Eshuys v St Barbara Limited

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL DIVISION

No. SCI 2009 of 10251

EDUARD ESHUYS	Plaintiff
V
ST BARBARA LIMITED	Defendant

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JUDGE:	KAYE J
WHERE HELD:	Melbourne
DATE OF HEARING:	21-25, 28, 29 March 2011
DATE OF JUDGMENT:	6 April 2011
CASE MAY BE CITED AS:	Eshuys v St Barbara Limited
MEDIUM NEUTRAL CITATION:	[2011] VSC 125

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CONTRACT – Employment of managing director – Provision for payment of completion based performance amount on termination of employment – Waiver of condition for payment – Construction of contract – Use of background circumstances - Discretionary determination by one party of amount – Principles.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R Strong	Gadens Lawyers
For the Defendant	Mr P Solomon SC and Mr E Gisonda	Freehills

HIS HONOUR:

In July 2004, the plaintiff commenced employment with the defendant as its managing director and chief executive officer. In the latter part of 2008, the defendant’s board of directors decided to engage a new managing director. In order to ensure that the defendant retain the services of the plaintiff until the new managing director had been appointed, the plaintiff and the defendant entered into an agreement dated 18 August 2008 (“the variation agreement”), which varied the terms of the original employment contract between them. The variation agreement provided for the payment by the defendant to the plaintiff of a final performance based completion amount of up to $1,000,000, upon the termination by the defendant of the plaintiff’s employment with it. The amount of that payment was to be determined by the board, as a matter of “discretion”, based on the “extent of compliance” by the plaintiff with two criteria stated in the variation agreement.

In December 2008, the defendant advised the plaintiff that his successor as managing director and chief executive officer had been identified. As a result, the plaintiff ceased his employment with the defendant on 2 March 2009. On 12 March 2009, the board of directors of the defendant determined to pay the plaintiff $150,000 in respect of the final completion performance amount specified in the variation agreement. The plaintiff claims that the defendant failed to properly assess the amount payable to him, and that as a result he has suffered loss and damage.

Background

The defendant is an Australian gold producer and mineral explorer. It is listed on the Australian Stock Exchange, and its corporate head office is located in Melbourne. At the times relevant to these proceedings, the defendant had two principal operational assets, Leonora and Southern Cross. Both of those operations are located in Western Australia. The Southern Cross division of the company comprised three principal operations, namely, one underground mine (Marvel Loch), some ore stockpiles, and five open pit mines (each with a short mine life). The Leonora operations comprised the Gwalia underground mine and the Trump open pit mine. The defendant also commenced the development of the Kailis open pit mine at the Leonora operations in September 2008. However, that development was deferred, and mining activities at Kailis ceased on 12 November 2008.

In about 2004, the defendant purchased the assets of Sons of Gwalia Limited after that company went into administration. At the time at which the plaintiff commenced employment with the defendant, the Southern Cross operations had limited reserves of gold. The Gwalia mine had no reserves, but it had significant exploration potential. The defendant sold assets, which enabled it to maintain operations at Southern Cross. It commenced exploration and feasibility work at both Southern Cross and at the Gwalia mine (also known as “Leonora”).

In 2007, the defendant decided to develop the Gwalia reserves. For that purpose, the defendant, in May 2007, raised the sum of $100,000,000 by the issue of convertible notes to professional investors. The trust deed, pursuant to which the notes were issued, entitled the note holders to require the defendant to redeem their notes at the issue price (of 72 cents per ordinary share) on 4 June 2010. That entitlement was referred to in the transactions, with which this case is concerned, as the “put option” available to note holders. The effect of that entitlement was that if, during the period leading up to 4 June 2010, the defendant’s shares were trading under the issue price of the notes, then it was likely that the put option would be exercised by note holders. The issue of the convertible notes enabled the defendant to proceed with the development work at Gwalia, which, as at 30 June 2008, was at an advanced stage. It was then expected that the mine would commence production in the first quarter of the 2008 to 2009 financial year.

At the defendant’s board meeting of 30 April 2008, the plaintiff told the board that he thought that a capital raising might be necessary in late August or early September 2008. In the latter part of May 2008, however, the plaintiff came to the conclusion that it was necessary to bring forward that capital raising. As a result, in June 2008, the defendant undertook an institutional placement, for the purpose of raising $61,000,000 capital. That placement was conducted under a prospectus, which predicted a targeted gold production of 295,000 to 315,000 ounces of gold in the following financial year from the Southern Cross and Leonora operations. The prospectus further stated that the defendant did not then anticipate that the planned operations at Southern Cross and Leonora, for the 2009 financial year, would require the raising of any additional equity funds, following the offer contained in the prospectus.

A number of issues were confronting the defendant in the period leading up to variation agreement, which is the subject of this proceeding. First, capital expenditure involved in the development of Leonora was significantly higher than that which had been projected in the original Leonora feasibility study, due to cost overruns in the refurbishment of the plant at Gwalia, and due to substantially higher underground development expenditure than had been originally anticipated. Secondly, it was evident that, during the 2008 to 2009 financial year, the defendant was to be reliant on cash flows from the Gwalia operations, which were scheduled to be commissioned in the first half of the 2008/2009 financial year, and also on supporting cash flows from the relatively mature Southern Cross operations. Thirdly, the defendant was also planning to carry out some extensive exploration works, which would involve significant expenditure.

The fourth issue arose from the requirement by the Western Australian Government that the defendant lodge environmental bonds, to secure its obligations to rehabilitate the environment in respect of its tenements in Western Australia. Since 2005, the Commonwealth Bank of Australia (“CBA”) had provided the defendant with a bank guarantee facility in respect of that obligation. Under that facility, the defendant was required, from December 2007, to place on deposit with the CBA an amount of cash equal to the full value of the bank guarantees. The deposit amount earned interest, but it could not be accessed at any time to assist with working capital. As at June 2008, the defendant had $21.3M on deposit with the CBA, in order to satisfy that requirement. That amount was referred to as “restricted cash” in the current assets in the defendant’s balance sheet. In order to maintain its working capital at a required level, the defendant, in 2008, was looking to replace the CBA facility with an institution which did not require the deposit of restricted cash with it.

The fifth issue, which was confronting the defendant in mid-2008, concerned the need to address the issue relating to the put options attaching to the convertible notes. At that time, the price of the defendant’s shares was less than the face value of the notes. Accordingly, it was likely that the obligation of the defendant, in respect of the convertible notes, would be required to be reclassified from a non-current liability to a current liability as at 30 June 2009. At that point, the defendant would need to demonstrate to its external auditors how it planned to meet that liability.

It is in that background that the plaintiff and the defendant entered into the variation agreement dated 18 August 2008, which is the subject of this proceeding. That background is also relevant to issues concerning the preparation and approval of the defendant’s budget for the 2008/2009 financial year, which itself is of significant relevance to the terms prescribed by the variation agreement for the determination of the plaintiff’s performance completion payment.

The variation agreement

The plaintiff was employed by the defendant pursuant to an executive service agreement dated 23 December 2004. Clause 3 of the agreement provided that the plaintiff’s employment with the defendant commenced on 20 July 2004, and continued until his employment was terminated. Clause 17 of the agreement provided that the defendant might terminate the agreement by providing three months’ notice of termination in writing to the plaintiff, and by paying the plaintiff the equivalent of nine months’ total salary at the expiration of the three month period, or by paying to the plaintiff the equivalent of twelve months’ total salary in lieu of notice. Clause 17.2 of the agreement entitled the plaintiff to terminate the agreement by giving four months’ written notice to the defendant.

On 24 July 2008, at the conclusion of the monthly board meeting, the chairman of directors of the defendant, Mr Colin Wise, told the plaintiff that the board had decided to engage a new managing director and chief executive officer. As a result, the plaintiff and Mr Wise entered into negotiations, which were designed to ensure that the plaintiff remained with the defendant, as its managing director and chief executive officer, until a replacement for him had been identified, and was ready to assume the plaintiff’s position. In the course of those negotiations, Mr Wise sent a draft agreement on 29 July 2008 to the plaintiff. After further discussions between the plaintiff and Mr Wise, a second draft of the agreement was forwarded to the plaintiff on 9 August.

Ultimately, after further discussions, the plaintiff, and Mr Wise on behalf of the defendant, executed an agreement in the form of a letter dated 18 August 2008. That agreement varied the terms of the original employment agreement between the plaintiff and the defendant. In particular, it fixed the term of the employment contract to expire on 31 December 2009. The plaintiff agreed to provide reasonable assistance to the defendant in identifying and appointing a suitable successor for him. The variation agreement further provided that the plaintiff would resign as managing director and chief executive officer, and step down from the board, in the event that the defendant identified a successor to the plaintiff before 31 December 2009.

Under clause 3 of the variation agreement, the defendant agreed to pay to the plaintiff, upon termination of the plaintiff’s employment, a twelve months’ termination notice period amount, which comprised one year’s total salary together with an agreed bonus of 40 percent of his salary. Clause 4 of the variation agreement provided for payment of the performance based completion amount, which is in dispute in this case. That clause stated:

“4. Performance based completion amount: In addition to the above amounts, you will be entitled to a final performance based completion amount of up to AUD $ One million (less superannuation deductions as required by law and applicable taxation) subject to completion of the following items:
·presentation of a detailed budget for the 2008/2009 year (incorporating a detailed five year plan) which is approved and adopted by the Company board prior to the end of September 2008; and
·continuing performance by the Company in meeting the milestones set out in that budget for the period between its adoption and the conclusion of your employment arrangements with the Company.

The board will have discretion to determine the extent of compliance with these criteria and its decision on these matters will be final. By way of example, if the board identifies a suitable replacement for your role in, say, March 2009 and asks you to resign, you will be entitled to full payment of the performance based completion amount if the board accepted your budget in September 2008 and the company continues to perform strictly in accordance with this budget as at March 2009. You agree that this arrangement is in lieu of any other form of STI or LTI whether under the 2004 Employment Contract or otherwise in respect of the period from 1 July 2008 through to 31 December 2009.”

