EW Blanch Pty Ltd v Robert Ashley Cooper

[2004] NSWSC 631

CITATION:	EW Blanch Pty Ltd and Anor v Robert Ashley Cooper and Anor [2004] NSWSC 631
HEARING DATE(S):	24, 25, 26, 28 & 31 May 2004. 1 & 3 June 2004.
JUDGMENT DATE:	29 July 2004
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Bergin J
DECISION:	See para 226
CATCHWORDS:	[CONTRACT] - Claims that the first defendant breached certain sale warranty clauses of a Share Sale Agreement with the first plaintiff whereby he sold to the plaintiff shares in an insurance broking company - Construction of clause in Agency Agreement requiring broker to transfer to insurer "money paid" to it by insureds - Provision for adjustment of purchase price reliant upon certain figures shown in "Specified Accounts" - Whether 'substantial performance' of Share Sale Agreement sufficient to trigger operation of clause adjusting puchase price - Whether Share Sale Agreement contained an implied duty to co-operate in the doing of acts necessary to the performance by the parties of fundamental obligations under the contract. - [TRADE PRACTICES] - Claims that the first defendant engaged in misleading and deceptive conduct by making representations in respect of the status of the relationship between the subject company and the insurer - Whether reliance by first plaintiff on representations.
LEGISLATION CITED:	Mining Act 1978 (W.A.) Trade Practices Act 1974 (Cth)
CASES CITED:	Ankar Pty Ltd & Anor v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia (1977) 139 CLR 54 Arcos Ltd v E.A. Ronaasen & Son [1933] AC 470 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Butt v M'Donald (1896) 7 QLJ 68 Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Henville v Walker (2001) 206 CLR 459 Hunter Resources Ltd v Melville (1987) 164 CLR 234 Mackay v Dick (1881) 6 App Cas 251 Newmont Pty Ltd v Laverton Nickel NL [1983] 1 NSWLR 181 Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979)144 CLR 596 South Sydney Council v Royal Botanic Gardens & Anor (1999) 10 BPR 18,961; [(2002) 76 ALJR 436] Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689
PARTIES :	EW Blanch Pty Limited (First Plaintiff) ACN 002 544 569 Pty Ltd (Second Plaintiff) Robert Ashley Cooper (First Defendant) Maco Consulants Pty Ltd (Second Defendant)
FILE NUMBER(S):	SC 50163/01
COUNSEL:	SD Robb QC, JA Hogan-Doran (Plaintiffs) JC Kelly SC, TP Duggan (Defendants)
SOLICITORS:	Cutler Hughes & Harris (Plaintiffs) Rutter Morgan (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

BERGIN J

29 JULY 2004

50163/2001 EW BLANCH PTY LTD & ANOR V ROBERT ASHLEY COOPER & ANOR

Introduction

1 These proceedings arise out of a sale pursuant to a Share Sale Agreement dated 24 December 1999 between the first plaintiff, EW Blanch Pty Ltd (formerly Swire Blanch (Australia) Pty Ltd between 21 February 1999 and 20 January 2000) (Blanch) and the first defendant, Robert Ashley Cooper (Cooper), in which Blanch agreed to acquire from Cooper the whole of the issued capital in the second plaintiff ACN 002 544 569 Pty Ltd, formerly Michael V Mahoney Insurance Brokers Pty Ltd (Mahoney). Blanch is a member of an international group of companies, the ultimate holding company of which is EW Blanch Holdings Inc, a US corporation. Blanch’s immediate holding company is EW Blanch Limited, incorporated in Hong Kong (EW Blanch (HK)).

2 On the same day the Share Sale Agreement was executed Blanch procured Mahoney to enter into a lease with the second defendant, Maco Consulting Pty Ltd (Maco) (all the issued capital of which was owned by Cooper) of premises that Maco owned in Newcastle (the Lease). Mahoney operated an insurance brokerage business including for Compulsory Third Party (CTP) and Third Party Property Damage (TPPD) policies for the taxi industry in New South Wales. Mahoney had been offering insurance brokerage services to the taxi industry in an apparently informal arrangement with Zurich Australia Insurance Limited (Zurich) since 1993, with policies effected through approximately fifty taxi co-operatives acting as Mahoney’s sub-agents. Mahoney’s wholly owned subsidiary, Brisbane Insurance Brokers (Qld) Pty Ltd (BIB) operated a similar business in Brisbane.

3 These proceedings were heard on 24 to 28 and 31 May 2004 and 1 and 3 June 2004 when Mr SD Robb QC, leading Mr JA Hogan-Doran, appeared for the plaintiffs and Mr JC Kelly SC, leading Mr TP Duggan, appeared for the defendants.

The pleadings

4 The claims made by the plaintiff in the pleadings warrant close scrutiny particularly because the defendants elected not to call any witnesses in their cases on the basis and on the understanding that the claims made against them were restricted to those made in the pleadings. That latter proposition is not a controversial one, however I regard it as prudent to record it in this case because there were applications to amend the pleadings during the trial that were abandoned and because of the election made by the defendant.

5 The plaintiffs were granted leave on the first day of the trial to file a Further Amended Summons (FAS). The FAS claims that in about 1999 Blanch and Cooper “commenced discussions” for the purchase of Cooper’s interest in Mahoney (C9). It is alleged that by letter dated 28 July 1999 Mahoney advised Blanch that Zurich, Mahoney’s and BIB’s principal underwriter, (a) was attempting to establish agencies with two major Sydney-based taxi co-operatives; and (b) had indicated that Mahoney and BIB may not have been properly appointed as insurance brokers by the persons for whom they acted and requested proper evidence to establish that they had been properly appointed (the July 1999 matters) (C11). The plaintiffs allege that as a result of being notified of these matters Blanch ceased the due diligence investigation that it was conducting with a view to entering into a sale agreement with Cooper (C12).=

Zurich Representations

6 It is further alleged that in about October 1999 Cooper and Maco represented to the plaintiffs that (a) Mahoney had entered into an agency agreement with Zurich; and (b) Mahoney was “back on track” and that the July 1999 matters had been “fixed”(C14). These are pleaded as “the Zurich Representations” and are claimed to have been made in a conversation between the director of Blanch, Carol-Anne Priest (Priest) and Cooper. It is claimed that Blanch relied upon and was induced by the Zurich Representations to enter into the Share Sale Agreement with Cooper (C18). It is also claimed that in reliance upon and induced by the Zurich Representations Blanch entered into the Lease with Maco (C19).

7 It is alleged that the Zurich Representations were misleading and deceptive or likely to mislead and deceive because, (a) Mahoney and BIB were in default in making payments to Zurich as required by the Agency Agreement; (b) Mahoney and BIB were not financially able to remedy the default; and (c) Mahoney and BIB were not able to comply with the obligations of payment within 37 days of the commencement of the insurance policy as required by Clause 16.1 of the Agency Agreement (C47). It is alleged that the plaintiffs suffered loss and damage by reason of this conduct and that the measure of damages is equal to the amount of the first instalment under the Share Sale Agreement, the running costs of Mahoney and BIB until they were sold in January 2001, legal and other costs and interest payments totalling approximately $2,631,533.30 (C51). It is also claimed that Mahoney suffered loss and damage including payment of a dividend and a personal loan to Cooper and payment of rental totalling approximately $843,400.41 (C52).

