZ relies on Ms Swinburne’s evidence as if it were expert opinion evidence. However, although she gave evidence, DTZ neither sought to qualify her as an expert nor to comply with rules 31.21 and 31.23 of the Uniform Civil Procedure Rules 2005 (NSW). Moreover, there appear to be difficulties with a number of her assumptions (such as the operation of the benchmarking provisions of the FM Contract). For those reasons, even though I was prepared to admit Ms Swinburne’s analysis, no weight can be placed on it in this context.

198. Nor is there any basis for awarding the additional damages claimed by DTZ or some other amount to take account of other risks. On the conclusions I have reached, even assuming the warranties were breached, no such adjustments are necessary. Moreover, apart from the analysis given by Professor Klein there is no logical basis for making any such adjustment. This is not a case where the Court should do the best it can to assess damages which have been proved. Rather, it is a case where the Court is being asked to pluck a figure out of the air.

Damages for the proven breach of warranties

199. On the conclusions I have reached, there was a breach of the warranties contained in the SSA arising from the failure to disclose the fact that the costs of cleaning were substantially more than budgeted and were likely to mean that, contrary to expectations, the FM Contract was likely to be loss-making at least for the first two or more years of its operation. DTZ is entitled to recover damages consequent on that breach. A reasonable method of assessing those damages would be to determine the present day (as at the date of breach) value of the difference between the profits originally forecast to be earned under the FM Contract up until the end of the first benchmarked period with the profit or loss during that period arising from the increase in cleaning costs.

200. Plainly, DTZ has not undertaken that task, and it is not a task that the Court could undertake unassisted by expert evidence. What is apparent, however, from the Five Year Plan is that any amount calculated in that way would be substantially less than the threshold for the cover provided by the first excess policy ($42,150,001). It is unnecessary, therefore, to reach a final conclusion on whether the Court should do the best it can to assess the amount of damages consistently with that approach and in the absence of evidence, since whatever the results of that assessment, no damages will be recoverable against the remaining defendants.

Conclusion on damages

201. It follows from what I have said that, if contrary to the conclusions I have reached, DTZ had been able to establish that the Accounts (as defined in the SSA) had contained the errors identified by DTZ, DTZ would not have recovered any damages in respect of the incorrect treatment of the Side Letter Payments and the incorrect capitalisation of mobilisation costs because those errors had no effect on future cashflows and therefore no effect on the value of the DTZ Business. It would have been entitled to damages for the failure to make a provision for the FM Contract as an onerous contract. However, those damages would have been limited to an amount of $17.82 million.

202. DTZ may have been entitled to claim damages for breach of the warranty I have identified. However, those damages are clearly less than the threshold at which the first excess policy attaches. Consequently, none of the remaining defendants have any liability to DTZ in respect of that breach.

Interest

203. Having regard to the conclusions I have reached, it is unnecessary to deal with the question of interest. However, I should say something about that issue in the event that my conclusions are wrong.

204. DTZ claims interest under s 57 of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act), which requires an insurer to pay interest from the date on which it was unreasonable for the insurer to withhold payment to the date of payment at a rate or rates prescribed by regulations. DTZ submits that it was entitled to be paid interest from a date no later than six months after the date it provided the defendants with a formal claims notice — that is, no later than six months after 3 November 2017.

205. The defendants take objection to that claim on two principal grounds.

206. First, the seventh defendant submits that the defendants were not liable to pay any amount under their policies until the insurers under the underlying policies had paid or agreed to pay or been found liable to pay under their policies. That did not occur until shortly before the hearing.

207. Second, the Joint Defendants and the seventh defendant submit that interest should only run from the time that DTZ properly quantified its claim. The earliest that occurred was when DTZ served the report of Professor Klein of 29 November 2022.

208. I accept the second of these submissions in substance, but not the first.

209. As to the first submission, in my opinion it would be unreasonable for excess insurers to withhold payment in circumstances where, on the material before them, it was apparent that they were liable. For the purposes of s 57 of the Insurance Contracts Act, it would not be reasonable for them to rely on the unreasonable conduct of the underlying insurers as a basis for refusing to pay amounts due under their own policies.

210. As to the second point, I accept the submission of the Joint Defendants that in order to determine the question of interest, it is necessary to ask two questions. The first is when did the insured first make the claim that succeeded. The second is when did the insured provide adequate information in support of that claim.

211. Until it is known on what basis DTZ succeeds, it is not possible to answer those two questions. Moreover, the length of time the insurers would reasonably need to consider that claim would depend on the claim and when it was first made. Accordingly, it is not possible to express any view on when interest should run.

Orders

212. It follows from the conclusions I have reached that DTZ’s claim against the second, fourth, fifth, sixth and seventh defendants under the First Excess Policy, the Second Excess Policy, the Third Excess Policy and the Third Fourth Excess Policy must be dismissed. There is no reason why DTZ should not pay the costs of those claims.

213. Accordingly, the orders of the Court are:

1. The plaintiff’s claim against the second, fourth, fifth, sixth and seventh defendants under the First Excess Policy, the Second Excess Policy, the Third Excess Policy and the Third Fourth Excess Policy (as those terms are defined in the Statement of Claim filed on 12 June 2020) (together, the Relevant Policies) is dismissed.

2. The plaintiff to pay the costs of the second, fourth, fifth, sixth and seventh defendants insofar as those costs relate to the plaintiff’s claim under the Relevant Policies.

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Decision last updated: 04 February 2025