Expectation Pty Ltd v Pinnacle VRB Ltd

[2004] WASCA 261

EXPECTATION PTY LTD -v- PINNACLE VRB LIMITED [2004] WASCA 261

Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2004] WASCA 261
Court:	THE FULL COURT (WA)
Case No:	FUL:142/2003	Heard:	11 AUGUST 2004
Coram:	STEYTLER J MCKECHNIE J JENKINS J	Delivered:	16/11/04
No of pages:	38	Judgment Part:	1 of 1
Result:	Appeal dismissed
Category:	B
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Parties:	EXPECTATION PTY LTD (ACN 009 030 102) PINNACLE VRB LIMITED (ACN 060 111 784)
Catchwords:	Contract Breach Condition precedent to an agreement required parties to enter into formal licence agreements and a collaborative venture Clause required parties to negotiate those agreements in good faith Alleged breach of that clause Whether trial Judge erred in finding respondent had not breached term requiring parties to negotiate in good faith Whether trial Judge erred by finding appellant breached term requiring parties to negotiate in good faith when that finding was not open on the pleadings or on the way the case was run at trial Turns on own facts
Legislation:	Nil
Case References:	Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144 Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160 Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236 Automasters Australia Pty Ltd v Bruness Pty Ltd (2003) Aust Contract Reports 90­162 Boyes v Colins (2000) 23 WAR 123 Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33 Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 Cohen v BBA Mortgage Corporation Pty Ltd, unreported; SCt of WA; Library No 980114; 17 March 1998 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2002] FCA 1018 Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 Foran v Wright (1989) 168 CLR 385 Fox v Percy (2003) 214 CLR 118 Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80 Khan v Armaguard Ltd [1994] 1 WLR 1204 Mahoney v Lindsay (1980) 55 ALJR 118 Paltara Pty Ltd v Dempster (1991) 6 WAR 85 Payless Superbarn (NSW) Pty Ltd v O'Gara (1990) 19 NSWLR 551 Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 R v GEC (2001) 3 VR 334 Rooty Hill Medical Centre Pty Ltd v Gunther [2002] NSWCA 60 Smith v Advanced Electrics Pty Ltd [2003] QCA 432 Smith v Carbone Bros Pty Ltd, unreported; FCt SCt of WA; Library No 960369; 17 July 1996 Southwell v Tomomoto (1992) 109 FLR 12 State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) (1999) 73 ALJR 306 Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 255 Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 White v Overland [2001] FCA 1333

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA TITLE OF COURT : THE FULL COURT (WA) CITATION : EXPECTATION PTY LTD -v- PINNACLE VRB LIMITED [2004] WASCA 261 CORAM : STEYTLER J

MCKECHNIE J
JENKINS J

HEARD : 11 AUGUST 2004 DELIVERED : 16 NOVEMBER 2004 FILE NO/S : FUL 142 of 2003 BETWEEN : EXPECTATION PTY LTD (ACN 009 030 102)

Appellant

AND

PINNACLE VRB LIMITED (ACN 060 111 784)
Respondent

ON APPEAL FROM:

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Coram : MURRAY J

Citation : EXPECTATION PTY LTD -v- PINNACLE VRB LTD [2001] WASC 144 (S)

File No : CIV 2463 of 2000

(Page 2)

Catchwords:

Contract - Breach - Condition precedent to an agreement required parties to enter into formal licence agreements and a collaborative venture - Clause required parties to negotiate those agreements in good faith - Alleged breach of that clause - Whether trial Judge erred in finding respondent had not breached term requiring parties to negotiate in good faith - Whether trial Judge erred by finding appellant breached term requiring parties to negotiate in good faith when that finding was not open on the pleadings or on the way the case was run at trial - Turns on own facts

Legislation:

Nil

Result:

Appeal dismissed

Category: B

Representation:

Counsel:

Appellant : Mr D M Stone
Respondent : Mr G S Clarke SC & Mr J Evans

Solicitors:

Appellant : Williams & Hughes
Respondent : Stables Scott

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

Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101
Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600
Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144
Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160




(Page 3)

Case(s) also cited:

Aiton Australia Pty Ltd v Transfield Pty Ltd (1999) 153 FLR 236
Automasters Australia Pty Ltd v Bruness Pty Ltd (2003) Aust Contract Reports 90­162
Boyes v Colins (2000) 23 WAR 123
Central Exchange Ltd v Anaconda Nickel Ltd (2002) 26 WAR 33
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1
Cohen v BBA Mortgage Corporation Pty Ltd, unreported; SCt of WA; Library No 980114; 17 March 1998
Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2002] FCA 1018
Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48
Foran v Wright (1989) 168 CLR 385
Fox v Percy (2003) 214 CLR 118
Glover v Australian Ultra Concrete Floors Pty Ltd [2003] NSWCA 80
Khan v Armaguard Ltd [1994] 1 WLR 1204
Mahoney v Lindsay (1980) 55 ALJR 118
Paltara Pty Ltd v Dempster (1991) 6 WAR 85
Payless Superbarn (NSW) Pty Ltd v O'Gara (1990) 19 NSWLR 551
Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235
R v GEC (2001) 3 VR 334
Rooty Hill Medical Centre Pty Ltd v Gunther [2002] NSWCA 60
Smith v Advanced Electrics Pty Ltd [2003] QCA 432
Smith v Carbone Bros Pty Ltd, unreported; FCt SCt of WA; Library No 960369; 17 July 1996
Southwell v Tomomoto (1992) 109 FLR 12
State Rail Authority of New South Wales v Earthline Constructions Pty Ltd (In Liq) (1999) 73 ALJR 306
Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 255
Walton Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
White v Overland [2001] FCA 1333


(Page 4)

1 STEYTLER J: This is the second appeal from the judgment of the trial Judge in civil proceedings in respect of alleged breaches of an agreement, referred to by the parties as "the Letter Agreement", made on 29 May 2000.

Facts giving rise to the dispute

2 The facts giving rise to the dispute, so far as they are relevant to this appeal, are as follows.

3 In 1998 the respondent ("Pinnacle") acquired rights to the technology involved in the development of a product known as the vanadium redox battery ("VRB"). That led to the making of the Letter Agreement between it and the appellant ("Expectation"). That agreement set out the terms and conditions pursuant to which Pinnacle would license Expectation to use what was referred to as "the full suit [sic] of intellectual property to make and sell electrolyte and VRB's [sic]".

4 The obligations under the Letter Agreement were expressed to be subject to and conditional upon a number of conditions precedent. One of these (provided for by cl 1(a)) was the entering into, by the parties, of "… mutually satisfactory formal licence agreements … and Collaborative Venture as soon as practicable but no later than 30 June 2000 (or such later date as agreed) which formalises and sets out more fully the terms and conditions of the licence and Collaborative Venture and includes in substance those terms set out in … [cl 2 and cl 3 of the Letter Agreement]". Another (provided for by cl 1(b)) was the "satisfaction of all necessary approvals applicable to Pinnacle and Expectation including, without limitation, the Boards of Pinnacle and Expectation …".

5 Clause 3 of the Letter Agreement read as follows:

"3. Collaborative Venture

Expectation and Pinnacle enter into a collaborative venture ('Collaborative Venture') to research and develop a cost effective means of producing vanadium electrolyte and to establish a research and development activity.

Pursuant to this Collaborative Venture:


(a) Pinnacle will exclusively licence Expectation to use the intellectual property currently owned by Pinnacle for electrolyte production in Australia with the right to export product;

(Page 5)

(b) Pinnacle will provide technical assistance, know how and expertise available to Pinnacle at a cost to be agreed;

(c) Expectation will provide the vanadium electrolyte as required for Pinnacle projects at a cost to be agreed; and

(d) intellectual property developed by the Collaborative Venture will be jointly owned by Pinnacle and Expectation."

6 Clause 4 provided that the consideration for the grant of the licences and the entering into of the "Collaborative Venture" was to be the underwriting, by Expectation, of a pro rata non-renounceable issue by Pinnacle of 3 options for every 10 securities held by all shareholders and participating option-holders and the taking of a placement, by Expectation or its nominees, of 2,000,000 shares with attaching options.

7 Clause 6 of the Letter Agreement, headed "Obligation of Good Faith", provided that:

"The parties agree that they will negotiate in good faith to close the transactions contemplated in this Letter Agreement in an expeditious manner and as soon as practicable."