Sale Warranties/Warranty Representations

8 It is alleged that the Share Sale Agreement contained various Sale Warranties and that Cooper represented to the plaintiffs that the sale warranties were “correct” (C17). These are also pleaded as “the Warranty Representations”. In this regard reliance is placed upon clause 5.1 of the Share Sale Agreement which provides:

5. Representations
5.1 The Seller represents to the Buyer that each Sale Warranty is accurate as at the date of the Completion Date in relation to facts subsisting at that date.

9 There are allegations of breaches of the Sale Warranties and there is reliance upon the Warranty Representations as a basis for further claims of misleading and deceptive conduct (C45:C48). It is alleged that the Sale Warranties, and the Warranty Representations, were not “accurate” as at the date of the execution of the Agreement on 24 December 1999. In this regard the plaintiffs rely upon three Sale Warranties in the pleading - clause 7.2 (h), clause 19.2 and clause 19.3. Those clauses are as follows:

7.2 Each of the Sale Company and the Subsidiary has from the date of the June 1999 Accounts until the Completion Date has (sic) conducted its business only in the ordinary course and there has been no:
…
(h) other matter in which the Buyer would be reasonably interested which contains any onerous or unusual provisions material for disclosure to an intending buyer.
19.2 No contract to which either the Sale Company or the Subsidiary is a party:
(a) is outside the ordinary and usual course of business or is otherwise unusual;
(b) is incapable of being fulfilled or performed on time, or only with undue or unusual expenditure of money or effort.
19.3 Neither the Sale Company or the Subsidiary, as party to any contract, is:
(a) in default of any material term; or
(b) but for the requirements of notice or lapse of time or both, would be in default of any material term of any contract.
The transaction contemplated under this Agreement will not lead to a breach of any contract to which the Sale Company or the Subsidiary is a party which is material to the operation of the Sale Company’s or the Subsidiary’s business.

10 It is alleged that Cooper breached the Sale Warranties and that the Warranty Representations were misleading and deceptive because (C44):

(a) As to clause 7.2 (h) of the Sale Warranties - Clause 11.3 (2) of the Agency Agreement required the second plaintiff to only issue a CTP green slip to customers after receipt of the payment of premium and Clause 16.1 and Schedule 7 of the Agency Agreement had the effect that the second plaintiff would pay to Zurich, monies paid to the second plaintiff as a premium not more than 37 days after the day of inception of the Contract of Insurance. At all times from the date of the Agency Agreement the second plaintiff was substantially in default of these terms and was not financially able to make good the default. Further, on 8 November 1999 and 23 December 1999 the second plaintiff had received facsimiles from Zurich containing Zurich’s complaints about the default of the second plaintiff.
(b) As to clause 19.2 of the Sale Warranties - As at 24 December 1999 the second plaintiff was incapable of operating the businesses in a way which met the second plaintiff’s obligations to pay the premium within 37 days as required under Clause 16.1 and Schedule 7 of the Agency Agreement.
(c) As to clause 19.3 of the Sale Warranties - As at 24 December 1999 the second plaintiff was in default of Clause 11.3 (2) and of clause 16.1 and Schedule 7 of the Agency Agreement.

11 There is one matter that needs to be highlighted having regard to the forensic decision made by the defendants not to call any witnesses. It relates to the last sentence of subparagraph (a): “Further, on 8 November 1999 and 23 December 1999 the second plaintiff had received facsimiles from Zurich containing Zurich’s complaints about the default of the second plaintiff”.

12 When the plaintiffs were granted leave to amend the Summons on the first day of the trial (24 May 2004) to include the abovementioned sentence, such leave was conditional upon the amendment being limited to the period commencing on 14 October 1999 with a requirement that the plaintiff provide to the defendant the actual alleged breaches. At the close of the plaintiff’s case on 31 May 2004, Mr Robb QC drew attention to the two faxes of 8 November 1999 and 23 December 1999 referred to in the sentence in question and noted that they contained complaints about defaults “under the pre-existing and informal agreement” between Mahoney and Zurich. Mr Robb QC sought to amend the Summons further by removing this sentence from subparagraph (a) of the particulars and adding it to subparagraph (c) of paragraph C 44 which, as can be seen above, alleged a breach of clause 19.3.

13 Mr Kelly SC opposed the amendment on the basis that it raised a whole new and different case. It was submitted it departed completely from the way in which the plaintiffs had run their cases upon which careful forensic decisions had been made. This was the first time it was alleged there was a breach of something other than the Agency Agreement of 14 October 1999. No agreement other than the Agency Agreement of 14 October 1999 had ever been pleaded nor had any specified breaches of any such pre-existing agreement been identified in the pleading.

14 Mr Robb QC provided a further draft of proposed particulars (MFI-4) that sought to amend subparagraph (c) in relation to a breach of clause 19.3 of the Share Sale Agreement. After further debate on 1 June 2004 the application to amend was withdrawn. Consequently the references to the facsimiles of 8 November 1999 and 24 December 1999 are not relevant to any case other than alleged breaches of the Agency Agreement of 14 October 1999.

15 It is alleged that on 10 April 2000 Zurich terminated the Agency Agreement and as a result of this termination and restrictions placed by Zurich on its underwriting of policies, the aggregate actual commissions and brokerage fees declined substantially. It is alleged that as a result of this substantial decline it became doubtful whether Mahoney and BIB could continue to trade without trading whilst insolvent (C24 & C25). On 10 January 2001 Blanch caused the sale of Mahoney and BIB to OAMPS Insurance Brokers Ltd (OAMPS) for $500,000.

16 It is alleged that by reason of Cooper’s breaches of the Sale Warranties and the misleading and deceptive Warranty Representations Blanch suffered loss and damage in the amount of approximately $2,631,553.30.

Claim under the Share Sale Agreement – cl 3.4

17 The plaintiffs make a claim pursuant to clause 3.4 of the Share Sale Agreement that the Actual Combined Brokerage Income (ACBI), as defined, for the year 26 October 1999 to 25 October 2000 was less than the Initial Combined Brokerage Income (ICBI), as defined, and that the Second Instalment is to be reduced by the shortfall multiplied by 1.25. It is also alleged that as at 25 October 2001 the ACBI was less than the ICBI so that the Third Instalment is to be reduced by the shortfall multiplied by 1.25. The plaintiff particularises a report of Cutcher & Neale dated 12 April 2001 in support of the claim that the ACBI for the year to 25 October 2000 was $2,982,264.47 and for the year to 25 October 2001 was $248,351.07.

18 The plaintiffs claim that in the result the Second Instalment was reduced from $1,595,985 to $3,685.04. It is alleged that the Third Instalment reduction was greater than the Third Instalment and in those circumstances Cooper is obliged to pay to the plaintiffs the amount by which the reduction exceeds the Third Instalment. The plaintiffs claimed in the Summons that Cooper is obliged to pay to the plaintiff $3,413,525.93 less $3,865.04 resulting in the amount $3,409,660.89. This claim was amended during the trial.

Negligent Misstatement

19 The plaintiffs also alleged that Cooper owed Blanch a duty of care to take reasonable care to ensure that the Zurich representations and the warranty Representations were true and reliable. It was alleged that Cooper breached that duty of care thereby causing Blanch loss and damage of approximately $2,631,533.30 (C53 – C58).

20 The Negligent Misstatement claim was abandoned at the trial.

Defences and Cross-Claims

21 The defendants deny the plaintiffs’ claims and allege that by reason of the failure by Blanch and Mahoney to obtain alternative underwriting after Zurich terminated its Agency Agreement, the formula in the Share Sale Agreement is unable to be triggered. The defendants also claim that there was an implied term in the Share Sale Agreement that the plaintiffs would act in good faith and that they failed to do so. Cooper cross-claims for the payment of the Second and Third Instalments and various other amounts under the Share Sale Agreement, alternatively for damages for breach of contract.