The 2008/2009 budget

In the meantime, work had been progressing on the preparation of a budget for the 2008/2009 financial year. For that purpose, Mr Wise sent to the plaintiff a memorandum dated 7 July 2008, in which he stressed the need for the defendant to meet the targets outlined in the prospectus, which had been issued in June 2008. On 17 July 2008, the plaintiff sent to Mr Wise an email, in which he expressed the same view. Mr Wise responded by an email of the same date, in which he stated that one of the key issues for focus, in addressing the budget outcomes, would be the level of “free cash”, which was produced in the ensuing year, and the level of cash which would be available as at 30 June 2009. Mr Wise stated that it would be necessary to assume that, unless there were exceptional circumstances, the debt and equity markets would not be reasonably available to the defendant for longer than the next twelve months, and therefore cash management was a “key issue”.

On 22 July, a draft budget for the 2008/2009 financial year was distributed to the members of the board. Appendix 3 to that draft budget contained a five year plan for the Leonora operation. The draft budget provided for a net cash balance as at 30 June 2009 of $1.4M (compared with an actual net cash balance as at 30 June 2008 of $56.1M). On the previous evening, the company secretary, Mr Ross Kennedy, had forwarded to the directors of the defendant (and copied to the plaintiff) an email, in which he stated that, at the ensuing board meeting, management proposed to request the board to consider the budget as an interim budget for the September 2008 quarter, and then for an updated budget for 2009 to be considered for approval at the September 2008 board meeting.

The plaintiff himself did not consider that the budget, to be presented at the board meeting on 24 July, was satisfactory, particularly because the projected cash balance as at 30 June 2009 meant that the company would run out of cash during the ensuing year, and would therefore cease to be a going concern. Accordingly, at the board meeting of 24 July, the plaintiff presented the July budget as an interim measure, and stated that further work would be carried out to produce an improved budget for the September meeting. Approval of the July budget on an interim basis was necessary to provide the requisite authority to management to incur expenditure in the ensuing period. The board accepted that proposal, and agreed for management to complete the budget preparation and for a final budget to be submitted for approval at the September 2008 board meeting.

Following that meeting, on 29 July 2008, Mr Wise sent to the plaintiff (and copied to non-executive directors and the chief financial officer and secretary) a memorandum entitled “Revised 2008 to 2009 budget preparation”. In the section headed “Overview”, Mr Wise noted (inter alia) that the draft budget, presented on 24 July, indicated a closing cash balance, as at 30 June 2009, of $1.4M. In the next section, entitled “Action Plan”, Mr Wise stated that the board required the 2008 to 2009 budget to be reviewed and materially revised in accordance with nine specified guidelines, which included: an expectation that gold production for the year would be within the range indicated in the prospectus (295,000 to 315,000 ounces); an expectation that cash flow would be dramatically improved to provide for a closing cash balance in the region of $50,000,000 as at 30 June 2009; that management undertake a critical review of corporate overheads; and that sufficient free cash flow should be generated by 30 June 2010 to meet any earlier redemption of the convertible notes. I interpolate that that memorandum was sent to the plaintiff on the same day on which Mr Wise sent to him the first draft of the variation agreement.

Subsequently, on 3 September 2008, Mr Wise sent to the plaintiff a memorandum entitled “2008-2009 Budget Preparation”. It listed the expectations of the non-executive directors in relation to the information, which was to be provided supporting the budget, which was to be put before the board later that month.

On 18 September 2008, a draft budget was distributed to the board. The draft budget provided for a net cash balance as at 30 June 2009 of $45,000,000. In the executive summary, it was noted that the budget assumed that the requirement by the CBA, of a $25,000,000 bank deposit to cover the guarantee facility, would be removed, which would thus provide the necessary “working capital buffer” of approximately $25,000,000 throughout the 2009 financial year. That working capital buffer was referred to within the defendant as the “plimsoll line”. The draft budget distributed on that date did not contain a five year plan for the Leonora operation.

On the same day, a memorandum from the plaintiff was distributed to the directors of the board entitled “Revised Budget Preparations”. In that document, the plaintiff noted that the budget as presented provided for gold production at 315,000 ounces at an average cash cost of $656 per ounce, and a cash surplus of $45,000,000, which would include the proceeds from the sale of put options (totalling $25,000,000). In the memorandum, the plaintiff referred to the absence of a five year plan in the following terms:

“Five Year Plan
The basis of a five year plan exists and the development and production activity for 2008/2009 does not compromise any future production or capital requirements. It is however clear that a comprehensive five year plan requires considerable additional analysis of current production plans at Southern Cross and Leonora operations. A comprehensive five year plan will be prepared for the November 2008 Board meeting.”

On 22 September 2008, Mr Wise sent to the plaintiff an email, in which he stated:

“We need to have the window into the five year plan now, not in November, to provide context especially for the mine sites, in which to assess the recommended capital expenditures for the 08-09. At a minimum this should show ounces produced, the cost per ounce, and total cash flow. If an overall corporate window is not available, then could we please have one for each of the SX (Southern Cross) and Leonora operations.”

In that email, Mr Wise also noted that the non-executive directors had requested that the budget show a cash surplus position of $45,000,000 without including the proceeds of the sale of the $700 put options. Mr Wise noted that the board needed to grapple with the conflict between, on the one hand, the need to spend money in the balance of the financial year, and, on the other hand, the need to conserve cash over the following nine months. He expressed particular concern that the defendant should be in a position to meet its obligations in relation to the put options attaching to the convertible notes.

On 23 September, the plaintiff forwarded a memorandum to Mr Wise and the non-executive directors, in which he provided additional budget information. In that memorandum, he stated that the five year plan still required substantial work, particularly in relation to Southern Cross, before it could be presented to the board. He said that the focus for Southern Cross needed to be on prioritising the development to maximise production beyond the 2009 financial year, while limiting the capital expenditure required for the 2010 financial year. He stated that the economic assessment of the Southern Cross operations would be made as part of “finalising the five year plan”.

On the next day, 24 September, a series of briefings to the board was conducted concerning the budget. The briefing included a section entitled “Five Year Strategic Planning”.

On the next day, 25 September, the board held its monthly meeting. In the minutes, the board noted that the budget assumed the removal of the cash backing requirement for the environmental bonds. The board resolved to approve the budget for the 2008/2009 year, subject to the following conditions:

“(i) Sale of $800 put options, for approximately $10,000,000 or more;
(ii)Establishment of a $25,000,000 environmental bond facility free from cash backing requirements; and
(iii)Not proceeding with development and mining of Nevoria underground at Southern Cross in the current financial year;
(iv)Removing the current put option available to Convertible Note Holders;
(v)In the event that any of (i), (ii) or (iv) is not achieved, or is not in the process of being substantially achieved, by 30 November 2008, or the cumulative net cash flow shortfall from 1 October 2008 (excluding the cost of restructuring the convertible notes and any payment arising out of the Kingstream litigation) exceeds $4,000,000 relative to budget as measured on a monthly basis, then management is to take the necessary steps to further conserve cash flow, including reducing underground development at Marvel Loch and further reductions in overheads (eg exploration) to the extent of the cash flow shortfall.

It was recommended for management to present a plan for 2009-10 by December 2008, and a five year plan ahead of the Board strategic planning sessions in 2009.”

Subsequently, on 14 October 2008, the final budget for the 2008 to 2009 year was circulated to the board. It incorporated the deferral of the development of the Nevoria underground mine, and the proceeds of the sale of the $800 put options. Those changes had the effect that the net cash balance at 30 June 2009 was budgeted at $62.2M.

Defendant’s assessment of plaintiff’s performance based completion amount

In early December 2008, Mr Wise informed the plaintiff that the board had identified a successor, who would take up the position, of managing director and chief executive officer of the defendant, at the beginning of 2009, so that the plaintiff would be asked to resign at that time. In response, the plaintiff’s solicitors wrote a letter to the defendant’s solicitors, stating that the plaintiff was entitled to the full amount of the performance based completion payment specified in the variation agreement.

In February 2009, the defendant’s board commenced to give consideration to the question of the plaintiff’s performance based completion payment. For that purpose, Mr Wise sent an email to the non-executive directors on 13 February 2009, stating that he and a co-director, Ms Gibson, had commenced to assess the process, which was needed for reaching a decision as to the plaintiff’s entitlement. At that time, Ms Gibson was the chair of the defendant’s remuneration committee.

On 20 February, Mr Wise made an arrangement with the non-executive directors that they attend a dinner after the board meeting, which was due to be held on 23 February next, in order to discuss the plaintiff’s entitlement. On the same day, Ms Gibson sent an email to the co-directors, stating:

“Directors will recall that (the plaintiff) was offered a performance based completion payment of maximum one million dollars subject to a number of performance criteria.
The performance criteria were based on the production of a credible budget 2008/9 and the actual performance against this budget.
Clearly, with the current performance to end of January there will be no payment owing for operational performance. This then raises the matter of
(1)Should the board take into consideration any other factors other than the budget process and subsequent performance?
(2)If so, what other factors should we consider and what proportion of the $1m should we set aside for ‘other factors’.
(3)Should we ask (the plaintiff) to submit his ‘other contributions for consideration?’”

Each of the other three directors of the defendant – Messrs Rae, Lockyer and Bailey – responded to that email in terms, to which I shall refer later. On 21 February, Mr Wise distributed a document to the non-executive directors, entitled “Ed’s performance bonus … a Road map to decision making”.

On the evening of 23 February, all the non-executive directors – Messrs Bailey, Gibson, Lockyer, Rae and Wise – met at a restaurant in Melbourne. At that meeting, they discussed the issues raised in Mr Wise’s document of 21 February, and the plaintiff’s performance payment. According to Mr Wise’s evidence, there was consensus between the non-executive directors that no payment was owed by the defendant to the plaintiff under the terms of the variation agreement, because the plaintiff had not delivered a budget which was readily capable of being approved by the board with an accompanying five year plan, and because there had been an overall continuing failure by the defendant to perform against the budget which had been approved. In particular, the directors discussed the outcomes measured against the budget for production, cost of production and cash flow. The directors then discussed the possibility of paying the plaintiff something, in order to recognise his achievements on other matters. At that point, differing views were expressed by the directors as to the quantum of such a payment, ranging from nil to $500,000. At the meeting on 23 February, no decision was made, because the financial results for February 2009 had not yet been completed.