8 Clause 8 of the Letter Agreement provided that Pinnacle would be responsible for arranging the preparation of, inter alia, "the … Collaborative Venture".

9 Notwithstanding that Pinnacle was responsible for preparing the necessary documentation, Expectation's solicitors were asked to prepare drafts of the agreements contemplated by the Letter Agreement, including the Collaborative Venture Agreement. By 13 June 2000 they had prepared a draft of what was referred to as a "Co-operation Agreement". On that day Mr Roderick Smith, the chairman of a number of companies which were related to Expectation, took this and other documents with him to Melbourne. There, he met with Pinnacle's managing director, Dr Malcolm Jacques. There followed discussions with Dr Jacques and others as regards the terms of the proposed Collaborative Venture.

10 The trial Judge found (Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144) that the draft agreement was considered by Dr Jacques and Mr Desmond Kennedy, another of Pinnacle's directors, to

(Page 6)

be an entirely unsatisfactory agreement. He also found that the parties were "able to progress the matter little further" notwithstanding that a document described as a "term sheet", which set out what the terms of the final form of the Collaborative Agreement might be and which was attached to the draft, was initialled by each of Dr Jacques and Mr Smith.

11 At about this time, some of Pinnacle's shareholders were fomenting unrest. They asked Pinnacle's board to hold a general meeting. They wanted to unseat from the board Dr Jacques, Mr Kennedy and two other of Pinnacle's directors, leaving only Dr Richard Sharp, of the then existing board, in office. They also wanted to appoint two new directors. They called for a meeting to be held on 31 July 2000. However, on 18 July 2000 Pinnacle's board resolved to postpone that meeting to 15 August 2000. Shareholders who attended the meeting on 31 July 2000 were told of the board's decision, but held a meeting regardless. They passed resolutions removing all of the existing directors other than Dr Sharp. They replaced them with new directors.

12 The members of the original board did not accept this. They commenced court proceedings challenging the validity of what had been done. In those proceedings, the Court held that Pinnacle's board could act validly to postpone a general meeting, as it had purported to do, provided it did so for proper reasons.

13 Then, on 15 August 2000, a general meeting of Pinnacle's shareholders was held. Dr Jacques was removed from office as a director and three other directors, including Mr Kennedy, retired. Of the original board, only Dr Sharp remained. Three new directors were appointed.

14 The trial Judge found that these events were a major distraction to Pinnacle's then board between the second half of June and the early part of August 2000. During that time Dr Jacques had sought the assistance of Expectation's managing director and chairman, Mr Hugh McLernon, to help shore up the position of the then incumbent board. Mr McLernon asked Mr Paul Rainford, Expectation's secretary, and Mr Smith to do what they could in that regard. The trial Judge found that Mr Rainford "met with influential groups and persons in June and early July".

15 Notwithstanding this unrest (which was added to in mid-July, when another company announced a take-over bid for the whole of Pinnacle's issued securities) efforts were made, in mid to late June 2000, to progress the making of the Collaborative Venture Agreement. These have been set out in my judgment in respect of the first of the appeals which was

(Page 7)

brought from the judgment of the trial Judge: Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160 at [19] to [30]. They included a request, by Dr Jacques to Mr Smith on 21 June 2000, that Mr Smith should ask his "technical people" to "define a sensible programme for the Collaborative Venture". Dr Jacques regarded this as requiring an initial feasibility study. He followed up this request, on 26 June 2000 and 28 June 2000, with emails to Mr Smith complaining (in effect) that he had not received anything from Expectation's "vanadium specialists" regarding the proposed Collaborative Venture, urging the need to develop a technical programme, offering a number of tasks as a starting point for defining the collaboration programme and stressing the need to define "what we will be collaborating on".

16 This produced a response from Mr Smith to the effect that he had not focused on the "Collaborative Venture detail" as the documents were not "in place". He said that a renowned chemical engineer was currently doing test work on the production of various chemicals and that the term sheet which had been initialled was a "good start". He said that this, and other things, could not be advanced in Dr Jacques' absence and suggested that Dr Jacques bring over a number of documents in two weeks.

17 At about the same time, Mr McLernon sent to Dr Jacques a facsimile transmission suggesting that the Collaborative Venture Agreement had been "initialled as accepted in principal [sic] but a few minor changes were required before the final copy could be executed" and urging that this should be done.

18 However, Dr Jacques was unimpressed by what had been said to him. On 28 June 2000 he sent to Mr Smith an email saying, inter alia:

"You must have joined the diplomatic corp [sic], how can you sign up a collaboration agreement with no details of level of commitment, costs, scope, personnel, etc, etc."

19 He reminded Mr Smith that there was "an expiry date on the letter agreement … unless extended by mutual agreement". He asked when Expectation and another company, Precious Metals Australia Ltd ("PMA") (a company controlled by Mr McLernon and another of Expectation's directors, Mr Hill, and the operator of a mine which produced vanadium pentoxide), wanted to discuss details of the "collaboration agreement".

20 By a further email sent on 30 June 2000, Dr Jacques took issue with Mr McLernon's facsimile transmission. He said, of the term sheet which

(Page 8)

had been attached to the draft Co-operation Agreement between Pinnacle, PMA and Expectation, that the "language in this draft agreement was little more than an agreement to agree and does not accurately reflect the terms of the Collaborative Venture as defined in the Letter Agreement …". He also said that he had been "chasing" Mr Smith for details of the scope of work contemplated under the Collaborative Venture. He added that he was acutely aware of Pinnacle's obligations "under the good faith negotiation provisions of the Letter Agreement" and said that his resolve to complete the relevant transactions had not changed. He suggested that the date fixed for completion of, inter alia, the Collaborative Venture Agreement be extended from 30 June to 15 July.

21 That led to an email from Mr Smith agreeing to an extension until 31 July, notwithstanding that Dr Jacques had suggested an extension only until 15 July. However, the date of the extension was not mentioned any further and the trial Judge appears to have found that there was a tacit acceptance, by Pinnacle, of Expectation's counter-offer in that respect. In his email, sent on 30 June 2000, Mr Smith suggested to Dr Jacques that, when Dr Jacques was in Perth, the two of them "could sit down with our technical guys and finalise the terms of the work required".

22 The trial Judge found that the evidence did not indicate that there had been any further effective action in respect of the Collaborative Venture Agreement after 30 June 2000. He said, at [95], [96] and [97]:

"In the exchanges to which I have referred above it is evident I think that the parties were never able to reconcile their different views as to the content of the collaborative venture agreement. In my opinion it is clear that the terms sheet initialled by the parties on 15 June could never by itself have been an adequate expression of such an agreement, nor I think was it ever intended to operate in that way …

In my opinion Jacques' view of what was required to be agreed and incorporated into the collaborative venture agreement was much closer to the mark in respect of what was required to fulfil the letter agreement than the approach that Smith was taking on behalf of Expectation. The impression I have is that Expectation were concerned not so much with the technical aspects but to have the agreements made and executed and to have Pinnacle locked in. In any event it is clear that Jacques regarded the responses from Expectation, particularly by Smith, as being entirely unsatisfactory by the end of June - he

(Page 9)

described the discussions as 'one sided' and it is clear that he regarded the response to his approaches as so inadequate as to preclude progress. Nothing further was achieved by Pinnacle to progress the collaborative venture after that time and nor it appears were there any further significant developments from Expectation's side.

So far as the collaborative venture is concerned, it appears that both parties simply allowed the matter to drift on once the extension of time was granted, despite the obligation imposed jointly on the parties by cl 6 of the letter agreement to negotiate in good faith to close the transactions contemplated by the agreement 'in an expeditious manner and as soon as practicable'."

23 On 27 July 2000, Expectation's solicitors wrote a letter of demand to Pinnacle asserting that Pinnacle had breached cl 6 of the Letter Agreement. It demanded specific performance of that agreement or damages. There followed a number of events which it is unnecessary, for present purposes, to recount, but which are set out at [35] and following of my earlier judgment. These culminated in the writing of a letter dated 27 October 2000 by Pinnacle's solicitors advising Expectation that, because of the failure to perform the Letter Agreement, that agreement was to be regarded as terminated. The proceedings giving rise to the trial of the action were commenced shortly thereafter.