22 Maco cross-claims for the payment of unpaid rent under the Lease. The plaintiffs claim that Cooper was the “guiding mind” of Maco and that his representations inducing Blanch to enter into the Share Sale Agreement must be taken to have been made by Maco in orderto induce Blanch to procure Mahoney to enter into the Lease. Mahoney ceased making rental payments under the Lease in August 2000 and the plaintiffs claim that orders should be made that the Lease be terminated as at 1 August 2000 and that the amount of any damages to be paid to Maco be equal to any amount due to the plaintiffs.

The Facts

23 In 1993 Zurich became Mahoney’s underwriter for TPPD and CTP offered to the taxi industry in New South Wales. The arrangement appears to have been an informal one, not governed by a written contract and one in which there was a degree of flexibility in relation to the time within which premiums were passed on to Zurich.

24 During 1999 Blanch entered into an underwriting agency agreement with Suncorp Metway Insurance Ltd (Suncorp) entitled “Taxi Choice - Queensland & Northern Territory Agreement. That agreement was dated 24 June 1999 but commenced on 1 April 1999. Blanch provided insurance for clients of BIB but could not underwrite policies outside Queensland or the Northern Territory without the authorisation from Suncorp. Paul Reid (Reid), the Vice-President Marketing and Operations, of Blanch, was the person with whom BIB dealt.

25 Priest, a director of the plaintiffs, holds a Bachelor of Laws degree from Sydney University and practised as a solicitor in Sydney for two years and in London for two years between 1986 and 1990. Subsequently she worked for Sedgwick Limited as the Director and Manager Legal, Financial and Professional Division between 1991 and 1994: for Swire Fraser Limited as Legal Counsel and Director, Financial and Professional Divisions in London and Australia between 1994 and 1997; for Swire Blanch Limited as Executive Vice-President, Australasia Region and Legal Counsel between 1997 an 1998; and for EW Blanch (HK) as President and Chief Operating Officer, Australasia Region and Legal Counsel from March 1998 to March 2002.

26 Between March 1997 and March 2002 Priest was a director of a number of companies in the Group and was “the Chief Operating Officer” and a director of Blanch and from 24 December 1999 the Chief Operating Officer and director of Mahoney and BIB. Priest gave evidence that for the purpose of fulfilling these roles she travelled to Australia “when necessary”, spending approximately 1 week per month in Australia and otherwise managing the companies from Hong Kong by “telephone, email and other means of communication”.

March 1999 to 14 October 1999

27 In March or April 1999 Reid advised Priest that he had been investigating the possibility of the Blanch Group expanding its business operations into Australia by acquiring an interest in Mahoney’s business. Reid had been having discussions with Mahoney’s since January 1999 and had received some detailed information about its business from Mr Lindsay Norton, the general manager of Mahoney. That information referred to the Taxi CTP business as 55.95% of Mahoney’s business and the taxi and motor vehicle TPPD as 33.03%.

28 Priest gave evidence that it was her responsibility as Chief Operating Officer of EW Blanch (HK) to identify attractive businesses for acquisition by the Group. Where a company within the Group within Priest’s responsibility entered into an agreement to buy a business, or shares in a company, Priest said she had the “initial authority to ensure that all of the conditions that had to be satisfied before the agreement was completed were in fact satisfied”. She also gave evidence that if she decided that the conditions for completion had not been satisfied then completion would not take place.

29 In April or May 1999 Priest and Reid attended Mahoney’s Newcastle premises to “have a look at the physical layout of the office and to get a feel for the running of the business”. On this visit Priest was informed that the bulk of the taxi business was placed with Zurich and that Zurich had been the underwriter on the taxi portfolio for a number of years. When Priest asked whether it was a broker arrangement or an agency arrangement she was informed that the clients were the taxis and Zurich was the underwriter. Priest gave evidence that at that time she understood that CTP Insurance was compulsory and that in New South Wales it could only be provided by a licensed CTP insurer, such as Zurich. It was also her understanding that no other licensed CTP insurer in New South Wales wrote any significant CTP policies in favour of taxi operators. Her evidence was that she regarded Mahoney’s capacity to obtain insurance cover for its taxi operator clients from Zurich, particularly in relation to CTP cover, as very important to the viability and continuing success of Mahoney’s insurance broking business.

30 On 13 May 1999 Reid, on behalf of Blanch, wrote to Cooper advising him of the arrangements put in place with Suncorp dealing with the business of BIB. The letter also included the following:

6. Taxi Portfolio – New South Wales & Other States. We are pleased to report that we have also been able to arrange placing facilities for New South Wales, Victoria and South Australia. Arrangements still have to be completed as far as the NSW CTP requirements are concerned and I will report to you as soon as this has been completed. An added bonus is that as part of the Risk Management Agreement that we have with the Insurer I am in the position of being able to increase the brokerage on this portfolio by between 2.5% and 4%. Whilst the increase will always be subject to the overall claims results, as our risk management strategies take effect, and claims results are reported on a pure incurred basis, the benefits accruing to your company should be quite substantial.

…
Further, subject to the NSW CTP placement confirmation, and/or satisfactory alternate arrangements being presented, confirmation that support for the NSW, Victorian and South Australian business will follow.

31 In an internal Blanch presentation prepared by Reid in about June 1999 to seek approval to purchase Mahoney, reference was made to Mahoney’s “excellent reputation” in the taxi industry that had resulted in the major Victorian co-operative contacting Blanch proposing that “we undertake to place their business as well”. Reid continued, “Whilst I have obtained Underwriter’s approval to write this business we are currently undertaking an analysis of the co-operative’s premium/claims information”. Reid identified, as a weakness, the heavy concentration on the taxi industry resulting in an imbalance in the overall spread of insurance business generated by both Mahoney and BIB. He suggested that if the situation “was not redressed” it could place the company in a potentially vulnerable position. His solution was:

Whilst there appears to be no major alternate player – broker or insurer – in the current market, the steps necessary to ‘lock in’ the income (Mahoney) receives is relatively simple. The New South Wales taxi business is ready – and as a result of a recent meeting with the Executive Council – they are currently awaiting our advice on the procedural requirements to convert their business/co-operatives into a “Captive” based operation. I have already met with the owners of the major co-operatives and they are extremely keen to undertake the necessary steps to make this happen. This would result in a number of benefits to (Blanch) if we were to purchase the (Mahoney/BIB) business. Most importantly we would be able to negotiate a five by five management contract as well as obtaining an additional revenue source by placing the reinsurance portion of the book as well as picking up significantly increased brokerage from the Section 1 insurance which is not currently being underwritten within the Sydney, Newcastle and Wollongong metropolitan areas.
Additionally, by utilising the resources and income base that the purchase of (Mahoney/BIB) would provide, Swire Blanch will be well placed to further extend our service throughout the Eastern Seaboard of Australia. On reading the attached Mahoney Portfolio Analysis you will see a number of areas where substantial additional income would be attained from their existing book. The only apparent management shortcoming that I have been able to detect within the Group is the lack of knowledge/understanding of the nationally and internationally available rates of returns on facilities that (Mahoney), in particular, place. With just a cursory understanding of their portfolio and without the addition of our own input, where I believe additional brokerage of $800,000 would be attainable, I could increase the annual income by a minimum of $1,000,000 (one million dollars).