Following that meeting, the chief financial officer of the defendant, Mr Campbell-Cowan, prepared a draft worksheet for the purpose of measuring the plaintiff’s performance. On 11 March 2009, Mr Campbell-Cowan provided Mr Wise with the final worksheets, incorporating the results for February 2009. On the same day, the company secretary, Mr Kennedy, distributed the worksheets to the other non-executive directors and also to the plaintiff. The worksheets reported figures for gold production, cost of production, and free cash flow, comparing the budgeted figures against the actual results for each of those three items. It also reported on the impact on the cash flow figures of the gold price, which was higher than the gold price assumed in the budget.

The directors met on 12 March 2009 at about 9.30 am, before the formal board meeting on the same day. I shall refer in some detail to that meeting later in this judgment. The outcome of the meeting was that the non-executive directors decided that the plaintiff should be paid the sum of $150,000 in respect of his completion based performance payment. That decision was approved by a resolution of the board on the same day. Following the meeting, Mr Wise gave to the plaintiff a letter advising him of the final amount of payment. In that letter Mr Wise stated:

“The board has assessed the level of continuing performance by St Barbara in meeting the milestones set out in the approved budget between the time of its approval and end of February. I am told that you have been sent a copy of the spreadsheet detailing the actual performance figures.
Despite the required level of continuing performance not having been adequately met, the board has exercised its discretion and decided that the final performance based completion amount will be $150,000 … “.

The claim

The plaintiff claims that the defendant breached the terms of the variation agreement in determining the performance based completion amount payable by the defendant to the plaintiff. In his statement of claim, the plaintiff relied on both the express terms of clause 4, and also on an implied term that in determining the amount of that payment, the board would act “fairly and reasonably” and further or in the alternative “in good faith”. By its defence, the defendant admitted the existence of that implied term.

The plaintiff’s statement of claim underwent a series of amendments during the interlocutory stages and at trial. As a result, the various breaches of the agreement, relied on by the plaintiff, were pleaded in a manner which was quite complex and difficult to follow. At my behest, Mr R Strong, who appeared on behalf of the plaintiff, prepared a document entitled “Plaintiff’s Case Summary”, which set out the breaches of the agreement upon which the plaintiff relied. In essence, the plaintiff alleges that in determining the amount of the performance based completion payment, the defendant’s board breached the terms of the variation agreement in four principal respects, namely:

(1)The plaintiff alleges that clause 4 of the variation agreement required the defendant to make a “measured determination” of the extent of the compliance with the two criteria specified in clause 4, in order to decide the amount of the performance based completion payment to which the plaintiff was entitled. The plaintiff alleges that the board acted on an incorrect view of the defendant’s obligation, by proceeding on the basis that it was only required to decide whether or not the company had met the milestones in the approved budget, and not the extent to which it had done so.
(2)The plaintiff alleges that, in determining the extent of compliance with the first criterion, specified in clause 4, the board wrongly took into account that the budget, which it approved on 25 September 2008, did not contain a five year plan. The plaintiff maintained that the board so erred, because it had waived the requirement that the budget included such a plain.
(3)The plaintiff alleges that the board acted on an incorrect view as to what constituted the “milestones” referred to in the second criterion specified in clause 4 of the variation agreement. In particular, it is alleged that the board measured the performance of the company against seven milestones, namely: gold production; gold sales; operating costs; EBITDA; net profit; cash balance; and cash flow. The plaintiff alleges that, on the proper construction of clause 4, there was a single milestone, being the company’s position as at 28 February 2009, as expressed in the income statement, cash flow statement and balance sheet of the company as at that date, compared to the position of the company predicted by the approved budget.
(4)The plaintiff alleges that, by virtue of the express term, or pursuant to the implied term, of the variation agreement, the board was not permitted to make a determination which was irrational and/or perverse; or which was made on grounds which were unreasonable and/or insufficient. The plaintiff alleges that the board acted in breach of that obligation.

By its defence, and in the course of the trial before me, the defendant made the following responses to those propositions:

(1)The defendant agreed that, pursuant to clause 4 of the variation agreement, the board was required to undertake a measured or quantitative assessment of the extent of compliance by the plaintiff with the two criteria contained in that clause. The defendant maintained that it had undertaken such an assessment, and, by reference to its assessment of the extent of compliance with the criteria specified in clause 4, it assessed the plaintiff’s entitlement at $150,000.
(2)The defendant maintained that the board did not err in taking into account the lack of a five year plan in the approved budget, because the requirement, for that plan, had not been waived by the defendant.
(3)The defendant admitted that the board determined the plaintiff’s entitlement to a performance based completion payment by reference to the seven milestones alleged by the plaintiff, and contended that those criteria were the correct milestones within the meaning of clause 4 of the variation agreement.
(4)The defendant maintained that it had validly exercised the discretion contained in clause 4, in that it did not act capriciously, arbitrarily, irrationally or perversely in determining the extent of compliance with the two criteria contained in clause 4, and in thus determining the amount of the performance based completion payment to which the plaintiff was entitled.

In light of the foregoing, it is clear that the following six issues need to be determined by me in this case:

(1)In deciding the amount of the performance based completion payment under clause 4 of the variation agreement, did the board perform a determination of the extent of compliance with the two criteria contained in clause 4, or did it, as alleged by the plaintiff, only determine whether or not the defendant had met the milestones in the approved budget?
(2)Was the requirement, in the first criterion in clause 4, that the approved budget included a five year plan, waived by the defendant?
(3)What were the milestones set out in that budget for the purpose of the second criterion specified in clause 4 of the variation agreement?
(4)What was the obligation of the board in exercising the discretion reposed in it under clause 4 to determine the extent of compliance with the two criteria? In particular, was the obligation of the board not to make a determination which was irrational and/or perverse, or which was made on unreasonable and/or insufficient grounds, as alleged by the plaintiff?
(5)Did the board exercise the discretion contained in clause 4 in accordance with that obligation?
(6)If the defendant acted in breach of the variation agreement in determining the performance based completion payment to the plaintiff, what is the correct measure of the damages to be awarded to the plaintiff in consequence of that breach?

Before turning to those issues I note that, in its defence, the defendant also pleaded a failure to comply with the five conditions specified in the approved budget. However, Mr P Solomon SC, who appeared with Mr E Gisonda for the defendant, stated that the defendant did not rely on any of those matters in answer to the plaintiff’s claim.

Nevertheless, for the purpose of completeness, I note that the $800 per ounce put options (specified in the first condition) were closed out in early October 2008, and the proceeds of $11,000,000 were included in the final budget. In respect of the second condition (removal of the cash backing requirement for the environmental bonds provided by the CBA), negotiations had been conducted for some time with both the ANZ bank and the CBA. Ultimately the CBA declined to remove the restricted cash condition attaching to the bank guarantee facility provided by it. Towards the end of September 2008, Westpac made an offer to St Barbara to provide a facility, which did not have a cash backing condition. However, subsequently, in January 2009, Westpac informed the defendant that it was focusing on rationing available capital for existing customers, and therefore would not provide the facility to the defendant.

The final budget, circulated to the board in October 2008, incorporated the deferral of the development of the Nevoria underground mine, thus complying with the third condition attaching to the board’s approval of the budget on 24 September.

The fourth condition related to the removal of the put option exercisable by the convertible note holders on 4 June 2010. For that purpose, the defendant obtained advice as to the appropriate method of effecting that goal. By early January 2009, the plaintiff formed the view that it was unlikely that the defendant would be able to secure debt finance in the current economic environment, and that it was also unlikely that any proposal would be possible to restructure the convertible notes. He therefore investigated the possibility of an equity issue. On 23 January 2009, the plaintiff suggested to the board that an equity issue be considered. At its meeting on 28 January, the board resolved to proceed with an equity raising of up to $50,000,000. In fact, market conditions improved during February. The further issue of 189,000,000 shares, at a price of 41 cents per share, was completed by 23 February, producing proceeds of $75,000,000. Subsequently, on 25 March 2009 (after the retirement of the plaintiff), the defendant accepted offers from note holders to buy back the convertible notes using the proceeds of the equity issue undertaken by it in February. The buyback of the notes generated a profit of $1,935,000.

The fifth condition prescribed by the board on 25 September 2008 required management to undertake the necessary steps to further conserve cash flow. At its meeting on 19 November 2008, the board accepted the recommendation by the plaintiff that it defer mining at Kailis, Leonora. That decision resulted in the conservation of cash of some $17.8M in the ensuing seven months. In addition, the plaintiff instituted a corporate functions review, as a result of which savings from corporate costs totalling $2.2M were achieved in respect of corporate capital expenditure.

I now turn to consider the issues, which I have set out above.

Did the board make a measured assessment of compliance with the two criteria in clause 4?

The first breach, alleged by the plaintiff of clause 4 of the variation agreement, is based on the proposition that that clause required the board, in determining the plaintiff’s performance based completion payment, to assess the extent of compliance with the two criteria specified in clause 4. In other words, Mr Strong submitted that, under clause 4, the board was required to undertake a “measured”, or “quantitative”, determination of the extent to which there had been compliance with the two criteria, and, by using that determination, to thus quantify the performance based completion payment to be made to the plaintiff. Mr Strong further contended that, in breach of clause 4, the board did not undertake such a “measured” determination of the extent of compliance with the two criteria. Rather, he submitted, the board acted on the incorrect view of clause 4, by proceeding on the basis that it was only required to decide whether or not there had been compliance with the first criterion, and, in respect of the second criterion, whether or not the company had met the milestones in the approved budget.

In response, Mr Solomon, on behalf of the defendant, did not take issue with the construction of clause 4 relied on by the plaintiff. He accepted that clause 4 did require the board to undertake a measured determination of the extent of compliance with the two criteria specified in that clause. However, he submitted that the board did undertake such an assessment, in determining, on 12 March 2009, that the amount of the performance based completion payment to which the plaintiff was entitled was the sum of $150,000.

Thus, the critical issue, in respect of the first breach alleged by the plaintiff, is a factual question concerning the nature of the decision made by the board on 12 March 2009. In order to properly characterise the nature of the decision made by the board on that day, it is necessary to bear in mind that that decision was not made in a vacuum. Rather, it was made in the context of a number of events which had occurred, particularly between the date of the approval of the budget on 25 September, and the date of the decision of the board on 12 March 2009. It is therefore necessary to refer, briefly, to those relevant background circumstances.

Following the approval of the budget on 25 September, the monthly report for September, containing the financial results for that month, was provided to the directors on 17 October 2008. That report disclosed that the performance of the company was already behind budget. In particular, it indicated a cash shortfall of $6.7M against budget, and that the operations results for Southern Cross were down on production and up on costs.