The trial Judge's conclusions in his first judgment

24 In his first judgment, the trial Judge concluded, relevantly, as follows (at [164] to [167]):

"The parties seem to me in this case to be either equally at fault, or it may be that neither is at fault, for the following reasons. It has been seen that following the making of the letter agreement there was a flurry of activity on both sides. The parties achieved the licence agreement by 15 June 2000. They initialled the basic terms sheet which might provide the foundation for the collaborative venture agreement. But it is clear that on Pinnacle's side in particular, for what appear to me to be obviously good reasons, the collaborative venture agreement produced in draft by Expectation was regarded as entirely unsatisfactory. I accept that Jacques made strenuous efforts thereafter to get a sensible contribution from

(Page 10)

Expectation, and in particular from Mr Smith on its behalf. He did that even while overseas in America and Japan.

An extension of time to 31 July was negotiated, but little effective work appears to have been done after that occurred. I think Jacques really gave up on Smith and I think that at that point the ball was in Expectation's court, but the work to progress the collaborative venture did not occur. As July progressed, of course, those in charge of Pinnacle's affairs became increasingly distracted by the efforts to preserve their own position on the Board of the company and as its management and those acting for Expectation were enlisted to assist in resolving their difficulties. The failure to progress … the collaborative venture agreement … cannot I think, in the circumstances that occurred, be reasonably laid entirely at the door of one party or the other.

… [A]lthough in its terms … [a facsimile transmission sent by Mr McLernon to the then chairman of Pinnacle's board, Mr Charles Wantrup] provided the affirmation that the parties would negotiate in good faith to finalise the collaboration [sic] agreement, it seems to me that thereafter nothing effective happened in that regard on either side. In my opinion, it is almost as if at that point, without anything being said, there was a mutual recognition that the letter agreement had failed, the collaborative venture would not occur and although, as Dr Jacques, as General Manager of Pinnacle but no longer on its Board, reported to the Board, the letter agreement with Expectation was a time bomb awaiting detonation, nothing effective was done on either side until Pinnacle acted at the end of October.

I think that the proper construction of what has occurred is that both parties are in breach of cl 6 of the letter agreement. The effect of that conclusion is of course that Expectation is not entitled to any relief on the basis that Pinnacle has breached the agreement, whereas it has not done so."

25 The trial Judge went on to dismiss Expectation's claim.

The first appeal

26 Expectation appealed against that decision on a number of grounds. As I have mentioned at [60] of my earlier judgment, counsel for

(Page 11)

Expectation advanced six broad propositions in the course of the appeal. The first four of them were as follows:

(1) The trial Judge should not have found that Pinnacle, by its letter dated 27 October 2000, effectively terminated the Letter Agreement.

(2) The trial Judge erred in finding that Expectation was in breach of the Letter Agreement by failing to negotiate in good faith with Pinnacle for the making of the Collaborative Venture Agreement when:


(a) Pinnacle did not plead any such breach on Expectation's part;

(b) no such breach was put, in the course of cross-examination at the trial, to Expectation's witnesses;

(c) no such breach was contended for on behalf of Pinnacle in the course of submissions at the trial;

(d) the finding overlooked a significant body of evidence which, had the issue been raised, would have been drawn to the attention of the trial Judge; and

(e) if the issue had been pleaded or otherwise raised by Pinnacle, Expectation would have introduced additional evidence in respect of it.


(3) Pinnacle repudiated the Letter Agreement by its letter dated 27 October 2000.

(4) The trial Judge erred in holding that Expectation was not entitled to sue for damages for breach by Pinnacle of the Letter Agreement when that agreement remained on foot after 27 October 2000, but Pinnacle refused thereafter to negotiate with Expectation for the finalisation of matters referred to in that agreement.

27 As to the first proposition, I found, with the agreement of Miller J (the third Judge, Hasluck J, wrote a separate judgment taking, in some respects, a different approach), that the trial Judge had not found that Pinnacle effectively terminated the Letter Agreement by its letter dated

(Page 12)

27 October 2000. What he said, at [161] of his reasons, was that, while it was clear that Pinnacle made its election to terminate at the latest by its solicitors' letter of 27 October 2000, this could not be effective if Pinnacle was to be regarded as being in breach of the Letter Agreement and, by that date, both parties were in breach of cl 6 of the Letter Agreement.

28 As to the second, third and fourth propositions, Miller J and I made a number of findings. These were relevantly as follows:

(a) The trial Judge had been right in his construction of the Letter Agreement to the effect that it did not provide for automatic termination in the event of a failure to meet the specified time limit. It followed that, notwithstanding that 31 July 2000 came and went without any formal agreement having been made with respect to the "Collaborative Venture" referred to in cl 1(a) of the Letter Agreement, the Letter Agreement remained on foot, neither party having terminated it.

(b) However, because that condition precedent to performance of the Letter Agreement was not satisfied, either party was at liberty to bring the agreement to an end if it chose to do so, so long as the failure to fulfil the condition had not been caused or contributed to by that party's own breach.

(c) It was not clear from the trial Judge's reasons whether his Honour had found that the parties had, by 31 July 2000, breached the obligation contained in cl 6 of the Letter Agreement (or an implied obligation to co-operate) or whether the breach which he found occurred after that date. If his Honour had reached the conclusion that cl 6 was breached after 2 August 2000, then that conclusion was not open to him. This was so because, in circumstances in which no further extension of time had been agreed upon and in which there was no waiver of the condition, neither party could, after 31 July 2000, breach an obligation to negotiate in good faith to close the transaction expeditiously and as soon as practicable when the time for doing so had already expired. Also, the breach by Expectation which was found by the trial Judge had not been pleaded by Pinnacle.

(Page 13)

29 The Full Court consequently set aside the judgment of the trial Judge and remitted the action to his Honour for determination on the existing evidence in accordance with its reasons.

The trial Judge's second judgment

30 Having heard afresh from the parties pursuant to the judgment of the Full Court, the trial Judge handed down his second or supplementary judgment on 5 September 2003.

31 He mentioned, at [7] of his judgment ([2001] WASC 144S), that the Full Court had held that the non-fulfilment of the condition precedent to the performance of the Letter Agreement did not automatically terminate that agreement. Rather, the agreement remained in force, but was voidable. Either party could terminate it, provided that it was not in default in the sense of having caused or contributed to the non-compliance with the requirement to make the Collaborative Venture Agreement by 31 July 2000. His Honour said (at [8]) that it followed from what the majority of the Full Court had said that Pinnacle could terminate the Letter Agreement, as it purported to do on 27 October 2000, "unless it caused or contributed to the failure to make the collaborative venture agreement by the stipulated time, by reason of its breach before that time of clause 6 of the letter agreement by its failure to negotiate in good faith as required by that clause".

32 His Honour went on to say (at [14]) that cl 6 of the Letter Agreement placed a mutual obligation on the parties "to negotiate in good faith, to do what was reasonably required in the circumstances affecting the parties to enable the contingent elements of the contract comprised in the letter agreement to be satisfied within the time framework provided, including any extension agreed upon". Importantly, he added (at [17]):

"The defendant would breach this term, not by what may be described as mere inactivity, but by the abandonment of the process of negotiation, a failure to do what was reasonably required if the defendant was to remain loyal to the promise it had made. The defendant was to do what was reasonably required in all the circumstances applicable to it, but it must not be overlooked that the obligation was imposed upon both parties and the process of negotiation is a two-way street."

33 Then, after referring to his earlier judgment, his Honour said (at [19] to [23]) the following:

(Page 14)

"I noted that all that was achieved was an extension of time to 31 July. I said that the evidence showed that the parties had different views as to the content of the collaborative venture agreement which they were unable to reconcile. The terms sheet initialled by the parties was, I considered, merely to be a general framework for a properly framed collaborative venture. I accepted that Dr Jacques' view that, despite his best efforts, he was unable to get a sensible contribution to the formation of the collaborative venture agreement from the plaintiff, was justified by the events which had occurred. It was not possible on the evidence to make any specific finding against the defendant in relation to Dr Jacques' visit to Perth early in July.

I accepted that Jacques was not reasonably required during the relevant period, the weeks of July 2000, to keep returning to Smith, who was apparently conducting the negotiations for the plaintiff, with propositions for the content of the agreement to which the plaintiff was not responding productively. He committed himself to that process without getting an effective response. In my opinion, at that point he was reasonably entitled to conclude, as it appeared he did, that negotiations could not be progressed without an effective contribution from the plaintiff. That never happened.