32 Priest gave evidence that she understood that the notion of a “captive” insurance arrangement was where the operators in a particular industry, such as the taxi operators, self-insure a portion of their collective risk, and then obtain reinsurance in relation to the amount of cover not self-insured. As it was compulsory for taxi operators to have CTP insurance, a captive insurance arrangement could not be put into effect unless a licensed CTP insurer could be found who would agree to provide directly to taxi operators the necessary CTP component of their insurance requirements.

33 It is apparent that Reid was at least exploring placing TPPD with an insurer other than Zurich and that he was concerned that if that occurred Zurich “may just throw the lot out”. On 16 June 1999 he wrote to Priest in Hong Kong informing her that he had spoken to a representative of SGIO who was “still interested in writing the book” but that he needed to obtain a further report from Zurich. After informing Priest of his concerns that Zurich may not tolerate splitting their book, he advised that even if the purchase of the Mahoney business proceeded, Blanch should hold off until at least 1 September in writing the NSW business. Priest responded the following day advising Reid to discuss his “worries” with David Burdis of the Hong Kong company when he was in Sydney shortly thereafter and also said “I think we are best off advising that we will not get the NSW business and then if we do, it will be a bonus. At the moment London has an expectation that we need to dispel”.

34 By this time and indeed since at least late 1998, Zurich had itself been exploring better ways to do business with the taxi industry. More recently it had been negotiating with the two largest taxi co-operatives, Cumberland Cabs company (Cumberland) and the Deluxe Cab Company (Deluxe) to deal with Zurich direct, thus cutting Mahoney out.

35 On 29 June 1999 Zurich wrote to Mahoney in terms which included the following:

As you know Zurich has been reviewing the insurance arrangements for the taxi industry in New South Wales, in particular in the Sydney Metropolitan Area.
In the course of our review it has become apparent that there are deficiencies in the documentation of the arrangements between Zurich and Mahoney, the taxi Co-operatives and the insureds (the taxi operators).
Zurich has been proceeding on the basis that Mahoney has been the appointed insurance broker of the taxi Co-operatives acting as representatives of the taxi operators for the purposes of acquiring insurance services from Zurich. It now appears that Mahoneys have not been appointed by the Co-operatives or the insureds (the taxi operators) as insurance broker.
We wish to clarify the relationship in the interests of all parties. Accordingly, the purpose of this letter is to advise you that Zurich requires the relationship between the relevant parties to be properly documented in accordance with the Insurance (Agents and Brokers) Act. As this matter involves some Co-operatives in New South Wales we have written to those with whom we do business (copy attached).
The inadequacy of the documentation has only come to Zurich’s attention in the past two weeks, and the steps we are now taking are as a result of us ascertaining this unsatisfactory state of affairs.
Zurich wishes to continue to do business with Mahoney’s where it can be demonstrated that you have been properly appointed as the broker of taxi operators. Accordingly we write to invite you to provide to us evidence that Mahoney’s have properly been appointed as broker of the insureds (the taxi operators) so that we can continue to provide insurance services in accordance with the Insurance (Agents and Brokers) Act.

36 Zurich suggested that it would be prudent to finalise the matter within 30 days so that the insurance services provided to the taxi operators were in accordance with the Act. It also advised Mahoney it was putting in place steps to issue renewal notices to all insured operators until matters were “rectified”.

37 On 2 July 1999 EW Blanch Holdings Inc executed Heads of Agreement with Mahoney in which it was recorded that the parties anticipated entering into an agreement whereby Blanch would purchase the shares in Mahoney from Cooper. But for some conditions in relation to costs, disclosure, non-publication and the like, the Heads of Agreement were not intended to be a binding agreement but an expression of present intentions. Both parties agreed to negotiate in good faith with a view towards executing a definitive agreement by no later than 31 August 1999. The Heads of Agreement provided for the sale price to be paid as to 40% on completion, as to 30% on the first anniversary of completion and to the balance on the second anniversary. There was also a clause for a “downward” adjustment to “reflect any loss of business” such that any “shortfall of revenues in the first two years” would reduce the subsequent payments.

38 One of the plaintiffs’ internal documents entitled “M&A/Investment Report” included:

A number of meetings have been held between (Mahoney) and the major New South Wales Taxi Co-ops, wherein the parties discussed the formation of a Taxi Captive Insurance Co. All have expressed considerable interest in this taking place as it would also fit into their (the Co-ops) own thinking in being able to provide a full range of services to the industry such as Workers Compensation Insurance, PA etc. In the event that Swire Blanch (Australia) Pty Limited (“SBA”) pursued this project it would “lock” the industry into one major insurer to which SBA/(Mahoney) would be contracted with a five by five management agreement. The income generated from this agreement would be in excess of the current returns of (Mahoney). Further SBA would be able to place the reinsurance for the venture therein gaining additional brokerage. Additionally, it would have the flow-on effect of removing any long-term instability problem from the current narrow base of the (Mahoney) business.

39 On 5 July 1999 Zurich wrote to Mahoney advising that it had received a phone call from Reid on 2 July 1999 requesting a meeting to discuss the “compliance issues”. The letter stated that Reid had informed Zurich that “his Company has now signed legal documents to progress the Mahoney purchase and has been given full authority by you to discuss these issues with Zurich”. Zurich asked for confirmation that Reid had been given such authority and also requested him to “outline any other authorities” given to Reid before Zurich had its meeting with Reid because “it may be appropriate to widen the discussion, rather than restrict it to just compliance issues”.

40 On 5 July 1999 Mahoney wrote to Zurich in the following terms:

Paul Reid of Swire Blanch has been given full authority by our Board of Directors to discuss all issues about insurances that this brokerage places with Zurich. The Board has not restricted Mr Reid’s authority in any way.

41 On 6 July 1999 a meeting occurred between Reid and two representatives of Zurich, Wayne Vincent and Rohan Stewart. The “key items” discussed at that meeting included “CTP in NSW and associated processes” and “NSW relationship and associated processes”. A minute of the meeting items included the following in relation to those items:

CTP in NSW and associated processes. Paul Reid advised that he had been told from an informed industry source that Zurich was working with other risk carrier to restrict access to Taxi coverage. Wayne Vincent advised Paul Reid that this was an illegal practice and in breach of legislation. Wayne Vincent stated that Zurich would never undertake such practices. Paul Reid accepted the explanation.
NSW relationship and associated processes. Wayne Vincent advised that the letter sent to Mahoney insurance brokers dated 29 June 1999 was sent to draw to their attention compliance issues. These issues surrounded the appointment of the broker by the insureds and the relationship between Zurich and Mahoney’s. Appointments and the relationship must be made compliant in accordance with the appropriate legislation. Agreed that letters of appointment would be produced for Zurich to prove that Mahoney’s were the authorised broker of the insured. Paul Reid stated that he had copies of appointments and agreed to deliver these appointments to Wayne Vincent by close of business on the 13th July 1999. Wayne Vincent agreed not to activate the renewal system to send notices to insureds on 10th July 1999 subject to receipt of the appointment letters. All present agreed that a compliant relationship must be established as soon as possible. Wayne Vincent agreed to write to Mahoney’s and outline the steps required to make the relationship compliant once appointment letters were produced to verify respective relationships.

42 The minutes also record that Reid agreed to prepare a full submission to Zurich on an Underwriting Agency for Zurich’s consideration and that he said that he would consider placing all Queensland business with Zurich if both companies reached agreement on an Underwriting Agency arrangement.