As a result, at its meeting on 23 October, the board requested that management thereafter provide to directors a weekly report comparing actual cash flow against budget, together with management’s commentary on weekly production achieved compared with budget. The first such weekly report was distributed to directors on 5 November. It showed that the cash balances at 31 October were $56.9M, compared to the budgeted cash balance at that date of $77.6M.

At the board meeting on 19 November 2008, the chief financial officer, Mr Campbell-Cowan, gave a presentation, which noted that the October closing cash balance was $20,000,000 less than budget. At the same meeting, the board was advised that Westpac had withdrawn its offer to provide a facility for the environmental bonds.

At the next board meeting on 12 December 2008, Mr Campbell-Cowan gave a further presentation, in which he forecast that the cash flow “plimsoll line” would be breached, with the end of month cash balance forecast to be less than $30,000,000 from the end of January 2009 to the end of March 2009.

The defendant was due to release its December quarterly report on 21 January 2009. On that day, the plaintiff sent an email to the board, advising that the forecast operational figures would need to be downgraded. In response, Mr Rae wrote to the non-executive directors, expressing his concerns about the downgrade. On 23 January, the plaintiff sent an email to the members of the board, noting that the cash flow position would be tight, because of the changes in timing of production, and levels of expenditure, at the Gwalia mine. He stated that a lot of work had been done on buying back the convertible notes, but he concluded that the buyback strategy could only be funded by having an equity raising from the larger shareholders.

At the next board meeting on 28 January, the directors resolved to fund the buyback of the convertible notes by a further share issue. Mr Campbell-Cowan noted at that meeting that, in the first week of February, March and April, creditor payments of $1,000,000 to $2,000,000 may need to be deferred. It was acknowledged that the deteriorated cash position was mainly due to the continuing lower than forecast gold production at both Southern Cross and Leonora.

On 17 February 2009, Mr Bailey reported to the non-executive directors that he had had a telephone call with the company’s auditor, who had foreshadowed that, in the absence of finalising an equity raising before the end of the next week, he would not be in a position to sign the defendant’s accounts. As a result, the capital raising (to fund the buyback of the convertible notes) was approved on 18 February, and was announced on the following day.

It is in that background that the non-executive directors of the board commenced to consider the question of the entitlement of the plaintiff to a performance based completion payment under clause 4 of the variation agreement. In particular, it is relevant that, as the board approached that task, they did so in a context in which production targets, set in the budget, had not been achieved by the company, and in which the company’s cash position was tight, and was significantly less favourable than the budgeted position. The evidence of Mr Wise, in his witness statement, discloses that he was in regular communication with his non-executive directors concerning those matters. In particular, it would appear both Mr Rae and Mr Bailey were both expressing some concerns about various aspects of the matters raised by Mr Wise. In addition, Ms Gibson, in her statement, describes how, during the period between the budget and March 2009, she had become concerned about the aspects of the performance of the company, to which I have just referred.

As I have stated, the directors met at a dinner after the formal board meeting on 23 February. The purpose of the meeting was to discuss their respective views as to the plaintiff’s entitlement to a performance based completion payment. Although no decision was reached at the meeting, it is clear, from the description of the meeting given both by Mr Wise and Ms Gibson, that the directors had, in effect, formulated their own individual views in the course of the meeting. As I stated earlier, Mr Wise’s evidence is that there was consensus between the non-executive directors that no payment was due to the plaintiff under the terms of the variation agreement, because the plaintiff had not delivered a budget which was readily capable of being approved by the board with an accompanying five year plan, and because there had been an overall continuing failure by the defendant company to perform against the budget which had been approved. The directors discussed the budget outcomes in terms of production, cost of production per ounce of gold produced, and cash flow. Reference was made in the discussion to the fact that the monthly reports for the period from September 2008 to January 2009, and the weekly cash flow reports, had indicated that the company had not met its budget, particularly in respect of the production of gold and cash.

Mr Wise in his evidence stated that the non-executive directors discussed the fact that both production and cash were under budget in the first complete monthly report to the board following the approval of the budget, and that the weekly reporting on cash flow was a cause for alarm rather than comfort. The directors were also concerned that the defendant had needed to advise the market, twice, of production downgrades (in November 2008, and in the ASIC’s quarterly report released on 22 January 2009).

In a similar vein, Ms Gibson, in her evidence, stated that each of the non-executive directors expressed the view that nothing had been achieved in terms of meeting the outcomes provided for in the budget. Ms Gibson stated (at the meeting) that the company was so far behind its budget performance that it had to raise further capital. In her witness statement, Ms Gibson said that each non-executive director expressed views to the effect that the business had not achieved its budget, particularly in terms of production, cost of production per ounce, and cash flow.

It was in the course of that discussion that each of the directors expressed the view that no payment was owed by the defendant to the plaintiff under the terms of the variation agreement. The directors then discussed whether, nevertheless, a payment should be made to the plaintiff to recognise his achievement on other matters, including his handling of the capital raising, and his professional conduct in respect of the transition of management to Mr Lehany. At that point, the directors stated differing views as to whether or not a sum should be paid to the plaintiff to cater for those considerations.

Pausing there, it seems clear, from the evidence, that the directors, on 23 February, were forming their conclusions to which they had at that stage arrived, not simply by reference to the question whether the company had met its budgeted targets, but, rather, by reference to the fact that the company had, on a repeated basis, failed to meet important targets (production, cash and costs per ounce) by significant margins. The views, expressed by the members of the board at the dinner on 23 February, were clearly not simply the outcome of an analysis of a snapshot of the company’s position at that time. Rather, it is clear from the descriptions of the meeting, by Mr Wise and Ms Gibson in their evidence, that the directors had formulated their views by reference to the ongoing failure by the company to achieve the outcomes stated in the budget to a significant degree.

After the meeting, Mr Wise asked the company secretary, Mr Kennedy, to arrange a financial analysis and comparison, to assist the board with its deliberations concerning the plaintiff’s entitlement. As a result, Mr Campbell-Cowan prepared a draft worksheet on 6 March. On 8 March, Mr Wise sent an email to the non-executive directors, explaining that they would meet on Thursday 12 March, in order to make a final decision. He concluded the letter by stating “the principal outcome however is clear … there has been a complete underperformance against budget” (emphasis added).

On 11 March, Mr Campbell-Cowan provided Mr Wise with the final worksheets. Those documents were distributed to the non-executive directors, and to the plaintiff. The worksheets reported figures for gold production, cost of production, and free cash flow, comparing the budgeted figures against the actual results for each of those three items. It also reported on the impact on the cash flow figures of the gold price, which were substantially higher than the gold price assumed in the budget. The figures in that worksheet demonstrated: that there had been a 16 percent shortfall on achieving the budgeted production of gold; that the cost per ounce of production was 18 percent higher than that budgeted; and that there was a 31 percent higher deficit in the net cash flow, than that predicted by the budget.

The non-executive directors then met on 12 March, before the formal board meeting on that date. Mr Wise commenced by summarising the history, including the dinner meeting on 23 February, and the worksheets prepared by Mr Campbell-Cowan. Each of the non-executive directors had a copy of the worksheets at the meeting, and they confirmed that they had reviewed them. Mr Wise asked each of the non-executive directors a series of questions, and to which the following answer was given by each director:

“• Were there any new issues? Answer: No.
• Did everyone understand the worksheets? Answer: Yes.
•Were there any queries or need to ask Campbell-Cowan to join the meeting and explain anything? Answer: No.
•Did everyone accept that there had been a failure to perform? Answer: Yes.
•Was everyone nevertheless agreeable to contemplate a payment anyway? Answer: Yes.”

Mr Wise then asked each director to complete a slip, which he handed out to them, setting out the amount of payment which the director considered ought to be made to the plaintiff. The directors each filled out their slips, nominating different amounts from nil to $500,000. The directors agreed that Mr Wise should eliminate the highest and lowest figures, and should then accept the average of the remaining three figures, as the appropriate amount of payment to be made to the plaintiff. In that way, it was determined that the plaintiff should receive a payment in the sum of $150,000. At the formal board meeting, which commenced at the conclusion of that meeting, the minutes recorded a resolution by the board to approve a “discretionary bonus” for the plaintiff in the sum of $150,000.

In support of his proposition, that the board did not conduct a measured determination of the plaintiff’s entitlement under clause 4 of the variation agreement, Mr Strong placed considerable reliance on the fourth question asked by Mr Wise of the directors at the 12 March meeting (namely, “did everyone accept that there had been a failure to perform”?), and the affirmative answer to that question.

Standing alone, that question and answer might support the proposition for which Mr Strong contends. However, it must be viewed in the context of the whole of the evidence, to which I have already referred. As I have already stated, the background circumstances, which preceded the discussions of February and March 2009, and the content of the meeting of the directors on 23 February, demonstrate that the directors had each formed the view that the performance by the company had, over the preceding five months, fallen substantially short of the budget, which had been approved by the board. In addition, the directors had taken into account the fact that the approved budget did not contain a detailed five year plan. It was in that context that Mr Wise asked the directors, on 12 March, whether everyone accepted that there had been a “failure to perform”? It is clear, from the background, that that question was directed to the views, which had been discussed on 23 February, namely, that there had been an overall continuing failure by the company to perform against the budget, particularly in respect of production, cash and costs.

That conclusion is supported by the evidence of Ms Gibson. In her evidence, Ms Gibson stated that, from her experience, she would expect the company to be able to achieve within plus or minus five percent of a budget. She considered that, if the performance of the company is less than 10 percent of the budgeted figure, then the business is seriously adrift from what is expected of it, and management would need to take serious action, including making a public statement to the market. Ms Gibson stated that she used the same yardstick, in determining the failure of the defendant’s business to perform to budget, for the purposes of assessing the plaintiff’s entitlement under clause 4 of the variation agreement. She further stated, in her evidence, that, from her observation, Mr Rae and Mr Lockyer had a similar approach.