As July progressed it was, in my opinion, relevant to note that the board of the defendant was, as I had put it and as the board itself clearly thought, effectively under siege by disaffected shareholders who sought to have their own nominees elected to the board. That process of reconstitution of the board, if I may describe it generally in that way, was effectively completely by the middle of August 2000. Thereafter it is clear the board of the defendant was not interested in pursuing to completion the terms of the letter agreement and the making of the various agreements, including particularly the collaborative venture agreement, by which the letter agreement was to be implemented.

I think that generally during July 2000 both the incumbent board of the defendant and those conducting negotiations for and involved in directing the plaintiff understood that if the letter agreement was to be fully performed it had to be by the board of the defendant which was then in office. That led to the involvement of Messrs Smith and Rainford in what I described

(Page 15)

as an endeavour to bring their influence to bear in an effort to shore up the position of the board. In my view, this activity forms part of the surrounding circumstances, with the final outcome of the activity in the last part of June, in the context of which the judgment must be made whether the defendant breached its obligation to negotiation [sic] in good faith by 31 July 2000, given also that there is no evidence to suggest that the defendant was not prepared during that period to enter into a properly framed collaborative venture agreement or that it was intent upon resisting or frustrating the plaintiff's legitimate contractual expectations in that regard.

While I think that certainly after the middle of August 2000, when the defendant's administration settled down, the position might have been different. I would not, in all the circumstances of the case, be prepared to find that before 31 July 2000 the defendant had breached the obligation of good faith by failing to take reasonable action to negotiate the collaborative venture agreement generally described in clause 3 of the letter agreement and the terms sheet, even having regard to the obligation that the negotiations should proceed expeditiously to make the relevant agreement as soon as practicable. In my judgment at [167] I thought that the proper conclusion was that both parties are in breach of clause 6 of the letter agreement. I intended that to be a conclusion following my effort to summarise my views about what occurred after 2 August 2000 in [166]. I understand what the Full Court said about that and that, so far as the defendant is concerned, the conclusion expressed generally in that way, without precision as to time, is unhelpful."

34 His Honour then expressed the following conclusion (at [24]):

"The conclusion to which I have come, that I am not satisfied that the defendant breached its obligation of good faith in July 2000, is dependent upon the state of the negotiations at that time and the circumstances generally affecting the defendant and its board, in which persons acting for the plaintiff were involved, in a mutual effort to create circumstances in which the collaborative venture agreement could not only be made, but would be performed. In my view, that is the issue requiring decision which is raised squarely by the pleadings. The

(Page 16)

defendant has not committed the relevant breach of contract and the plaintiff's claim should be dismissed."

Grounds of appeal against the second judgment

35 Expectation now appeals on six grounds. These read as follows:

"1. His Honour erred in fact and law in holding that Pinnacle did not breach Clause 6 of a letter agreement made on 25th May 2000 (the Letter Agreement) by failing or refusing to negotiate in good faith the terms of a collaborative venture agreement before 31st July 2000.

2. His Honour erred in fact and law in holding that the obligation imposed by Clause 6 of the Letter Agreement was only breached by Pinnacle if it abandoned the process of negotiation, and not by (Pinnacle's) 'mere inactivity' or mere failure to negotiate. His Honour should have held that, absent Expectation dispensing with Pinnacle's performance, or a waiver by Expectation (cases which Pinnacle did not plead), Pinnacle breached the obligation if it did not use reasonable endeavours to achieve the contractual objective (the making of a collaborative venture) [sic] agreement by 31st July 2000.

3. His Honour erred in fact and law in holding that Pinnacle did not breach Clause 6 of the Letter Agreement by failing or refusing to negotiate in good faith because (as he found):-


(a) Pinnacle was unable to get a sensible contribution to the formation of the collaborative venture agreement from Expectation;

(b) Expectation did not make an effective response to Pinnacle's proposals for a collaborative venture;

(c) Expectation did not make an effective contribution to negotiations;

(d) accordingly (though His Honour accepted a finding of breach was not open) that Expectation had engaged in conduct amounting to a breach of Clause 6 of the Letter Agreement;

(Page 17)

when that case was not:-

(e) pleaded;

(f) referred to in a witness statement served prior to trial;

(g) put to Expectation's witnesses in cross examination;

(h) opened in submissions served before Expectation's case had closed.

3A. His Honour erred in fact and law in holding that:

3A.1 Pinnacle did not breach Clause 6 of the Letter Agreement by failing or refusing to negotiate in good faith because it (and Expectation) understood that if the Letter Agreement was to be fully performed it had to be by Pinnacle's board then in office, and that board thought itself under siege from disaffected shareholders.

3A.2 in making the findings referred to at paragraph 3A.l where that case was not:-


(a) pleaded;

(b) referred to in a witness statement served prior to trial;

(c) put to Expectation's witnesses in cross-examination;

(d) opened in submissions served before Expectation's case had closed.


4. His Honour's finding that (there was no evidence to suggest that) [sic] in the period between late June 2000 and 31st July 2000, Pinnacle was not prepared to enter a properly framed collaborative venture agreement:-

4.1 was against the evidence or weight of the evidence and/or inferences to be drawn from the evidence; and

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4.2 was contrary to Pinnacle's case at trial.

…

5. His Honour should have held, on the basis of the evidence and other matters referred to at Ground 4, that:-

(a) Pinnacle had breached the Letter Agreement;

(b) Pinnacle's breach caused or contributed to the non satisfaction of the condition precedent referred to in Clause 1(a) of the Letter Agreement."

36 Lengthy particulars have been provided in support of ground 4.

Expectation's three propositions

37 At the hearing of the appeal, counsel for Expectation summarised the grounds of appeal by saying that three propositions were sought to be advanced in support of them. They are as follows:

(1) Clause 6 of the Letter Agreement required the parties to negotiate a Collaborative Venture Agreement in good faith and that clause was breached if a party failed to use reasonable endeavours to conclude the agreement, more particularly if it was not willing to make it. (This proposition is presumably directed in support of grounds 2 and 3A(1).)

(2) Contrary to the finding of the trial Judge, there was a wealth of evidence that Pinnacle had failed to use reasonable endeavours to make the Collaborative Venture Agreement before 31 July 2000 and, indeed, the evidence established that it was unwilling to do so. (This proposition is presumably directed in support of grounds 1, 3A, 4 and 5.)

(3) The trial Judge's finding that Pinnacle was not in breach of cl 6 of the Letter Agreement was underpinned by his finding that Expectation was in breach of that clause by failing to negotiate with Pinnacle when that finding was not open on the pleadings or having regard for the way in which the case was run at trial. (This proposition is presumably directed in support of grounds 1 and 3.)

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38 I will deal with each of these propositions in turn.

The first proposition

39 As to the first proposition, the trial Judge said, in his first judgment (at [36]), that the obligation contained in cl 6 of the Letter Agreement to negotiate in good faith "was effective to require both parties to use their best endeavours to ensure the making of the agreements contemplated by the letter agreement within the time framework provided so as to ensure that each had the benefit of the agreement".

40 Then, at [156] he said:

"… [I]t is important to note that the obligations provided for in cl 1 of the letter agreement are mutual obligations, but they are not obligations which either party promises will occur. For example, the obligation under par (a) is to enter into formal licence agreements and the collaborative venture agreement which are 'mutually satisfactory'. The terms of those agreements remain to be negotiated, guided by the provisions of cl 2 and cl 3 of the letter agreement. There was no promise on either side that those agreements would be entered into. Nor I think was there any promise that any approvals necessary would, under cl 1(b), be provided. The Boards of Pinnacle and Expectation might not agree. Pinnacle's shareholders might withhold their approval and, if any such thing should occur, it seems obvious to me that the letter agreement would simply be terminated."

41 No issue was taken with that construction in the first appeal and counsel for Expectation has said that none is taken with it in this appeal.

42 However, in his second judgment, the trial Judge, after referring to what he had said in the first judgment, went on to say (at [14] to [16]):

"Taking the view of clause 6 of the letter agreement which I set out in item (8) of [36] of my judgment, a view which I repeated at [162], my view of the clause is that the obligation of good faith provided for is a mutual obligation upon both parties to negotiate in good faith, to do what was reasonably required in the circumstances affecting the parties to enable the contingent elements of the contract comprised in the letter agreement to be satisfied within the time framework provided, including any extension agreed upon.