43 On 9 July 1999 Cooper on behalf of Mahoney wrote to Zurich in response to its letter of 29 June 1999. That letter included the following:

As you will be aware, we have been acting as broker for a number of taxi co-operatives for a period of 10 years. Under our arrangements Zurich has agreed to provide insurance to taxi co-operatives and taxi operators. Numerous policies have been issued utilising a procedure agreed between us. It comes as a surprise that you have recently discovered an alleged irregularity which threatens our arrangement. We would appreciate it if you would provide us with the precise details of the irregularity and explain to us why this irregularity means that you cannot continue to provide insurance services to taxi operators under our arrangement.
You have asked us to demonstrate that we have been properly appointed as the broker of taxi operators. As we informed you, we are currently investigating this matter and seeking advice from our lawyers. We have agreed to meet you on 13 July as originally requested. In the absence of receiving our response to this request you have written to at least one insured (ABC) and informed them that “ Mahoney’s have not been properly appointed by the co-operatives or the insureds (the taxi operators) as insurance broker”. We take exception to this suggestion. You have dealt with us as brokers of the insured throughout the operation of the arrangement and policies have been issued to insureds on that basis. At no stage during that process have you suggested there may be an irregularity.

44 Cooper requested that Zurich cease making the statements to the co-operatives and to provide an assurance that no further publications of that kind would be made. Mahoney sought a response by 16 July 1999 and reserved its rights to take further action.

45 On 13 July 1999 Reid reported to his superiors in a document entitled “Monthly Report – Australian Operations”. That report included the taxi scheme arrangement in Queensland and the Northern Territory and it also referred to Mahoney in the following terms:

I have not included any of the general insurance figures from this company into the revised budget. I was asked to place it (away from Zurich) last week but have requested that they stay where they are at least until I speak with Wayne Vincent and Rohen Stewart again this week. I accept the instructions that I am not to discuss the acquisition of Mahoney Insurance Brokers with anyone from Mahoney’s or indeed anyone else as I am “Production” and not “Acquisition”. I would mention though that because they are not only business associates but friends of many years standing they will ask me questions. Particularly as it was I that broached the whole question of their company being purchased by Swire Blanch and negotiated the purchase price. Because of our relationship I was also supplied a tremendous amount of confidential company information that we would normally not have been privy to until we had signed the Heads of Agreement etc.

46 On 15 July 1999 Priest reported to her superiors in relation to the proposed acquisition of Mahoney and advised that the acquisition would give the Australian operation a “back office” situated in a low cost centre of Newcastle for high volume transactions. Priest referred to the fact that Mahoney had recently won the National Insurance Brokers Regional Broker of the Year Award and identified the flow-on benefit of incorporating the underwriting and risk management requirements of the taxi portfolio into one operation as a reduction in the costs of managing that portfolio. The report also included the detail of the discussions about the formation of a taxi captive insurance company that were referred to in the “M&A/Investment Report” referred to earlier.

47 Reid had discussions with Mr Burdis of Blanch (HK) when Mr Burdis visited Sydney on 13 July 1999. Reid sent an email to Mr Burdis on 14 July 1999 referring to their discussions and informing him that they had left Reid a little “disturbed/worried regarding the operational aspects and administrative capabilities that proceeding in the direction you envisage Sydney/NSW will present”. Reid referred to the various concerns that included the following:

The Taxi business provides a constant stream of claim payments that will increase in direct proportion to the increase in premium volume. As we cannot afford to adopt a make do attitude in the area without the proper remedies we will/are leaving ourselves open to the possibility of bad faith claims. Without the additional administrative support to attempt to further increase our workload through increasing the business input would jeopardise our existing income base.
The pressure being generated directly impacts on our current relationship with Mahoney. Zurich are playing hardball because of the Underwriting facilities I have been able to obtain outside of their office. If we are unable to write the NSW business and Mahoney have to make a new agreement with Zurich then it may not be in our best interest. I certainly do not believe that Zurich would offer Mahoney the Risk Management fee that I have acquired which would have the flow on effect of possibly reducing our combined revenue over the next 12 months.

48 On 15 July 1999 Mr Burdis responded to Reid with a copy to Priest in terms that included the following:

Re Zurich and NSW. If they do not agree to go with us then what can we do if there are no other underwriters willing to do the CTP even on a fronting basis. What we cannot understand is why Suncorp is not able to do this for a fronting fee. It makes us wonder whether there is some other story as it just doesn’t make sense. You keep saying when we write this but it doesn’t look as if we will.

49 On 16 July 1999 Reid responded to Mr Burdis and a copy was ultimately sent to Priest, in terms that included the following:

Re Zurich and NSW and CTP etc. There are a number of CTP licensed insurers in NSW and Suncorp would be, as I understand it, quite simply breaking the law (to pay some one else a fronting fee and then write the business inhouse). I must be getting old as the more I read this David the more frustrated I am feeling. As a matter of interest irrespective what anyone thinks other for than the CTP portion of the book I could have written the NSW business some 2 months ago and within reason if I say WHEN I do actually mean when. I could write the NSW business today but I’m not going to jeopardise Mahoney, Swire Blanch or what I have been able to put together so far by what would be no more than an act of commercial suicide. As a further matter of interest I am meeting with Zurich again next week and they are sending me boxes of information re the claims this afternoon which I was going to work on over the weekend. I have a meeting with HIH next week to promote a full facility for the industry with workers comp, CTP, section 1 and 2 etc. so I am actually trying to do something about the full book. I am not in the habit of misleading people and have never intentionally passed on to Hong Kong information that I did not believe.

50 On 20 July 1999 Priest wrote to Mr Norton requesting that he provide the “Due Diligence material” to Mr Caulfield in Dallas, Texas in the USA. That request included that Mr Norton provide to Priest in Hong Kong all material “relating to general business matters including captive and taxi associated matters”. Annexed to that request was a lengthy document entitled “Due Diligence Check List”. Mr Norton responded by fax dated 22 July 1999 observing that the amount of information that had been requested was “immense” and that it was most unlikely that Mahoney could provide it prior to a scheduled visit to Australia by Mr Ian Packer of the US Blanch company on 5 August 1999. In those circumstances Mr Norton requested Priest to advise him whether she still wanted the information supplied.

51 By this time Zurich had been successful in its negotiations with Cumberland and on 22 July 1999 signed an Agency Agreement with Cumberland. There is no evidence that Mahoney was aware of this Agency Agreement at this time.

52 On 23 July 1999 Priest instructed Ernst & Young to review the financial information provided to them as part of the Due Diligence program. That letter of instruction observed that it was “a relatively small transaction” and that Blanch was trying to keep the “Due Diligence exercise costs to a minimum.” Priest advised Ernst & Young that she would provide a copy of the Heads of Agreement and the “Due Diligence Check List” that day and that Blanch was operating under a “fairly tight deadline” as the Heads of Agreement required a definitive agreement by 31 August 1999.

53 On 27 July 1999 Zurich wrote to Cooper requiring “proper documentation” to be put in place and advising that otherwise it would not transact taxi insurances with Mahoney. The letter also advised that it had been brought to Zurich’s attention that Mahoney had recently written to taxi co-operatives and taxi operators asking them to sign letters appointing Mahoney as their broker. Zurich claimed that such action was inconsistent with Cooper’s previous claim and demonstrated that Mahoney was not the appointed broker of the insured. The letter continued:

Unless Zurich can be satisfied that you are the legally appointed broker we will have no option but to regularise all our taxi business dealings. As from the 6/08/99 all renewal notices will be forwarded to insured operators unless you can substantiate Mahoney’s appointment as broker of the insured
……
As discussed verbally with you on 7/7/99 and on 23/7/99 I confirm, once again, that Zurich have been approached by intermediaries to underwrite taxi insurances. We have been considering these requests and I would like to formally advise you that we have decided to underwrite taxi insurances through any duly appointed agent or broker who has been given proper authority by the insured (taxi operators) to transact insurances on their behalf. This decision has been taken in the interests of all parties, taxi operators, co-operatives and intermediaries.