Based on the foregoing, it is evident that the board took the view that, in light of the significant discrepancy between budget targets and actual performance by the company, during the preceding five month period, there had been a total failure of compliance with the budget milestones, so that the plaintiff was not entitled to any payment under the strict terms of clause 4. Further, it is clear, from Mr Wise’s evidence, that the agreed payment of $150,000 was not a reflection of a determination by the directors that there had been a compliance with the two criteria in clause 4 to a commensurate degree. Rather, the payment was made on the basis of other factors, notwithstanding the view of the board that there had been a total failure of compliance with the two criteria specified in clause 4.

For the foregoing reasons, I reject the proposition made by Mr Strong, that the board did not conduct a measured determination of the overall extent of compliance with the two criteria specified in clause 4. Rather, the board did make such a determination, and, in doing so, it came to the conclusion that there had been such a failure of compliance with the two criteria that the plaintiff was not entitled, on that basis, to any payment under clause 4.

The five year plan: was it waived?

The first criterion, contained in clause 4 of the variation agreement, required that the plaintiff present a detailed budget to it for the 2008/2009 year, incorporating a detailed five year plan, which would be approved and adopted by the defendant’s board before the end of September 2008. The budget which was presented to the board, and approved by it, on 25 September, did not contain a five year plan. The first question, raised by the plaintiff in this case, is whether the defendant waived the requirement, specified in the first criterion, that the budget contain such a plan.

The term “waiver” is used in the law in a number of different contexts. As such, it has become quite an imprecise concept, and it is somewhat elusive of definition. In particular, the content of “waiver” tends to vary according to the context in which it is used.[1] For the purposes of the question raised in the present case, it was common ground that the appropriate meaning of waiver is that defined by Chernov JA in Zhang v Shanghai Wool & Jute Textile Co Limited[2], namely, that “…waiver is constituted by the deliberate, intentional and unequivocal release or abandonment of the right that is later sought to be enforced”. It was also, correctly, accepted that the question, whether the requirement for a five year plan was waived, must be answered by reference to the circumstances up to the end of September 2008.
[1]See for example The Commonwealth of Australia v Verwayen (1990) 170 CLR 394, 406-407 (Mason CJ), 427 (Brennan J), 451-452 (Dawson J), 47 (Toohey J), 481 (Gaudron J), 491-499 (McHugh J).
[2][2006] VSCA 133, [14]; 201 FLR 178, 185-6, see also STY Afforestation Pty Ltd v Atkinson [2006] VSCA 283 [22] (Maxwell P).

In arguing this part of his case, Mr Strong realistically conceded that he was not on strong ground in contending that, as at 30 September 2008, the defendant had waived the requirement for the incorporation of a detailed five year plan in the budget which was approved on 25 September. He was correct in making that concession. I do not consider that the evidence discloses that the defendant did waive the contractual requirement that the budget, to be approved by the end of September 2008, should incorporate a detailed five year plan.

The requirement for a five year plan had been discussed for at least five months before the board decision on 25 September. In the board minutes of 30 April 2008, it was noted that management was then in the process of preparing the financial budgets for 2008 to 2009, as well as a five year plan. On 27 May, Mr Wise sent an email to the plaintiff, asking him whether it was then contemplated that the draft budget for the next year, “and the related five year plan”, would be available on 13 June. The draft budget for 2008/2009 year, distributed on 22 July, contained a five year plan for the Leonora operation. The first draft of the variation agreement, which Mr Wise sent to the plaintiff on 29 July 2008, contained clause 4 in exactly the same terms, in which it appeared in the agreement entered into between the parties on 18 August, including the requirement (in the first criterion) that the budget incorporate a detailed five year plan.

It was not until 18 September that the issue, whether the budget would contain a five year plan, first emerged. On that date, the plaintiff distributed the draft budget, which did not contain a five year plan. I have already referred to the memorandum, which he sent to the members of the board on that day, stating that the basis of such a plan existed, but that a comprehensive five year plan required considerable additional analysis on current production plans at Southern Cross and Leonora operations. His memorandum further stated that a comprehensive five year plan would be prepared for the November 2008 meeting.

In a sense, at that stage, the directors were presented with a fait accompli. Obviously, the interim budget was not acceptable. It was important for the company to have a proper budget. In his memorandum to the plaintiff dated 22 September, Mr Wise affirmed the importance of the board then having an acceptable five year plan, noting that the directors needed to have “a window” into the five year plan “now”, and not in November.

On 25 September, the board approved the budget without a five year plan, and recommended that a five year plan be developed ahead of board strategic planning sessions in 2009, which were due to be held in the following March. It is clear that, in the foregoing circumstances, that decision did not constitute a waiver, in the sense defined by Chernov JA in Zhang’s case. In the circumstances presented to the board, the decision by the board was clearly directed to the need to approve a budget, and to provide an appropriate timetable for the provision of the outstanding five year plan. It was not addressed, nor could it reasonably be understood to be intentionally addressed, to the requirement, in the first criterion in clause 4 of the variation agreement, that the budget, to be presented to and approved by the board, contain a detailed five year plan. In those circumstances I am not persuaded that the defendant waived that requirement as part of the first criterion which was to be considered by the board in determining the plaintiff’s performance based completion payment.

The milestones

In his further amended statement of claim, the plaintiff pleaded, and the defendant, in its defence, admitted, that the board, for the purposes of determining the plaintiff’s entitlement under clause 4 of the variation agreement, measured the performance of the company against the seven milestones, to which I have earlier referred. However, the evidence makes it plain that, in fact, the board principally focused on three of those criteria, namely, gold production, cost of production per ounce, and cash balance and cash flow. To a lesser extent, the board also took into account the comparison between the budgeted and actual result on the profit and loss account. The plaintiff alleges that those criteria were not the “milestones” referred to in the second criterion in clause 4. Rather, the plaintiff maintains that there was a single milestone, namely the company’s position as at 28 February 2009, as expressed in the company’s income statement, cash flow statement and balance sheet as at that date.

Mr Strong submitted that the word “milestones”, in the second criterion in clause 4 of the variation agreement, should be given its ordinary, literal meaning, namely, a marker which indicates the extent of progress towards a particular objective. Mr Strong pointed out that the budget contained appendices, in which there were tabulated, for each month, the projected profit statements, balance sheet, and cash flow of the company. He submitted that those monthly figures were, collectively, the milestones or markers towards the ultimate “destination” or objective, namely, the financial position of the company. Thus, he submitted that, for the purpose of the second criterion in clause 4, the board should have measured the performance of the company against one milestone, namely, the financial position of the company, in terms of the actual performance of the company against the budgeted cash flow profit and balance sheet.

On the other hand, Mr Solomon submitted that the meaning of “milestones” must be determined by reference to the commercial context, in which the variation agreement was concluded. He pointed out that the executive summaries to the July and September budgets each contained the same items (although the September budget also included an additional item for capital expenditure). He further submitted that the extrinsic circumstances demonstrated that, in the period leading up to the execution of the August agreement, three of those items, namely, cash, production, and cost, were of particular concern to the plaintiff and the defendant, both in terms of the development of the budget, and in terms of the overall performance of the defendant company. Mr Solomon submitted that the commercial context to the agreement demonstrated that the word “milestones” was intended to refer to the cash, production and cost items, which are contained in the executive summary of the budget.

The variation agreement does not contain an express definition of the word “milestone”. Nor was that term used by the parties, in the lead up to the execution of the agreement, in a manner which might give it some specific meaning or content. In the Macquarie Dictionary, “milestone” is defined to mean a “stone to mark the distance to or from a town, as along a highway or another line of travel”. I agree with the submission of Mr Strong that, in the context of a budget which is expected to provide monthly targeted results, each monthly target could be described as a “milestone” within the meaning of clause 4. However, the application of that meaning of “milestone” to clause 4 of the variation agreement, does not of itself yield a clear answer to the meaning of the term. In particular, it does not resolve the critical question, namely, which of the monthly targets, set out in the budget, were intended to constitute such milestones. Ordinarily, a budget would contain a large number of individual line items. For example, in the draft budget which was approved as an interim budget in July, the cash flow statement contained 25 individual components, each with their monthly targets. Understandably, neither party in this case suggested that the monthly target for each such line item constituted an individual milestone.

Thus, it was clearly in the contemplation of the parties, at 18 August, that the milestones, referred to in the second criterion in clause 4, must attach to particular components in the budget. However, the variation agreement is silent, and on its face does not provide any guidance, as to the particular components in the budget, the monthly targets of which were to constitute milestones for the purposes of clause 4. However, the agreement did not stand alone. It was made between two parties who were then in an ongoing commercial relationship. It was made in the setting of the commercial circumstances, which were relevant to the relationship between those parties, including the specific factors, which were then the prominent matters of concern for the plaintiff and the defendant in respect of the budget which was then under preparation.

It is now well accepted that, in determining the meaning of terms used by parties in a commercial contract, it is relevant, and indeed important, to take into account the background context to the agreement, in particular to ascertain, objectively, the underlying purpose of the particular transaction.[3] Although it is not permissible to seek to elicit, from the background circumstances, the parties’ subjective intentions in respect of an aspect of the agreement, nevertheless the surrounding circumstances are relevant, because an understanding of the purpose and genesis of the agreement enables the court to determine, objectively, the import of the language used by the parties in the agreement reached between them.
[3]Prenn v Simmonds [1971] 1 WLR 1381, 1383-4 (Lord Wilberforce); Reardon Smith Line v Hansen-Tangen [1976] 1WLR 989, 995-6 (Lord Wilberforce); Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337, 348-351 (Mason J); Pacific Carriers Limited v BNP Paribas (2004) 218 CLR 451, 461-2 [22].

In the present case, I consider that the background circumstances to the variation agreement are instructive in revealing, objectively, the meaning of the word “milestones” in the second criterion contained in clause 4 of the variation agreement.

It is clear, from a review of the relevant events during the last four months before the conclusion of the variation agreement, that two particular matters were of primary importance in discussions between the directors of the defendant and the plaintiff. The first matter related to the cash position of the company, and in particular it reflected a concern by the directors that the company be able to remain solvent as a going concern. The second prominent consideration between the parties concerned the ability of the company, in its budget, to predict, and in the ensuing financial year to achieve, the production target of 295,000 ounces to 315,000 ounces stated in the prospectus, which was issued in June 2008 as the basis for the capital raising which was then undertaken.