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In my opinion, that view of the clause is consistent with the observations of Dawson J in Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 at 144, and of Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703 at 43,014 [37], where his Honour said:

'In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied.'

Those observations were quoted with approval by Parker J in Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382, and at 394 [24] and [25] his Honour accepted the submission that the obligation of good faith involved at least three related notions:

• 'An obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself),

• compliance with honest standards of conduct, and

• compliance with standards of conduct which are reasonable, having regard to the interests of the parties.'"

43 Then, at [17] of his judgment (which I have quoted earlier), his Honour said that the defendant would not breach the term by what might be described as "mere inactivity". Rather, he said, the term would be breached by the abandonment of the process of negotiation in the sense of a failure to do what was reasonably required if the defendant was to remain loyal to the promise it had made. As will be apparent from the extracts from his Honour's judgment quoted earlier, his Honour returned, at [22], to the question of breach of the obligation to negotiate in good faith by 31 July 2000, saying that a judgment in that regard must be made, "given also that there is no evidence to suggest that the defendant was not prepared during that period to enter into a properly framed collaborative venture agreement or that it was intent upon resisting or frustrating the plaintiff's legitimate contractual expectations in that regard".
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44 Counsel for Expectation complains, in particular, about these last comments, suggesting that the trial Judge erred in finding that an element of intention had to be shown before a breach of cl 6 could be made out.

45 In my opinion, his Honour did no such thing. It is quite clear, from his first judgment, that his Honour was fully cognisant of the fact that cl 6 would be breached by failure to take reasonable action to negotiate the agreement and, indeed, he said as much, once again, at [23] of his second judgment (quoted earlier in this judgment). That being so, as I read what his Honour said at [22] of his second judgment, he was there doing no more than putting to one side the notion that Pinnacle had not been prepared to enter into a properly framed Collaborative Venture Agreement or that it had acted in bad faith, in the sense of intending to resist or frustrate Expectation's attempts to do so, before going on to consider whether or not Pinnacle had made reasonable attempts to negotiate that agreement. Also, in saying that cl 6 would not be breached by "mere inactivity", his Honour was saying no more than that the test for failing to negotiate in good faith was not simply one of "mere inactivity".

46 I should add that counsel for Expectation also contended that [24] of his Honour's judgment reflected error. As will be apparent from what I have earlier said, the trial Judge there said that his conclusion that he was not satisfied that Pinnacle had breached its obligation to negotiate in good faith in July 2000 was "dependent upon the state of the negotiations at that time and the circumstances generally affecting the defendant and its board, in which persons acting for the plaintiff were involved, in a mutual effort to create circumstances in which the collaborative venture agreement could not only be made, but would be performed". Expectation's contention is that the trial Judge there appears to be saying, erroneously, that Pinnacle was excused from negotiating the Collaborative Venture Agreement because its board was distracted at the time.

47 I do not understand his Honour to be saying that. Rather, it seems to me, when his Honour's remarks are read in their overall context he was saying no more than that the question which he was required to decide had to be decided in the light of all of the circumstances, including the fact that representatives of Expectation, as well as those of Pinnacle, had been involved in attempts to shore up the position of Pinnacle's incumbent board, those attempts having been made by Expectation in its own interest, given the need (provided for by cl 1(b) of the Letter Agreement) to gain the approval of Pinnacle's board to the undertaking of the obligations provided for by the Letter Agreement. His Honour was not saying that, because Pinnacle's incumbent board was distracted by the fact

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that a majority of its members was likely to be replaced, it was excused from negotiating the Collaborative Venture Agreement.

48 It follows that, while Expectation's first proposition is accurate, it does not, of itself, lead anywhere, the trial Judge having correctly understood the nature and extent of the obligations imposed by cl 6 of the Letter Agreement.

The second proposition

49 As to the second proposition, the trial Judge, having looked at the whole of the evidence, concluded that it had not been demonstrated that Pinnacle failed to use reasonable endeavours to make the Collaborative Venture Agreement before 31 July 2000. Counsel for Expectation contends that his Honour erred in this respect, more especially taking into account the manner in which Pinnacle ran its case at the trial.

50 Expectation's contention essentially depends upon these subsidiary propositions:

(a) By mid-June 2000 Pinnacle's then directors (or a majority of them) knew that:

(i) some of Pinnacle's shareholders were not supportive of the Letter Agreement and were consequently unlikely to approve the agreements contemplated by that agreement (and, if they did, would only approve them as a "package"); and

(ii) their own positions as directors were under threat.

(b) It might consequently be inferred that, after this time, those directors (or those most directly under threat of removal) were not willing to make the Collaborative Venture Agreement.

(c) Prior to 31 July 2000, Pinnacle's then directors were not willing, or not ready, to put the underwriting and placement agreements to Pinnacle's board and/or shareholders, with the consequence that Pinnacle could not have made, and did not intend to make, a binding Collaborative Venture Agreement by that date, given that its board and/or shareholders required all agreements to be approved as a package.

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(d) In any event, Pinnacle's directors were, after mid-June 2000, more concerned with Pinnacle's internal squabbling than they were with the making of the Collaborative Venture Agreement and, hence, did little or nothing to progress the making of that agreement.

51 Subsidiary proposition (a) finds some support in the evidence. I have earlier mentioned that, by virtue of cl 1(b) of the Letter Agreement, the obligations under that agreement (including the making of the various agreements contemplated by it) were expressed to be subject to and conditional upon, inter alia, "satisfaction of all necessary approvals … including, without limitation, the Boards of Pinnacle and Expectation …". It seems that Pinnacle's major shareholder, the University of New South Wales, wanted to see the details of the Licence Agreements and the Collaborative Venture Agreement before they were executed and also that it wanted the "Expectation Agreements" voted on as a total package by shareholders. Dr Jacques told Mr McLernon of this in an email which he sent to Mr McLernon on 30 June 2000. He went on to say, in that email (part of the content of which has been mentioned above):

"As evidenced by the executed Licence Agreement [it had been executed in mid-June 2000], the management of Pinnacle … does not hold the same view as our major shareholders on the issues of the responsibilities of executive management and the content of resolutions to be placed before shareholders.

I think you are also aware that a group of four shareholders associated with Pethard and Horton have requested a shareholders meeting to spill the board. They and their friends, including Horton, are not supportive of the Expectation Agreement. Given this situation, and the shareholdings of the various parties I am sure that you will appreciate the importance of trying to keep our major shareholder, UNSW, on side. In fact if we do not then there is little doubt in my mind that the board will be spilled and replaced with a board hostile to the Expectation Agreement. A result that in my opinion, would not be in the interests of all shareholders. We also need to carefully consider the timing and implications of the 3 for 10 rights issue and the shareholders meeting that needs to be called for the board spill.

I am acutely aware of the Company's obligations under the good faith negotiation provisions of the Letter Agreement, and … my

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resolve to complete these transactions has not changed. Given Roderick's travel schedule and the need for us to co-ordinate a number of interrelated corporate matters, I would ask for your understanding in these matters and suggest that we extend the proposed date for completion of formal agreements from June 30th to July 15th. I am of the opinion that to keep the UNSW on side the Collaboration Agreement should include some language covering the proposed scope of work, budgets, management responsibilities, contract research (UNSW), time schedules, etc.

I would also like to ensure that other shareholders including ABH, fully understand the importance, and are supportive of the Expectation Agreements.

I plan to come over to Perth early next week to meet with representatives of ABH as suggested and to progress the Expectation Agreements."

52 That one or more of the agreements contemplated by the Letter Agreement needed to be approved by Pinnacle's shareholders (certainly the share placement appears to have required shareholder approval: see [36 (13)] of the trial Judge's first judgment and Ch 7 of the Australian Stock Exchange Listing Rules), and that those agreements might only be approved by its board, and perhaps also by its shareholders, as a package, appeared also from evidence given by Mr Kennedy, Dr Sharp and Dr Jacques.

53 In his written statement of evidence prepared for the purposes of the trial, Mr Kennedy said (par 21) that the agreements contemplated by the Letter Agreement were to be approved by Pinnacle's board "as a package" and that "shareholders approval was required for the placement proposed by the board". He also said that he and Dr Jacques had told Mr Smith "that the licence agreement and the other agreements were subject to board approval as a total package". In a supplementary statement prepared by him (dated 12 February 2001) he said (par 7) that one of the reasons "why they were a total package" was "because the board had approved the letter agreement on 29 May 2000 on the basis that the board was to review the total package in its entirety in reporting to the shareholders and in making recommendations to them in support of the proposed placement to Expectation".