54 On 28 July 1999 Mr Norton wrote to Priest in the following terms:

I believe that Bob Cooper has informed you by telephone of a recent development in our Taxi Insurance portfolio, which is causing us some concern. It is important that you are aware of the facts, as we know them at present, as it seems on face value that Zurich Australian Insurance is attempting to establish Agencies with the two major Sydney based Taxi Co-operatives. This would force us to seek an alternative underwriter and to market our product direct to individual clients utilising a planned advertising campaign. It is most likely that these events would cause a reduction in premium and a subsequent reduction in commission income and possibly a loss of clients, although the extent of the reduction and/or loss is difficult to accurately gauge.

55 Mr Norton provided copies of recent correspondence with Zurich and requested Priest to advise what impact, if any, it had on the proposed sale of Mahoney to Blanch.

56 This development was obviously important enough for one of the members of Swire Blanch in London to write on 14 August 1999 to Zurich reminding the recipient, Malcolm Jones, of their “pleasant lunch in Manhattan some 3 years ago” and advising:

Swire Blanch is at present investigating a more formal relationship with Mahoney’s Insurance Brokers in Sydney. As you will be aware, Mahoney’s have placed a large part of the Commercial Taxi Programme with Zurich for the last several years. It has come to my attention that problems have recently arisen between Mahoney’s and Zurich with respect to the CTP in NSW. Obviously this segment of the business is quite important for the ongoing viability of Mahoney’s and we would therefore wish to offer our assistance in resolving the problem and preserving what has been a profitable relationship for both companies.

57 The letter went on to suggest that a meeting should take place between Zurich and Priest on her visit to Sydney. That meeting was later confirmed and occurred on 6 August 1999 when Priest and Mr Maunder of Blanch, met with Messrs Jones and Day of Zurich. Priest’s evidence was that this meeting was on “a chief executive to chief executive basis” and that she said:

We’re thinking of buying Mahoneys. We understand there are some problems between Mahoneys and Zurich. We are seeking some comfort that Zurich is not attacking Mahoneys business and that you are not going direct to clients.

58 Notwithstanding the obvious importance of this meeting, Priest’s evidence was that she could not remember in any detail the substance of the response to this request for “comfort”. However Priest did recall that Mr Day “referred principally to 2 taxi co-operatives with whom Zurich had had some direct discussions”. Day advised Priest that Zurich was not causing the problem and that the problem was between Mahoney and the co-operatives. He suggested she take the issue up with Mahoney.

59 If this was the advice that Zurich gave Priest it was obviously less than frank. To suggest that Zurich “had had some direct discussions” with 2 taxi co-operatives when it had already signed Cumberland as an Agent and was but two weeks from signing Deluxe Red & Yellow Cabs as an Agent is hardly the true commercial position. In any event it seems that Blanch and Zurich were behaving similarly in what appears to have been a race to capture the taxi co-operatives for themselves.

60 On 6 August 1999 Zurich wrote to Reid by email confirming the discussions in relation to the meeting that morning including that notices would continue to be sent to Mahoney’s “for the current book of business and not to the operators” as detailed in Zurich’s letter to Cooper on 27 July 1999. The email also stated that Zurich would transact business “on an offer and acceptance basis as with any broker relationship”. Zurich also advised that with regard to CTP, it had not been able to “confirm at this stage the agency etc”. It suggested a further discussion when Reid presented his “strategy”.

61 On 12 August 1999 Cooper wrote to Priest enclosing a document entitled “Deluxe Red &Yellow Cabs Private and Confidential Report – Captive Feasibility Study” that had been presented to Mr Reg Kermode of Deluxe Red & Yellow Cabs that morning. Cooper advised that the reaction was “quite positive” and that Mr Kermode had requested a second meeting to discuss it with their company lawyer. Cooper also advised that Mr Kermode was willing to meet Priest on her next visit to Australia.

62 The feasibility report was jointly prepared by Mahoney and International Risk Management Group (IRMG), the largest manager of captive insurance companies in Australia. The report included the following:

3.1 Access to reinsurance market
The establishment of a captive will give Deluxe direct access to the reinsurance market which is a more stable, less cyclical market. This is a more sophisticated market and a multi class reinsurance product that would include first party (section 1) third party (section 2) green slip and workers compensation as one policy is feasible.

A structure may be that a captive insurance company accepts the major risks of Deluxe Red & Yellow Cabs (above appropriate deductibles) and then purchases one reinsurance policy above an annual aggregate limit. This structure caps the captive’s exposure and allows the reinsurer to assume a portfolio of risks which are widely spread. There are now a number of large professional reinsurers in the market place who offer this type of product.

This type of structure cannot be achieved without the establishment of a captive insurance company.
3.2 Control
The simplest and most flexible way for the group to control risk acceptance and risk transfer decisions is through a captive insurance company. If the market hardens then the captive can retain more of the risk if premiums become cheaper through increased competition, then more of the risk can be transferred. Having control over this risk retention and risk transfer process is likely to have a significant affect on the long term premium rates for Deluxe Red & Yellow Cabs.

63 On 13 August 1999 in a meeting that included Zurich representatives, Reid and Cooper, Zurich became more open about its strategy. It advised that a number of Taxi Co-operatives had applied to it for agencies and that it had signed one agency and was in the process of negotiating with other co-operatives. After further discussion and Cooper’s and Reid’s expression of disappointment, a further meeting was planned towards the end of August when Reid would inform Zurich of Blanch’s plans for the future. That further meeting was held on 24 August 1999 at which both Cooper and Reid expressed continued disappointment with Zurich’s approach. The minutes of that meeting note that Reid questioned Zurich’s approach “given the international relationship between Zurich” and Blanch. Cooper advised that Mahoney was still placing business with Zurich “at this stage” but had “sourced” another underwriter. He also advised that if Zurich informed Mahoney that it was definitely not removing the agency with Combined Cabs, Mahoney would plan to place all business elsewhere.

64 On 28 August 1999 in an e-mail to Priest, Reid advised:

I expect an all out war with Zurich will commence – if it hasn’t already – within the next few days. One of the co-ops is already on line with Zurich and I would expect that unless we can produce a better product than that of Zurich others will follow within the next few days.

The concerns expressed in this e-mail were well founded because by this time Zurich had signed an Agency Agreement with Deluxe on 20 August 1999.

65 On 8 September 1999 Zurich wrote to Cooper in terms that included the following:

In relation to CTP we are unable to continue the current arrangement without a formal agreement in place between our two companies. In future all CTP renewal notices will be forwarded direct to the client as required by current legislation.
I understand you have made alternative arrangements in regards to CTP business & if this is correct it is not practical for us to execute the required agreement.
Could you please confirm in writing your intentions regarding the placement of CTP business within 7 days.

66 On 13 September 1999 Priest received Ernst & Young’s draft report regarding Mahoney which included the following:

Note 16 to the Accounts of (Mahoney) refers to a subsequent event whereby business is being passed directly from one underwriter to the insured and by-passing (Mahoney) as broker. This may have significant impact on the ongoing future income stream of (Mahoney).
We have not attempted to verify the status of this situation nor have we attempted to place a monetary value on the impact of this event on the future income stream of (Mahoney).