At the April board meeting, it was noted that an equity raising by the company would be required in the coming September, because it was predicted that, by then, the company would have a cash shortfall. However, within three weeks circumstances changed, so that the plaintiff, by 26 May, had formed the view that it was necessary for the company to undertake an immediate capital raising. As a consequence, there were discussions involving the plaintiff (referred to in Mr Wise’s witness statement), in which the directors expressed their concerns that the date for the proposed capital raising had been brought forward. As a result, Mr Rae undertook a review of the capital raising.

At the same time, the production targets for the company also featured prominently as a matter of important concern for the upcoming budget. On 7 July, Mr Wise sent a memorandum to the plaintiff, Mr Campbell-Cowan, Mr Kennedy and the company’s investor relations officer (Delphin Cassidy), in which he stated that “ … St Barbara’s meeting its targets as outlined in the prospectus is an absolutely critical objective to be achieved”, and that the board looked forward to receiving the recommended 08-09 budget which had “sharp focus” on achieving the prospectus targets, with supporting details of the projected returns on capital invested.

As I have already stated, on 17 July, the plaintiff sent to Mr Wise an email, in which he expressed the same view, that it was necessary to “deliver on the prospectus forecast”. He stated that the budget process had been focusing on achieving that end. On the same day, Mr Wise sent to the plaintiff an email dated 17 July, to which I have already referred, and in which he stated that one of the “key issues” of focus in assessing the budget outcomes would be the level of free cash produced during the year, and the level of cash available at the end of the year. Mr Wise stated that, in the absence of exceptional circumstances, the debt and equity markets would not be reasonably available to the defendant for the next twelve months, so that cash management was “therefore a key issue”.

The question of the budgeted cash position of the company, and its effect on the potential solvency of the company during the ensuing financial year, came to a head as a result of the draft budget which was distributed on 22 July. The budget provided for a net cash balance, as at 30 June 2009, of $1.4M. It was clear that, on the figures contained in the budget, the company would cease to be a going concern at some stage during the forthcoming financial year. The minutes for the meeting of the board on 24 July demonstrate that the board was, again, concerned with the issues of the budgeted production and cash position. The board noted that the budgeted production for the 2009 fiscal year needed to be in line with the information provided in the prospectus in June 2008, and that the cash position should be in line with the internal forecasts, which underpinned the June equity raising.

Following that meeting, the directors held discussions as to the information which they each required to be contained in the next draft of the budget. As a result, on 29 July, Mr Wise sent to the plaintiff the memorandum entitled “Revised 2008 to 2009 budget preparation”, which placed particular emphasis on the issues of gold production and cash flow. As I have already noted, it is significant that that memorandum was sent to the plaintiff on the same day, on which Mr Wise sent a separate email to the plaintiff, containing the first draft of the variation agreement. Clause 4 of that draft was in the same terms as clause 4 of the agreement ultimately concluded between the parties.

On 8 August, the plaintiff sent to the directors a document entitled “Budget Review Process and Schedule”. That document referred to a number of different matters on which the budget review was focusing. The most detailed aspect of the document related to the projected production from Leonora and Southern Cross. Reference was also made to the deferral of some corporate capital expenditure, and reduction of consultant costs.

It is important to bear in mind that, at the time at which the parties were involved in the foregoing discussions relating to the preparation and approval of the 2008/2009 budget, the plaintiff and Mr Wise were also negotiating for the conclusion of the variation agreement. It is clear from the foregoing that, in the period which preceded the execution of the variation agreement on 18 August, the parties were particularly focused on the need for the budget to provide for a cash outcome, which would provide for the ongoing solvency of the company, and, further, that the budget would be able to provide for production of gold in the ensuing year, which was consistent with the target stated in the June prospectus.

Those background circumstances are, in my view, particularly significant in determining the meaning of the term “milestones” in the second criterion contained in clause 4 of the variation agreement. The fact that the key matters of focus of the parties, in the lead up to the agreement, and in the preparation of the budget, were production and cash, was not a matter of arbitrary choice by the parties. Rather, the background circumstances of the company dictated that those two elements of the company’s financial position were then of pre-eminent importance. At the April 2008 board meeting, it had been anticipated that the cash position of the company would be tight by September. That position deteriorated so much in the ensuing three weeks, that an immediate capital raising was necessary by the end of May. The cash flow predictions in the first draft of the budget, distributed on 22 July, demonstrated that the company would cease to be a viable going concern in the ensuing financial year. The exigencies of the company, relating to its continuing cash position, were coupled with the commercial necessity that the company predict, and achieve, the production targets stated in the prospectus, which was necessary for the successful conclusion of the capital raising in June 2008. The credibility of the company would have been destroyed if, shortly after the publication of that prospectus, a budget were approved setting materially lower production targets. The focus of the directors, and the plaintiff, on producing a budget, which set targets consistent with the prospectus, was a necessary product of the commercial circumstances of the company at that time.

On the other hand, it is clear that, during the discussions between the plaintiff and the board, concerning the preparation of the budget, which preceded the execution of the variation agreement on 18 August, there was virtually no mention of the expectations for the projected balance sheet to be contained in the budget. Further, there was only one short fleeting reference to the projections for the profit and loss account of the company, that reference being contained in the memorandum by Mr Wise to the plaintiff on 29 July.

In the context of the foregoing circumstances, which preceded the conclusion of the variation agreement on 18 August, it would be singularly artificial to endeavour to construe the term “milestones”, in clause 4 of that agreement, by reference solely to its literal meaning, even if that meaning were unambiguous as Mr Strong contends. The first criterion in clause 4 was designed to ensure that the plaintiff, as managing director and chief executive officer, would present to the board a detailed budget for the ensuing financial year, which would address the critical commercial exigencies of the company at that time. The purpose of the second criterion was that the plaintiff would continue to oversee the ongoing performance by the company to meet the objectives contained in the budget. As I have stated, the key objectives of the company at that time revolved around the need to ensure that the ongoing cash position of the company was sufficient to enable it to survive, and, secondly, the need to ensure that the company projected, and met, gold production targets consistent with those stated in the prospectus.

The variation agreement was, of course, concluded before the 2009 budget was finalised. Thus, clause 4 referred to milestones in a budget which was not yet in existence. However, the board had, one month earlier, approved the July budget on an interim basis. It is important to bear in mind that the executive summary to the July interim budget summarised the projected outcome for five particular matters, namely: production; operating costs; budgeted result (EBITDA and net profit after tax); free cash flow; and exploration program. In cross-examination, the plaintiff agreed that the format and contents of the executive summary were in orthodox form. There was no suggestion, either by the directors or by the plaintiff, between the date of the presentation of the draft budget on 22 July, and the date of the variation agreement on 18 August, that the executive summary should focus on any other particular item or items.

Accordingly, I consider that it is appropriate, and indeed necessary, to take into account the background context to the agreement, in order to properly understand the meaning of “milestones” in clause 4. Foremost in the considerations of the parties at that time were the issues of cash and production. There was no disagreement between the parties that the topics, selected for the executive summary of the draft budget in July, were inappropriate or incomplete. Two of the five topics referred to production and cash, which, as I stated, were the central matters of focus for the parties in the lead up to the agreement. By contrast, the “overall position” of the company, which Mr Strong contends was the single “milestone”, was neither the focus of the discussions between the parties during the relevant time period, nor, of itself, the subject of the executive summary in the draft budget. The clear purpose of that executive summary (as with any executive summary) was to identify the key elements of the document, which it introduced. In those circumstances, in my view, the “milestones”, in the second criterion to clause 4 of the variation agreement, were intended to refer to the monthly targets for each of the five matters stated in the executive summary to the July draft budget, namely, production, operating costs, budgeted result (that is earnings and profit), free cash flow and exploration.

The evidence of Mr Wise demonstrates that, at the dinner meeting on 23 February, the directors focused primarily on a comparison of the actual and budget positions of the company in relation to cash, production and costs. In cross-examination, Mr Wise stated that, in those discussions, the question of the performance of the company in respect of its net profit, as against the budgeted net profit, was at most only a subsidiary consideration. It is clear that, although a formal decision had not been reached by the directors on 23 February, each of the directors had reached the conclusion that there had been a fundamental failure by the company to perform in compliance with the budgeted targets of costs production and cash. Ms Gibson’s evidence was to like effect. In cross-examination, she stated that the focus of her assessment, for the purposes of clause 4 of the variation agreement, was on production, costs and cash. She said that, in making her assessment, she paid very little attention to the net profit performance of the company against budget.

Thus, in reaching its determination as to the plaintiff’s entitlement under clause 4 of the variation agreement, the defendant’s board based its decision on three of the five milestones which, I consider, were contemplated by the second criterion in clause 4. The fourth milestone – net profit, was not entirely ignored by the board, but was considered to be of “minor” relevance. It has not been suggested by the plaintiff that the board should have had regard to the fifth milestone to which I have referred – the exploration program - and that concession is realistic, given the commercial context in which the board was considering the plaintiff’s entitlement.

In those circumstances, I reject the submission on behalf of the plaintiff that the defendant breached clause 4, by failing to assess the plaintiff’s entitlement by reference to the milestones referred to in that clause.

Alleged breach of discretion

The third breach of contract, relied on by the plaintiff, is based on an allegation that the defendant’s board, in determining the plaintiff’s entitlement under clause 4, failed to exercise properly the discretion reposed in it in determining the extent of compliance with the two criteria specified in clause 4. Mr Strong contended that, as a part of the express term, or, alternatively, by virtue of the admitted implied term (of good faith), the board was required to make a determination, of the extent of compliance with the criteria, which was not “arbitrary, capricious, irrational or perverse”. For that proposition, he relied on the decision of Burton J of the Court of Queen’s Bench in Clark v Nomura International Plc[4].
[4][2000] IRLR 766.

In any event, to the extent to which the difference between the budgeted and actual loss was relevant to that determination, I do not consider that the board would have acted in breach of its obligation to the plaintiff, if it did not take into account, as relevant, the fact that the discrepancy between the budgeted and actual loss was due to the write downs to which I have just referred. The evidence of Mr Campbell-Cowan establishes that those write offs were reasonably required by reference to the relevant accounting standard. In particular, Mr Campbell-Cowan stated that, if the adjustments and provisions were not made in the half yearly accounts, it would have been necessary to convince the auditor that it was reasonable to act on the basis that the particular mining operation, in respect of which the capitalised costs were not written off, was part of the future plans of the defendant.