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54 Dr Sharp said, in his statement prepared for the purposes of the trial, that the various agreements contemplated by the Letter Agreement were to be "presented …, considered … [and] approved as a package" by Pinnacle's board and by its shareholders (this appears to be the effect of pars 32, 33 and 55 of his statement).

55 In his statement (par 37), Dr Jacques said that, during a meeting with Mr Smith on 15 June 2000, he and Mr Kennedy had told Mr Smith that, in their opinion, the Letter Agreement "required the collaborative agreement and the funding agreements to be put in place at the same time".

56 The trial Judge made findings which were inconsistent with some of this evidence. At [27] and [28] of his first judgment he said that he was troubled by Dr Sharp's evidence in this respect. After mentioning that this evidence had "revealed an element of reconstruction", he said:

"I think it is clear that in his own mind Dr Sharp thought that all the elements of the agreement were interdependent and linked. As the share placement required shareholder approval, I think it followed in Dr Sharp's mind that all the composite parts of the total package of agreements would require that approval. A necessary prerequisite to seeking that approval in Dr Sharp's mind was that the Board itself would approve the agreements as they were made and be in a position to recommend them to the shareholders.

There would be a need for a prospectus to go to shareholders explaining the total transaction and there would be a need for what is commonly called a 'due diligence' inquiry into Expectation and the merits of the transaction prior to the final approval being sought. It was upon that basis I think that Dr Sharp gave his approval to the letter agreement and he voted in favour of the resolution. But I do not think that he believed that it really was part of that resolution that the individual agreements envisaged by the letter agreement would again individually be brought before the Board, approved by it and then individually or collectively taken to the shareholders for their approval in general meeting."

57 His Honour dealt with the evidence of Mr Kennedy and Dr Jacques, in this respect, at [48] and [49] of his first judgment. In the first of those paragraphs he said:

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"Mr Kennedy, in giving evidence, employed language which rather suggested that although the licence agreement was binding on Pinnacle, it was only provisionally so, each of the agreements provided for by the letter agreement being subject to further Board approval as a total package. But I think it was the idea of the agreement being part of a total package rather than that it specifically needed to be returned to the Board to be approved, upon which attention was focused. Dr Jacques, in giving evidence, said that the discussions were such as to confirm his view that the licence agreement, once executed, would bind Pinnacle, but that if the total package under the letter agreement was not put in place any rights which the licence agreement might create in favour of Expectation would be 'divested'."

58 He said, at [49]:

"If Jacques and Kennedy had believed that the licence agreement in the form they accepted to be appropriate required specific Board approval before its execution, then they would not have executed it [as they had done]."

59 He also said, at [149] of his first judgment, that only the share placement required approval by the shareholders of Pinnacle.

60 Subsidiary proposition (b) was said by counsel for Expectation inevitably to follow from the fact that, as appears from Dr Jacques' email to Mr McLernon dated 30 June 2000, a group of four of Pinnacle's shareholders, who wanted a spill of the then incumbent board, were not supportive of the Letter Agreement. He submitted that, given this circumstance, it might readily be inferred that none of Dr Jacques, Mr Kennedy or Dr Sharp would have been prepared to execute a Collaborative Venture Agreement once they became aware of the motion for a spill of the board. Moreover, he submitted, this inference was strengthened by the fact that, in the course of their evidence, none of Dr Jacques, Mr Kennedy or Dr Sharp said that Pinnacle was willing to make the Collaborative Venture Agreement after 15 June 2000 (although none of them said that it was not willing to do so). He also mentioned, in this respect, evidence to the effect that a fourth director, Mr Charles Wantrup, had said to Mr Rainford (albeit on 1 August 2000, after the time for the making of the Collaborative Venture Agreement had expired) that he wanted "to get rid of" the share placement and underwriting agreements. The fifth of Pinnacle's then five directors, Professor Malcolm

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Logan, had been overseas at the material time. Finally, he submitted that, given that Dr Jacques and Mr Kennedy understood that Pinnacle's board and/or shareholders were required to approve all of the agreements contemplated by the Letter Agreement, they would have accepted that they had no authority themselves to make any binding Collaborative Venture Agreement.

61 Subsidiary proposition (c) was said to have been part of Pinnacle's own case at the trial. I have earlier mentioned Mr Kennedy's evidence to the effect that the Letter Agreement was approved by Pinnacle's board on the basis (which does not appear in the minutes) that the board was to "review the total package in its entirety" when reporting to shareholders and making recommendations to them. Next, counsel for Expectation relied upon the fact that, in its opening submissions at the first hearing before the trial Judge, Pinnacle's case was that, because of this requirement that the agreements contemplated by the Letter Agreement would not bind Pinnacle unless and until its board, or shareholders in general meeting, or both, had approved them, and because no approval was ever obtained, the obligations under the Letter Agreement had been discharged. Also, Pinnacle had pleaded, in par 4E(d) of its defence that, while Expectation had, on or before 13 June 2000, provided Pinnacle with drafts of the subscription and underwriting agreements, negotiations in respect of those drafts did not subsequently occur "in detail" because of subsequent attempts by Pinnacle's shareholders to remove four of its five directors and also because of the decision made by Expectation, on or about 2 August 2000, not to proceed with any form of underwriting and/or subscription agreement with Pinnacle. Counsel for Expectation repeated his contention that, because all agreements were required to be approved by Pinnacle's board as a "package", this necessarily meant that negotiations for the making of the Collaborative Venture Agreement by 31 July 2000 could not seriously have been pursued by Pinnacle between mid-June 2000 and the end of July 2000 and Pinnacle could not have intended to enter into a binding Collaborative Venture Agreement before 31 July 2000. Finally, in this respect, counsel for Expectation relied upon a faxed letter from Pinnacle's solicitors to Expectation's solicitors dated 31 July 2000 mentioning that Pinnacle had "been somewhat distracted given the various EGMs which had been requisitioned by minority interests". That letter also told Expectation's solicitors that Pinnacle's solicitors were "currently waiting for instructions from the company in relation to the draft Underwriting Agreement …".

62 Subsidiary proposition (d) was said to appear from the evidence and, more fundamentally, from Pinnacle's own pleading.

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63 As to the evidence, counsel for Expectation relied upon what was said by Pinnacle's directors (particularly Dr Jacques and Mr Kennedy). He said that it was plain that they had been distracted by the attempts to unseat them. He also relied upon the evidence of Mr Kennedy, in the course of cross-examination at the trial, to the effect that, while he had told Mr Smith that he was proposing to forward some comments to him in respect of the Collaborative Venture Agreement, he never did so.

64 As to the pleadings, counsel for Expectation pointed, once again, to par 4E(d) of Pinnacle's defence. He also relied upon Pinnacle's plea, in par 4H(g)(iii) of its defence, that Expectation knew, as at 2 August 2000, that the "board of directors of Pinnacle was under attack, that the directors of Pinnacle were operating in caretaker mode, that the composition of the board of Pinnacle was unclear and was the subject of litigation and that the corporate governance of Pinnacle at that time was in turmoil". He pointed to the fact that Pinnacle particularised those allegations by reference to events which had occurred between 15 June 2000 and 15 August 2000. He also pointed to the fact that this plea is consistent with closing submissions which were made (in writing) on Pinnacle's behalf at the trial, to the effect (par 181) that it "was legitimate for the Board to attend to the confused and uncertain state of the company management, as a matter of priority" and that Pinnacle's "management and control was paralyzed until it was able to sort out its affairs", as it did only in early August 2000.

65 Even if it be assumed that subsidiary proposition (a) has been made out, I am not persuaded that the inference articulated in subsidiary proposition (b) should have been drawn by the trial Judge (I should add that that proposition appears not to have been put to him, at least in the way that it was put to us). Nor am I persuaded that subsidiary propositions (c) and (d) ought to have been found by the trial Judge. Indeed, those propositions seem to me to be contrary to the evidence which was accepted by him in circumstances in which it was open to him to accept that evidence.