67 On 17 September 1999 Priest wrote to Mr Kermode referring to a recent meeting with him in terms that included the following:

We were most encouraged to hear your vision for insurance of the taxi industry. We at EW Blanch believe the future for insurance of such affinity groups lies with the creation of virtual insurance companies where risk improvements are rewarded with reduced premiums benefits. We are assisting such groups to access the international reinsurance market currently utilised by traditional insurance companies for protection of catastrophe exposures.
…
Over the last couple of weeks we have met with a number of individual cab owners from various cooperatives and they have all without exception, endorsed our approach of establishing an industry insurance and financial services scheme for the benefit of the industry. Interestingly people have been vocal about their desire to have ownership and responsibility for the “captive”. Quite often they have made the suggestion that a seminar be held to explain the concept and how it has been successful in other industries and companies.
With the foregoing in mind we are pursuing the acquisition of the Mahoney group. We believe this will provide us with the critical mass to develop the above approach.
We would welcome your thoughts with respect to our approach, the proposed seminar and the potential involvement of the taxi industry and Cabcharge in the development of a taxi industry insurance and financial products scheme.

68 In the light of the fact that Deluxe had already signed its Agency Agreement with Zurich, this communication appears to have been somewhat futile.

69 In mid September 1999 Mahoney had sent a “flyer” to taxi operators and co-operatives. On 17 September 1999 Zurich wrote to Mahoney referring to its letter of 8 September 1999 and to the flyer and noting, apparently from its contents, that:

We are now of the understanding that Mahoney Insurance Brokers have made alternative arrangements for the transaction of CTP business.
…
Given this it is not practical for Zurich to execute the required agreements to formalise any arrangements that were previously in place.
Any arrangements between Zurich & Mahoney insurance brokers for the purpose of transacting CTP business are now cancelled.
Cancellation is effective from 4.00pm 17th day of September 1999. Under no circumstances is CTP business to be transacted after this time.

70 The letter also requested Cooper to arrange for all CTP material, greenslip books etc, to be made available for collection. Zurich also advised that other business between Zurich and Mahoney would be operated on an Underwriter & Broker basis with full offer & acceptance criteria. This process was suspended pending further discussion between Mahoney and Zurich that resulted in the execution of an Agency Agreement.

The Agency Agreement – 14 October 1999

71 Mahoney and Zurich signed an Agency Agreement on 14 October 1999. The Agreement commenced on that day and was agreed to “continue until terminated by either party giving to the other written notice of termination in accordance with the provisions of article 3.2 or until terminated in accordance with article 18” (3.1). Article 18 dealt with termination for breach, “malpractice or wilful misconduct”, loss of licence, insolvency and the like. Article 3.2 provided:

Either party may at any time terminate this Agreement by giving to the other thirty (30) days written notice of termination.

72 The Agency Agreement was limited to the provision of CTP Insurance (11.4; Sch 3) and Zurich reserved the right not to accept any proposal except “where cover is effective upon the Insurer issuing a validated certificate and receiving payment of premium” (11.6). Mahoney was prohibited from issuing a validated green slip to the customer unless “prior payment” had been received (11.3(2)).

73 Zurich agreed to pay Mahoney commission, fees and other amounts on insurance policies transacted by Mahoney on behalf of Zurich “on the issue and renewal of policies” at 5% of the Net Premium, being the gross premium excluding stamp duty and other taxes fees or levies and GST (14.1; Sch 6). Mahoney was only entitled to the commission, fees and other amounts after Zurich accepted both the proposal lodged by Mahoney and the payment of the appropriate premium and when the “actual premium payment is made to“ Zurich (14.2 & 14.3).

74 Mahoney was required to pay to Zurich within 37 days after the day on which the contract of insurance was “incepted” money paid to it as premium without deductions or off sets (16.1; Sch 7). Zurich was entitled to set-off all or any part of the commissions or other remuneration due, or which became due, to Mahoney “to cover any debts owed” to Zurich by Mahoney (16.2). However “any existing debts” between Zurich and Mahoney were “not affected by” the Agreement (17.3). The Agreement listed fifty two sub-agents consisting of taxi co-operatives and individual taxi owners.

75 On 20 October 1999 Cooper telephoned Priest and advised “we have signed up an Agency Agreement with Zurich and our relationship with them is back on track. Everything is fixed up. Let’s start the negotiations again.” It is apparent from the documents in evidence that Cooper also advised Priest that he had received an offer from another party. Subsequently Priest advised her superiors and colleagues, including Bill Farmer, head of the International Operations of the Blanch group, that Blanch still wished to proceed but needed to revise its offer. Blanch had apparently received a revised profit forecast which improved the profit from $960,000 to $2.2 million. Priest proposed a counter offer of 3 times profit before tax, payable in 3 instalments. In an email to her colleagues she advised:

This offer reduces our exposure to expense blowouts as we would have a fall clause and provides Cooper with an incentive to obtain more business. It is also competitive with the other offer. In terms of the earnings multiple it is a better deal than the original one i.e. 3 times earnings as opposed to 4.7 times.

76 In a return email Priest was asked what was the reason for the improvement of profit. In response to that email Priest wrote that Mahoney had picked up business in other states and “also now that the Zurich matter is fixed they have an agency agreement in place which means they are writing CTP again. This was taking off the revised figures when the trouble with Zurich started. They are also writing more covers on NSW business than before”.

A: I wouldn’t have gone into the financial details.
Q: You did discuss with them, however, that the effect of what Ernst & Young were saying in this report was that Mahoneys was balance sheet solvent?
A; Yes.
Q: However, liquidity impacted adversely on its quality as a going concern?
A: I would have said that more funds were required …
Q: Yes
A: … to be put in by Blanch.
Q: Did you put a particular figure to them?
A: No, I don’t recall mentioning…

Q: The clear instruction you got from them was they weren’t prepared to inject any further capital into this business?
A: They did not wish to keep putting money into it, that’s correct.

…

Q: But you in your own mind, in your capacity as an officer of EW Blanch and as a director of Mahoneys, had an understanding that the effect of an injection of capital would provide the best prospect to maximise value of the insurance portfolio for creditors of Mahoney?
A: Yes, I appreciate that.

Q: Yes. On the other hand, if the ultimate owners of the holding company put more capital into it they, themselves, would not necessarily be getting value, that is to say, the shareholder, EW Blanch, would not necessarily be getting any commensurate value out of any such further injection of capital?
A: No, they would have just been keeping it afloat

…
Q: Just moving on a little bit. In this climate, what I’d like to suggest to you is that there came a point at or about the time that the Ernst & Young report of 30 August came through when EW Blanch made a commercial decision that it would not support Mahoneys any further and that it would cause Mahoneys to sell off the two residual insurance businesses to OAMPS.
A: That was Blanch’s desire and Mahoney’s board agreed with that.
Q: It was a commercial decision made at a time because the other alternatives – ongoing funding, managed wind down, the appointment of an administrator or what have you - didn’t have the same commercial appeal.
A: We did not wish to keep putting money in to that company that was clearly dying.
Q: It hadn’t died yet?
A: It was only kept alive by us continuing as EW Blanch to fund.