The remaining item of adjustment to the profit and loss account consisted of a write down of the Bendigo Mining shares held by the defendant. The value of those shares was written down by $6,373,000 in the half yearly accounts for the period ended 31 December 2008. However, by the end of February 2009, the value of the shares had recovered to the value which they had as at the date of the budget on 25 September 2008. Mr Campbell-Cowan explained that the accounting standard provided that, once the value of such an asset has been written down in the profit and loss account, it is impermissible to record a subsequent increase of the value of the asset in the profit and loss account. Rather, that increase in value must be carried as a reserve in the balance sheet. The original loss on the asset, in the profit and loss account, can only be reversed at the time at which it is later sold.

If it had been necessary for me to decide, I would have concluded that, in the foregoing circumstances, the board would have been obliged to take into account the fact that $6.37M of the discrepancy, between the budgeted net loss, and the actual net loss, as at 28 February 2009, had been due to the accounting considerations, to which I have just referred. However, as I stated, the board only treated profit as, at most, a subsidiary issue, and it would appear that the discrepancy, between the actual and budgeted loss, did not play a material part in the deliberations of the board on 23 February and 12 March.

The effect of the gold price

The approved budget assumed a gold price of $975 per ounce during the forecast period. In fact, in the ensuing months the gold price improved quite markedly. By December 2008, the actual price was $1,224 per ounce; by February 2009, it was $1,452 per ounce.

The plaintiff alleges that the board acted in breach of the discretion, under clause 4 of the variation agreement, to the extent to which it took into account that the defendant’s performance in meeting the milestones in the approved budget had been assisted by the fact that the actual gold price was higher than the budgeted gold price.

That point arises principally from an aspect of the worksheet, which was prepared by Mr Campbell-Cowan and provided to the directors. The worksheet was divided into two sections. The first section, entitled “Operational Performance”, compared the position of the company as against budget in respect of performance, cash operating costs and free cash flow. The second section, entitled “Variance Attributable to Gold Price”, compared the actual gold price for each month with the budgeted gold price of $975 per ounce. It then contained two lines which demonstrated what would have been the discrepancy between actual cash flow and budgeted cash flow, if the price of gold during the period September 2008 to February 2009 had remained static at the budgeted price of $975. In particular, it demonstrated that, if the price had remained at $975, the shortfall in cash flow for the relevant period would have been $35.8M.

In his evidence, Mr Campbell-Cowan expanded on the effect of the increase in gold price from September 2008 to February 2009. In particular, he demonstrated that, by not producing the ounces of gold which had been budgeted, at a time of high gold prices, the defendant had missed the opportunity to earn up to $31.9M in additional gold revenue.

It would, however, seem that the effect of the increased gold price, both in ameliorating the shortfall in cash flow, and in contributing to a lost opportunity to earn revenue, was given limited consideration by the directors, when determining the amount of the completion based performance payment to be made to the plaintiff. As I stated, the evidence of Mr Wise was that, at the meeting on 23 February, the principal focus of the directors was on the fact that the company had consistently failed to meet budget, particularly in respect of production and cash. In cross-examination, Mr Wise said that at the meeting on 12 March it was said that the company’s position had been fortuitously enhanced by a coincidental increase in the gold price in excess of the price which was assumed in the September budget. In her witness statement, Ms Gibson also remarked on the effect of the higher gold price, stating that the period from September 2008 to February 2009 should have been a favourable period for the company, because of the higher gold price. She stated that the loss of that opportunity was a “frustrating element” of missing budgeted gold production.

In my view, the limited manner in which the Board thus considered the effect of the higher than expected gold price could not be regarded as irrational, arbitrary, perverse or capricious. It was relevant for the board to observe that the impact of the shortfall of production had not been as bad as it might have been, because of the increase in the gold price. That observation was relevant to an understanding by the board as to the magnitude of the shortfall of the production, and as to its overall effect on the company’s performance and financial position. Equally, Ms Gibson’s comment about the increased gold price could not be said to be logically irrelevant or irrational. In my view, she was entitled to take into consideration, in a similar way, the fact that the lost gold production translated, in a sense, into a lost commercial opportunity because of the prevailing high gold price. Thus, to the limited extent to which the board took into account the higher than expected gold price, I do not consider that the board acted irrationally, capriciously, arbitrarily or perversely.

The zero assessment

The fundamental proposition, advanced by Mr Strong, as constituting a breach by the board of the terms of its discretion contained in clause 4 of the variation agreement, was that the board was capricious, irrational, arbitrary or perverse in concluding that the extent of the compliance with the two criteria, specified in clause 4, was such that the plaintiff was not entitled to any payment under that clause. In advancing that proposition, Mr Strong relied, at least in part, on the circumstances, to which I have just referred, and which provide reasons or explanations for the discrepancies between the performance of the company in a number of material respects (particularly in respect of cash, production and profit) and the budgeted outcomes in those areas.

The first premise, in that proposition, is that the board’s conclusion, on 12 March, was that the extent of compliance with the two criteria was such that the plaintiff was not entitled to any payment, under clause 4, in respect of the performance based completion amount. As I have already stated, I accept that that premise has been made out by the evidence.

In particular, it is clear from the evidence relating to the lead up to the meeting of 12 March, and as to the deliberations of the board on 23 February and 12 March, that the board concluded that, if it were to determine the plaintiff’s entitlement solely by reference to the extent of compliance with the two criteria specified in clause 4, the plaintiff would not be entitled to any payment. The board, nevertheless, determined to make a payment to the plaintiff, because it considered that there were other factors, not falling within the ambit of clause 4, which persuaded it that some payment should be made to the plaintiff in any event.

The evidence, leading to that conclusion, commences with the memorandum from Ms Gibson to the directors on 20 February, in which she stated that “clearly, with the current performance to end January there will be no payment owing for operational performance … “. The same view was expressed by Mr Wise in the “Road map”, which he distributed to members of the board on 21 February. In his witness statement Mr Wise said that he was then of the view that the defendant’s performance had “completely failed” against budget, and that the performance payment under the letter agreement therefore should be “nil”.

Mr Wise’s evidence concerning the dinner meeting of the directors on 23 February, demonstrates that all the directors expressed the same view, namely, that based on the performance of the company, as measured against the budget, no payment was owing to the plaintiff. The various members of the board then expressed differing views as to whether a payment should be made to the plaintiff in any event, and, if so, as to the amount of any such payment.

On 8 March 2009, Mr Wise sent to the directors an email after he had reviewed a worksheet provided by Mr Campbell-Cowan, and in which he stated that there had been a “complete underperformance against budget”. He stated in the email that he therefore anticipated that it would only be necessary to have a “short session” to reach a final conclusion. That prediction was borne out by Mr Wise’s description of the meeting, which did take place on 12 March. It is clear, from that description, that the directors had not altered their previous view, namely, that there had been such an underperformance in respect of the two criteria specified in clause 4, and in particular in respect of the second criterion, that no payment should be made to the plaintiff.

The second question, which arises, is whether that determination by the board was “irrational”, “perverse”, “arbitrary” or “capricious”, within the meaning of the authorities to which I have referred, in light of all the circumstances which were then before the board.

Mr Strong contended that the decision should be so characterised. He pointed out that, although there had been a shortfall in production, nevertheless 84 percent of the predicted production had been achieved. Furthermore, although there had been a shortfall in the cash position, the cash flow and cash balances of the defendant were improving in the period from December to February 2009. He further submitted that, as part of that process, the board ought to have taken into account the fact that, as an offset to the deteriorated cash position, the amount of outstanding creditors had reduced to a commensurate degree. Mr Strong also contended that although a five year plan had not been attached to the budget, nevertheless the plaintiff had substantially performed the first criterion in clause 4, namely, by presenting a detailed budget which had been approved by the board. In those circumstances, he submitted that it was irrational, perverse, arbitrary or capricious for the board to reach a conclusion that the extent of compliance with the two criteria, specified in clause 4, had been such as to lead to the conclusion that the plaintiff was not entitled to any payment in respect of the completion based performance amount.

In determining this question, it is important to bear in mind some basic propositions. The critical starting point is whether the particular board of the defendant, as it was constituted on 12 March 2009, made a decision which was perverse, irrational, arbitrary or capricious. In order for the plaintiff to succeed on that issue, it is not sufficient for me to conclude that a board, acting reasonably, might have reached a different conclusion. The question, which was before the board on 12 March, essentially involved an evaluative decision by it. No doubt other minds, and boards, might differ in relation to the answer to that question.

The second matter, which must be borne in mind, is that the board, in making its decision on 12 March, was not acting in a vacuum. Rather, it was the same board which had overseen the development and approval of the budget, and which was particularly well acquainted, through weekly and monthly reports, with the ongoing position of the defendant during the critical period from the approval of the budget in September 2008 to 28 February 2009. Essentially, the evaluation by the board on 12 March 2009, in respect of the performance as against the two criteria in clause 4, was made by a board which was well informed as to the critical issues then confronting the company, and which was well acquainted with the importance of the milestones, to which it had attached particular weight.

The third proposition, which is important to bear in mind, is that it has not been suggested, nor could it be, that the board was acting in a manner which was not “bona fide”. There is no suggestion that the board was actuated by any malice towards the plaintiff, nor by a desire to achieve an ulterior objective on behalf of the company. Rather, the processes adopted by the board, and the deliberations undertaken by them, satisfy me that the board approached the question of the plaintiff’s entitlement under clause 4 in a measured, considered and conscientious manner. Mr Strong, correctly, did not seek to persuade me to the contrary.

In light of those preliminary observations, it is necessary to determine whether, in all the circumstances, the board made a decision which was capricious, arbitrary, irrational or perverse, in determining that the extent of compliance with the two criteria was such that the plaintiff was not entitled to any payment by way of a performance based completion amount under clause 4.

As I have already discussed, the critical factor, which dictated the defendant’s performance, was its production results. The production figures at 28 February 2009 demonstrated that, at that time, there had been a shortfall against budget of some 16 percent. The board considered that that was a significant failure by the company to meet its budgeted target. As I have stated, I do not consider that the board was irrational or perverse in not regarding as “mitigating” factors, off-setting that shortfall, the operational reasons for that deficiency (that is, the delay in the commencement of the Gwalia mine, the grade issues at Trump, the plant breakdown at Southern Cross, and the complexity of mining the Undaunted lode at Southern Cross).