66 It must, first, be recognised (as the trial Judge recognised at [156] of his first judgment) that the Letter Agreement required the parties to it to negotiate in good faith (as to which seeAnaconda Nickel Ltd v Tarmoola Australia Pty Ltd (2000) 22 WAR 101 at 105 - 113) with a view to entering into "mutually satisfactory formal licence agreements … and Collaborative Venture". There was no promise that those negotiations would prove to be successful. Indeed, an agreement to agree at some time in the future would not have been enforceable: Booker Industries Pty Ltd

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v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600 at 604. Similarly, insofar as the Letter Agreement provided, as a condition precedent to performance of the obligations contained within it, for the "satisfaction of all necessary approvals applicable to Pinnacle", including, without limitation, the approval of its board, there was no promise that those approvals would be forthcoming.

67 Next, it seems to be clear that Expectation's contentions are directed to Pinnacle's conduct after mid-June 2000. There was not (nor could there be, when regard is had to the evidence) any suggestion that, prior to that time, Pinnacle did not negotiate in good faith for the making of the Collaborative Venture Agreement. As to Pinnacle's conduct after that time, I have said that the trial Judge found that the term sheet initialled by the parties on 15 June 2000 could never have been an adequate expression of the Collaborative Venture Agreement and that Dr Jacques was entitled to take the view he did, namely that considerably more was required before that agreement could be progressed ([95], [96] and [164] of his first judgment). His Honour also accepted that Dr Jacques made "strenuous efforts thereafter to get a sensible contribution from Expectation" but that none was ever received ([164] to [166] of the first judgment).

68 These findings were repeated by his Honour in his second judgment (at [19]). As will be apparent, he went on to say, at [20] of that judgment, that Dr Jacques was not reasonably required to keep "returning to Smith" during July 2000 and that Dr Jacques had committed himself to the process of negotiation without getting an effective response. His Honour found that Dr Jacques was reasonably entitled to conclude, as it appeared he did, that negotiations could not be progressed without an effective contribution from Expectation, which contribution was never obtained. He also found, as I have said, that Dr Jacques "really gave up" on Mr Smith at a time when the ball was "in Expectation's court" and that there was no evidence to suggest that Pinnacle was not prepared, during July 2000, to enter into a "properly framed collaborative venture agreement". I have earlier mentioned that Dr Jacques had said, in his email dated 30 June 2000, that he was acutely aware of Pinnacle's obligations under cl 6 of the Letter Agreement and that his resolve to complete the relevant transactions had not changed. I have also mentioned that Mr Kennedy considered that it was essential to agree upon a scope of work if the Collaborative Venture Agreement was to be progressed and that he, too, consequently kept pressing Mr Smith for this.

69 As to Expectation's contention that the inference referred to in proposition (b) is strengthened by the fact that none of Dr Jacques,

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Mr Kennedy and Dr Sharp said in evidence that Pinnacle was willing to make the Collaborative Venture Agreement after 15 June 2000, I have already mentioned that none of them said that it was not then willing to do so. Sight should not be lost of the fact that Pinnacle was answering a plea of breach by Expectation. It was for Expectation to establish that Pinnacle had failed to negotiate in good faith. In the absence of some evidence which established this, either by showing that Pinnacle had lacked the intention to make the Collaborative Venture Agreement (and it was not put to Pinnacle's witnesses that it would never have made a collaborative venture agreement under any circumstances) or otherwise, it was unnecessary for Pinnacle to go further than it did in the course of its evidence.

70 In any event, it appeared from the evidence of Dr Jacques (accepted by the trial Judge) that he believed that Pinnacle was willing to make that agreement. He said that he would have pursued the further drafting of the Collaborative Venture Agreement, even given the board distractions, had Mr Smith come back to him. I have also stressed that, on 30 June 2000, Dr Jacques said that his resolve to complete the relevant transactions had not changed. Indeed, it was he who suggested that the date fixed for completion of the Collaborative Venture Agreement be extended. As will be apparent, he then said that he would like to ensure that other shareholders fully understood the importance of, and were supportive of, the Letter Agreement and that, in order to gain the support of Pinnacle's major shareholder, it was important that the Collaborative Venture Agreement contained details of the kind for which he had been pressing. It seems to me to matter little, in this regard, that he and Mr Kennedy might have assumed that they did not themselves have the requisite authority to execute any of the relevant agreements (if, indeed, they did assume this - the assumption is not consistent with the execution of the Licence Agreement or with the first of the paragraphs which I have earlier quoted from Dr Jacques' email to Mr McLernon dated 30 June 2000).

71 Also, contrary to the submission advanced on Expectation's behalf in support of subsidiary proposition (c), Dr Jacques' evidence in this respect was consistent with Pinnacle's pleading and with the way in which it put its case at the trial.

72 As to its pleading, in answer to par 4E of Expectation's statement of claim, which alleged, inter alia, that Pinnacle had failed to negotiate in good faith the terms of the Collaborative Venture Agreement, Pinnacle pleaded (par 4E(c)(ii) and (iii) of its defence) that, on 15 June 2000, Mr Smith had agreed with Dr Jacques and Mr Kennedy that he would

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cause a form of Collaborative Venture Agreement to be prepared, based upon the term sheet, and that he would provide it to them for comment and further negotiation, but that he never did so.

73 As to the way in which Pinnacle put its case at the trial, I have mentioned that Pinnacle's counsel said, in par 181 of their closing submissions, that Pinnacle's board gave priority to the confused and uncertain state of the company's management and that its management and control was "paralyzed" until it was able to sort out its affairs. However, they also there said that "The transaction with Expectation was still on the agenda, but Pinnacle was waiting for Expectation to get back to it with information to enable further progress on the Collaborative Agreement".

74 I have mentioned, in this last respect, that Expectation placed some reliance on the evidence of Mr Kennedy to the effect that, while he told Mr Smith that he would forward to him some comments in respect of the Collaborative Venture Agreement, he did not do so. It was suggested that this was the cause of Expectation's failure to progress matters. However, in his evidence, Mr Kennedy went on to explain why this had been so. He said that the agreement was then "in a very poor state" and that Pinnacle "wanted to know what the scope of work was before we identified responsibilities and obligations for the various parties under the co-operation agreement". He added that he consequently "kept pressing … [Mr Smith] for the scope of work". Contrary to the submission by Expectation's counsel, this is hardly consistent with an intention not to proceed further with the Collaborative Venture Agreement.

75 In all of these circumstances it seems to me that it was open to the trial Judge to find, as he did, that the evidence did not establish that, at any time prior to 31 July 2000, Pinnacle had decided that it would not proceed with the Collaborative Venture Agreement. It also seems to me that it was open to his Honour to find, as he also did, that the evidence established that Pinnacle did all that it could, given Mr Smith's inactivity or intransigence, to progress negotiations for the making of that agreement. At best for Expectation, the evidence established no more than that there was a real prospect that Pinnacle's incumbent board (which wanted to see the implementation of the Letter Agreement) might be replaced by a board which was less likely, or even unlikely, to approve agreements of the kind then under contemplation and that there existed the prospect that shareholders of Pinnacle, to the extent that their approval was required, might not grant it. It is important to bear in mind, in this respect, that Pinnacle's then incumbent board was not replaced until after

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31 July 2000 and also that, as I have stressed, the "satisfaction of all necessary approvals applicable to Pinnacle" was a condition precedent to performance of the obligations under the Letter Agreement.

76 The trial Judge's findings were not precluded by anything pleaded by Pinnacle in par 4E(d)(ii) of its defence to the effect that negotiations as regards the placement and underwriting agreements did not "occur in detail" after 13 June 2000 because of internal unrest in Pinnacle's camp. The fact that Pinnacle was not, by 31 July 2000, in a position to put the placement and/or underwriting agreements before its board and/or shareholders did not mean that it had not met its obligations under cl 6 of the Letter Agreement so far as the Collaborative Venture Agreement was concerned. I have stressed that Dr Jacques' evidence (with which I will deal in more detail below, when dealing with Expectation's third proposition) was to the effect that his resolve to complete the relevant transactions had not changed and that, even given the board distractions, he would have pursued the further drafting of the Collaborative Venture Agreement, had Mr Smith come back to him. Even if, as events turned out, the placement and underwriting agreements could not be made by 31 July 2000, that did not mean that, if Expectation had done what was asked of it by Dr Jacques and Mr Kennedy, Pinnacle would not have endeavoured to make the Collaborative Venture Agreement by that date (and, perhaps, also those other agreements, if it was necessary for all agreements to be approved as a package).