211 I am not satisfied that the evidence establishes that the sales of the businesses were not “voluntary” in the relevant sense. The parent company was well aware of the possible dangers of this purchase if Zurich won the race to the taxi co-operatives and Blanch/Mahoney was unable to establish the “captive” into which so much effort was being put. It had “approved” the purchase pursuant to the terms of the Share Sale Agreement and was funding the business to facilitate the establishment of the captive in the circumstances where it knew that Zurich was in competition with Mahoney. I am satisfied that when Blanch and its parent formed the view that it could not compete in the CTP area with Zurich by finding an alternative CTP insurer it decided to leave the field altogether rather than fight on to make income from the sale of insurance generally.

212 There was no analysis by Ernst & Young of the alternative funding arrangements or capital injections that may have been available to Mahoney nor was there any analysis of the business opportunities generally that may have been available to the brokerage. I am satisfied that it was a decision made for its and its parent’s economic interests not to put any further money into the business because it was, as Priest saw it, in the process of “dying”. It was in my view a voluntary sale.

213 The plaintiffs’ claims under clause 3.4 of the Share Sale Agreement fail.

Cross Claim for the balance of the purchase price.

214 Cooper seeks payment of the balance of the Purchase Price pursuant to clause 3.3 of the Share Sale Agreement. That claim is for the Second and Third Instalment, as defined, without any adjustment under clause 3.4 because the clause has not been triggered in the circumstances outlined earlier. The total of those two instalments is $3,191,970. Cooper also seeks interest on those amounts pursuant to clause 3.5(a) of the Share Sale Agreement from 24 December 2001. Clause 3.5(a) provided:

The Buyer shall pay to the Seller interest on any unpaid amount of the Purchase Price other than any amounts withheld by the Buyer in accordance with clauses 4.2,4.3 and 4.4 or other deductions or withholdings referable to the Seller’s default. That interest will be paid monthly and will be calculated:
(i) at the rate being the aggregate of the published base rate of the NAB and a margin of 1.5%; and
(ii) on a daily basis and on a year 365 days.

215 The Share Sale Agreement required Blanch to deposit $3,191,970 (being the estimated balance of the Purchase Price) into an interest-bearing account with an Australian trading bank and to retain that deposit “for the purpose of paying the Second Instalment and the Third Instalment in accordance with the terms” of the Share Sale Agreement. Blanch was entitled to all interest accrued on that account (cl 3.2(a)(ii)).

216 During the trial the defendants’ solicitor asked the plaintiffs’ solicitor if the deposit was held in a bank account in Australia. The plaintiffs’ solicitor informed the defendants’ solicitor that he was unable to tell him whether that was so. In response to the defendants’ solicitor’s question as to whether the plaintiffs had sent the $3 million overseas, the plaintiffs’ solicitor advised that he did not have any instructions. The defendants then moved for interlocutory relief in the form of an order requiring the plaintiffs to “forthwith restore” the deposit to an interest-bearing account with an Australian bank and to retain the deposit until further order of the Court.

217 The documents produced in answer to a Notice to Produce (Ex 2 & 3) established that $3,191,970 was invested with the National Australia Bank as at February 2000 but that withdrawals from time to time had reduced it to $250,000 at the time of the trial. Blanch had the benefit of the use of the difference and the interest earned thereon during that time. It became unnecessary for me to rule on the interlocutory application because the plaintiffs undertook to restore the deposit.

218 The defence to the Cross Claim for the balance of the Purchase Price mirrored the claims made in the Further Amended Summons. Having regard to the findings I have made in respect of those claims there is no available defence to the plaintiff in respect of this claim. In those circumstances the plaintiff is to pay Cooper the balance of the Purchase Price of $3,191,970 with interest as claimed.

The Cross-Claim in relation to the Lease

219 The plaintiffs have admitted that Mahoney ceased paying rent under the Lease between it and Maco for the premises at 103 Beaumont Street, Hamilton in August 2000. The rent under the Lease was $94,000 per annum plus GST.

220 Maco sold the premises by Contract dated 20 June 2002 and completed the sale on 21 August 2002 without any adjustment of rent in its favour. The amount of rent to which Maco claims to be entitled is $109,623.33 calculated on the basis of 387 days at $283.29 per day inclusive of GST.

221 There is no defence to this claim other than one that is reliant upon the claim that Mahoney was induced to enter into the Lease based on the alleged misleading and deceptive representations made to Blanch by Cooper (the Zurich Representations and the Warranty Representations). As those claims have failed there is no defence to the claim made by Maco for the outstanding rental. Maco is entitled to an order that the second plaintiff pay to it the amount claimed.

OAMPS Claim Adjustment

222 The Share Sale Agreement included provisions relating to an OAMPS claim adjustment in the following terms:

4.3 OAMPS Claim Adjustment
(a) The parties acknowledge that the Subsidiary has a potential liability in relation to the dispute with OAMPS referred to in paragraph 9.1(c) of Schedule 2 ( the “OAMPS Claim”) . An amount of $227,000 has been provided for this liability (the “ Provision ”).
(b) If the Subsidiary (and or the Sale Company) has to pay any amount in respect of the OAMPS Claim in excess of the Provision, the Company may deduct that excess amount from the Second Instalment or the Third Instalment as appropriate. If the OAMPS Claim has not been resolved by the date on which the Third Instalment is due the buyer is entitled to retain such amount as the Buyer reasonably believes it is likely to be payable in relation to the OAMPS Claim in excess of the Provision (if any) including a provision for legal and other expenses from the Third Instalment until the OAMPS Claim is resolved, at which time the Buyer will set off against the amount retained any amount payable by the subsidiary and/or the Sale Company. To the extent that there is a positive balance of the amount retained after that set off, the Buyer shall pay the balance to the Seller. To the extent that there is a shortfall between the amount so payable and the amount retained, the Seller shall immediately pay that shortfall to the Buyer. To the extent that the amount payable to discharge the OAMPS Claim is less than the Provision, the Buyer will cause the Sale Company to pay the Seller an amount equal to that difference. The Seller will use its best endeavours to settle the OAMPS Claim as soon as practical at his own cost and cause to be delivered to the Sale Company an executed Deed of Release and ASIC Notification of Discharge of Charge in relation to the OAMPS Charge and a duly executed Deed of Release of the Guarantee.

223 Paragraph 9.1(c) of Schedule 2 of the Share Sale Agreement provided: “there is a dispute between the Sale Company and OAMPS with a potential liability of $227,000”.

224 There does not appear to be any issue about the OAMPS claim adjustment. The only question was whether interest should be awarded and the bases for resiting such a payment were the claims made by the plaintiff in the Further Amended Summons, which have failed. Following the settlement of the OAMPS Claim, the amount payable by Blanch to Cooper was $142,000. That amount should be paid to Cooper together with interest from 10 January 2001 to the date of judgment.

225 There was also a claim by Cooper for unpaid consultancy fees. That claim was abandoned by Notice from Senior Counsel dated 4 June 2004.

Conclusion

226 The claims made by the plaintiffs in the Further Amended Summons are dismissed. The first plaintiff (Blanch) is to pay to the first defendant/first cross claimant $3,191,970 plus interest as claimed and the amount of $142,000 for the OAMPS adjustment plus interest as claimed. The second plaintiff is to pay to the second defendant/second cross claimant (Maco) $109,623.33 for outstanding rental for the Newcastle premises.

227 The parties are to prepare Short Minutes of Order to reflect these findings together with any agreed costs order, to be filed when the matter is listed at 9.30 on 5 August 2004. If the parties are unable to agree on a costs order I will hear argument on 5 August 2004.

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Last Modified: 08/03/2004