Further, the information available to the board demonstrated that the production cost per ounce was 18 percent higher than budgeted. As I have already stated, while that discrepancy was the result of the shortfall in production, nevertheless the board was not acting perversely or irrationally in taking that factor into account. In particular, it was entitled to rely on that shortfall as demonstrating that the shortfall in production had not, in any way, been offset by an appropriate reduction in costs, which would have been reflected by a closer adherence to the budgeted cost of production per ounce.

In addition, the board was entitled to regard the shortfall in the cash flow, and cash balance, results at the end of February 2009 as of particular import. The shortfall in cash flow was 31 percent of budget, and the shortfall on the cash balance at the end of February was 17 percent of budget. Those results took place in a context, in which there had been a dramatic deterioration in the cash position of the company by the end of October 2009, only one month after the budget had been approved. On 12 December, the chief financial officer had forecast to the board that the critical “plimsoll” line for cash would be breached in the earlier part of the following year. That dire position confronted the directors in a context in which the initial interim budget, presented in July, had demonstrated that the company faced insolvency in the following financial year, necessitating significant reworking of the budget to produce a result, which would enable the company to continue as a going concern. It is true that, in the period between December 2008 and February 2009, the cash position of the company had improved, but it was still well short of budget. As I have already concluded, I do not consider that the board acted irrationally, capriciously, arbitrarily or perversely in evaluating the significance of the cash shortfall, by not taking into account, as an off-setting factor, the emergence of the $8.5M of creditors, who had not been recorded in the accounting system of the defendant by the end of August 2008.

Finally, it is clear that the board did not place much weight on the profit and loss performance of the company as against budget. If the board had done so, I would have concluded that it ought to have taken into account, as an offsetting factor, the write down of the Bendigo shares. Nevertheless, even taking that factor into account (and thus notionally reducing the net loss position of the company as at 28 February 2009), on my calculation the adjusted net loss position of the company would still have been 18.4 percent under budget.

Pausing there, in those circumstances, I do not consider that the decision of the board, that there had been such a lack of compliance with the second criterion, that the plaintiff was entitled to no payment in respect of that aspect, could be characterised as capricious, arbitrary, perverse or irrational. As I stated, a different board might have come, reasonably, to a different conclusion. However, that is not the test. Rather, the test is whether a reasonable board, acting rationally, and not capriciously, arbitrarily or perversely, could have reached the conclusion made by the defendant’s board in respect of the second criterion. In my view, the clear answer to that question is in the affirmative.

It was also contended, on behalf of the plaintiff, that the decision of the board was irrational, arbitrary, perverse or capricious, because it failed to take into account the fact that a budget had been presented to, and approved by, the board, in determining the extent of compliance with the first criterion in clause 4. The evidence discloses that the board was significantly influenced by the fact that the budget was not accompanied by a five year plan. In my view, the board’s approach in that respect could not be regarded as irrational, perverse, arbitrary or capricious. The requirement, that the budget include a five year plan, was contained in the agreement of 18 August, which was made just five weeks before the presentation of the budget to the board. The plaintiff had agreed to that requirement as part of his execution of the agreement on 18 August. There was no evidence that anything occurred in the intervening period, which had rendered that requirement incapable of achievement. The need for a five year plan had been well understood for a period of more than four months. As I have already stated, such a plan was a matter of moment for the board, particularly because of the need to carefully balance factors which might affect the short term survival of the board, with factors which were necessary to ensure its long term operational and financial success. In addition to the lack of a five year plan, it is relevant that a number of the matters, which affected the shortfall in production, cash and net profit as against budget, were, principally, matters which related to the appropriateness of the predictions made in the budget. Taking those matters into account, I do not consider that the board acted irrationally, capriciously, arbitrarily or perversely in reaching its conclusions on 12 March, notwithstanding that the plaintiff had presented a detailed budget on 25 September, which had been approved by the board.

Accordingly, I do not accept the proposition advanced on behalf of the plaintiff that the board made a decision which was irrational, perverse or capricious, in reaching the conclusion, on 12 March, that the extent of compliance with the two criteria in clause 4 were such that the plaintiff was not entitled to any payment.

Conclusions on breach

For the foregoing reasons, the plaintiff has not established that there was a breach of clause 4 of the variation agreement by the board in its determination of the amount of the completion based performance payment to be made to the plaintiff. Thus, the plaintiff’s claim for damages fails, and the proceeding must be dismissed.

It is, therefore, not necessary for me to deal with the issues which were raised on the question of damages. However, for the purpose of completeness, I make two observations. First, it was common ground that, if I concluded that the defendant had breached clause 4 in determining the amount of the performance based completion payment to which the plaintiff was entitled, the appropriate method of assessing damages payable to the plaintiff would consist of a judgment by me as to what a reasonable board, in the position of the defendant’s board on 12 March, would have determined to be the extent of compliance with the two criteria contained in clause 4. That approach has support in the authorities, to which I was referred by the parties[10].
[10]Clark v Nomura International Plc (above), [81] and following; Horkulak v Cantor Fitzgerald International (above), [72].

On the issue of damages, Mr Solomon pointed to the fact that Mr Strong had not cross-examined either Mr Wise or Ms Gibson, as to the amount of payment which would have been determined by the board, if it had taken into account the various factors, which the plaintiff had submitted the board had erroneously failed to take into account, in exercising its discretion in determining the extent of compliance with the two criteria in clause 4. Mr Solomon, at one stage, suggested that the absence of such evidence, from the members of the board, was fatal to the claim by the plaintiff for damages. I do not agree. The type of cross-examination, to which Mr Solomon adverted, would have produced answers which were no more than ex post facto hypothetical rationalisations by the witnesses. Such questions would, in the circumstances of this case, have required the witness to perform a task which was highly artificial, and also particularly complex. In essence, it would have required the witness to take into account circumstances, which the witness, genuinely, did not believe to be relevant to the determination to be made under clause 4. Secondly, if Mr Solomon is correct, Mr Strong would have been be required to ask an almost infinite amount of questions, based on the several different factors on which he relied as pointing to errors in the exercise of the discretion of the board under clause 4. In those circumstances, I am not persuaded that the absence of such cross-examination by Mr Strong would have been fatal to his client’s claim for damages.

Postscript: witness statements

Finally, before completing this judgment, it is relevant to say something about the manner in which the evidence in chief was adduced in this case.

When I first perused the file, I noted that witness statements had been filed, which were to constitute the evidence in chief of each of the witnesses. At a mention which I held before the commencement of the trial, I raised my concerns as to that process, and I expressed my preference that evidence in chief be adduced in the ordinary, proper manner, by way of viva voce evidence. However, I was reluctantly persuaded that I should receive evidence in this chief in the form of witness statements. The question whether witness statements should be used in the case was agitated before the judge, who was in charge of the management of the case. After hearing arguments, her Honour was persuaded by counsel for the defendant that evidence should be led by witness statements. I was conscious of the fact that the parties had incurred substantial costs in the preparation of the witness statements. Those costs would have been wasted if I did not permit any of the statements to be used.

There were no credit issues in this case. Nor was there any contest between the parties as to particular facts which were relevant to the case. Nevertheless, I consider that the procedure, of presenting the evidence in chief of a witness by a written statement, was, to some extent, a disadvantage to me in determining the case. An important part of the plaintiff’s evidence consisted of an explanation by him why various factors ought to have been taken into account by the board in exercising its discretion under clause 4 of the variation agreement. The defendant’s witness statements were directed to the same issue, explaining why those matters ought not to have led the board of directors of the defendant to a different conclusion. In addition, the defendant’s witness statements were directed to establishing how, and on what basis, the board made its decision on 12 March. Having heard the cross-examination of those witnesses, I consider that it would have been preferable if the witnesses had been permitted to give their evidence in chief orally, thus explaining, in their own language, why particular factors should, or should not, have been considered by the board in determining the entitlement of the plaintiff to a payment under clause 4 of the variation agreement. That process would also have been fairer to the witnesses, who were subjected to cross-examination on their witness statements, shortly after they entered the witness box.

From my observations in this case, witness statements seem to have become a licence to introduce an unacceptable amount of irrelevant and otherwise inadmissible material. The original witness statement of Mr Wise, filed with the court, comprised 79 pages. A large proportion of the witness statement was irrelevant. It had been prepared with almost total disregard for the most fundamental principles of the law of evidence. I required the defendant to redraft the statement, and to remove from it irrelevant and inadmissible material. Ultimately, that process led to the production of a witness statement for Mr Wise which was only 22 pages in length. Even in that state, the statement contained material which was of borderline relevance, and which, on proper analysis, was probably inadmissible. The other two witness statements filed by the defendant, although less egregious, also contained an unacceptable amount of irrelevant and unnecessary matters.

The witness statements, filed by both parties, contained a superfluous number of references to documents, which were irrelevant to the case. I only permitted the parties to tender documents which were relevant and admissible, and which were properly proven by the witness, or which were tendered by consent. As a result, less than one half of the contents of the four Court Books, which were originally filed in the case, were admitted into evidence.

I note that the Practice Book, concerning the operation of the Commercial Division, states that, ordinarily, evidence in chief is to be given by way of witness statement. I do not usually sit in the Commercial Division, but rather I sit in the Common Law and Criminal Divisions, in which viva voce evidence in chief is the norm. It is not for me to express a view as to whether or not witness statements should continue to be used in the Commercial Division. However, the observations which I have made indicate that, if witness statements are to be used, significantly greater discipline must be exercised in their preparation. In addition, the parties need to give more considered thought to whether, in a particular case, oral evidence, rather than witness statements, might be more helpful to the judge, who is called on to decide the case.

In making the above observations, I am not, in any way, critical of the judge, who directed that the case should proceed by way of witness statements. Her Honour was persuaded to that course by counsel for the defendant. At that stage of the proceedings, the ability of a judge to determine whether statements are appropriate is limited. Necessarily, the judge is reliant on the views put by the parties in respect of that issue.

Conclusion

For the reasons contained in this judgment, I have concluded that the plaintiff has not demonstrated that there was any breach of the agreement of 18 August 2008 by the defendant, in determining the amount of the performance based completion payment to be made by the defendant to the plaintiff under clause 4 of that agreement. It follows that the plaintiff’s proceeding must be dismissed. I shall hear counsel on the question of costs.

[2011] VSC 125

6 April 2011