77 Finally, so far as Expectation's second proposition is concerned, I should say that, in the course of dealing with it, counsel for Expectation challenged the trial Judge's finding, at [22] of his second judgment, that "those conducting negotiations for and involved in directing … [Expectation] understood that if the letter agreement was to be fully performed it had to be by the board of … [Pinnacle] which was then in office". He did so upon the basis that "that case" had not been pleaded by Pinnacle, nor advanced in its witness statements or opening submissions, nor made the subject of cross-examination.

78 In my opinion, there is nothing in this contention. I have already said, in dealing with Expectation's first proposition, that the trial Judge seems to me to have accorded no particular significance to this finding and that, when his remarks in that respect are read in context, he was saying no more than that the question which he was required to decide had to be decided in the light of all of the circumstances, including the circumstance that, at material times, representatives of both Expectation and Pinnacle had co-operated in attempts to shore up the position of

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Pinnacle's incumbent board, that having been seen by Expectation to be in its own interest. I have also said that his Honour did not find that Pinnacle was excused from negotiating the Collaborative Venture Agreement because its incumbent board was distracted at the relevant time. Equally, he did not find (contrary to the suggestion to this effect by Expectation's counsel) that, because Expectation understood that a board other than Pinnacle's incumbent board was unlikely to approve the agreements contemplated by the Letter Agreement, Expectation somehow waived the requirement of compliance by Pinnacle with cl 6 of that agreement, or was estopped from contending that Pinnacle breached that clause as a result of its incumbent board's pre-occupation with its own survival. What he found was that, notwithstanding its pre-occupation, Pinnacle's board had done all that could reasonably have been expected of it to progress negotiations for the making of the Collaborative Venture Agreement.

The third proposition

79 That leaves Expectation's third proposition.

80 The first point which might be made in respect of it is that the trial Judge did not find that Expectation was in breach of cl 6 of the Letter Agreement. All that his Honour found was that Pinnacle was not in breach of that clause.

81 However, counsel for Expectation submitted in any event that the basis for the trial Judge's finding that Pinnacle was not in breach of cl 6 was one which was not open to him. He contended that the finding that Pinnacle had not been able to progress the making of the Collaborative Venture Agreement because Expectation had not given it the information and further contribution which was required in order to progress it was not open because Pinnacle neither pleaded nor ran its case at the trial in that way. He also said that the Full Court's finding, on the first appeal, that it was not open to the trial Judge to find that there had been a breach of cl 6 by Expectation, given the state of the pleadings, precluded the trial Judge's finding, in his second judgment, that Pinnacle was not in breach of cl 6 because the failure to advance the negotiations for the making of the Collaborative Venture Agreement was the fault of Expectation.

82 As to the pleadings, I have mentioned that, in par 4E of its statement of claim, Expectation alleged that Pinnacle breached cl 6 by failing or refusing to negotiate in good faith the terms of, inter alia, the Collaborative Venture Agreement. Particulars of that allegation were neither sought nor given. In response, in par 4E(a) of the defence,

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Pinnacle denied the allegation of breach. I have also mentioned that Pinnacle went on to plead (in par 4E(c)(ii) and (iii)) that, on 15 June 2000, Mr Smith had agreed with Dr Jacques and Mr Kennedy that he would cause a form of Collaborative Venture Agreement to be prepared, based upon the term sheet to which I have earlier referred, and that he would provide it to them for comment and further negotiation, but that no such draft agreement was ever provided by Expectation to Pinnacle.

83 In the Full Court, Miller J and I said ([2002] WASCA 160 at [104]) that this last allegation is somewhat different from one of breach, by Expectation, of the Letter Agreement by failing to negotiate in good faith for the making of the Collaborative Venture Agreement. While I remain of that opinion, it is, nonetheless, a matter which was offered up by Pinnacle, in its defence, in answer to the plea that it had failed to negotiate in good faith in respect of the making of the Collaborative Venture Agreement. It could consequently be taken into account upon the latter basis, albeit not in support of the former basis and there is nothing in the judgment of the Full Court which is to the contrary. Moreover, Pinnacle was also able to rely upon its plea, in par 4G(c) of its defence, that since on or about 16 June 2000 Expectation had not been ready, willing or able to perform its obligations to Pinnacle as regards the making of the Collaborative Venture Agreement because, inter alia, of the matters referred to in par 4E(c) of Pinnacle's defence.

84 As to the manner in which Pinnacle ran its case, counsel for Expectation repeated his submission that, whatever might have been the position as regards the pleadings, Pinnacle's case at the trial, at least until Dr Jacques gave evidence, was that the agreements contemplated by the Letter Agreement, including the Collaborative Venture Agreement, would not bind Pinnacle unless and until its board, or its shareholders in general meeting, or both, had approved those agreements, that the board insisted on approving them as a "package" and that those agreements never were approved as a package. He said that, when Mr Smith gave evidence, he was not examined, or cross-examined, on the issue of whether or not negotiations for the Collaborative Venture Agreement had become bogged down as a consequence of his own intransigence, or failure to advance the position. That issue first emerged when Dr Jacques gave evidence, close to the end of the trial. Had it emerged earlier, counsel for Expectation said, Mr Smith might possibly have shed more light (he did not say what light) in respect of it, in particular as to why the suggested meeting between Mr Smith and Dr Jacques, mentioned in the email sent by Mr Smith to Dr Jacques on 30 June 2000, did not take place.

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85 Although directions had been given in advance of the trial for the exchange of witness statements, none had been provided by Dr Jacques, because he had not then been available. It was only realised towards the very end of Pinnacle's case that Dr Jacques had become available. A statement was consequently taken from him (and a copy provided to Expectation's lawyers) on 8 May 2001, the day before he gave evidence at the trial.

86 In par 39 of his statement, Dr Jacques mentioned the initialling of the term sheet on 15 June 2000. He also there said that:

"The draft collaboration agreement was totally unsatisfactory, as it had no definition as to what the scope of the collaboration would be and how it would be funded. Smith said that he would take the term sheet back and work that into a collaboration agreement. I said that I wanted the language of the collaboration agreement to be consistent with that of the licence agreement. He said that he would attend to that and get back to us with a draft collaborative agreement. He never did so."

87 In par 41 of his statement, Dr Jacques mentioned that, on 21 June 2000, he had a telephone conversation with Mr Smith. He said that, during that conversation, he told Mr Smith that "as per his agreement with me on the 15th, he should be getting the collaborative venture agreement drafted". He went on to say:

"I told him that we needed input from his technical experts at PMA on the definition of the technical program for producing cost-effective vanadium electrolyte so that we could get the agreement finalised. Smith said that he would talk with his technical people and get back to me shortly on the draft."

88 None of this evidence appears to have been objected to by counsel for Expectation. Moreover, Dr Jacques was cross-examined at some length in respect of it. It was put to him that Mr Kennedy had said to Mr Smith, on 15 June 2000, that there were various amendments that he (Mr Kennedy) wished to make to the formal draft Collaborative Venture Agreement and that Mr Kennedy had promised to let Mr Smith have them. Dr Jacques was asked whether or not that was his recollection. He said that it was not. He said that Mr Kennedy wrote a number of suggested changes on one copy of the Collaboration Agreement and that Mr Smith took those changes with him. He went on to say that the

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marked up copy of the Collaboration Agreement "was really not an agreement at all" and was "just an agreement to agree" with an attached term sheet.

89 It was also put to Dr Jacques that, during the course of the last 10 days or so of June 2000, there was "quite an active discussion between … [Dr Jacques] and Mr Smith in particular as to what the collaborative venture agreement should contain". Dr Jacques responded by saying:

"No, I'd say it was a one-sided dialogue. Mr Smith never replied to any of the questions I asked him in … emails."

90 Dr Jacques also said, during the course of cross-examination, that there had been a disagreement between himself and Mr Smith as to what the Collaborative Venture Agreement should contain. Although cross-examined at some length on this, Dr Jacques maintained that he received no response at all from Mr Smith to his proposals as to what the Collaborative Venture Agreement should contain. He also said:

"I don't see how it's possible to have a collaborative venture unless you know how much you're going to spend, what the program is going to be, when it's going to start, when it's going to finish, who's going to be involved in it."

91 He said that after 15 June 2000 Mr Smith was in no doubt that Pinnacle considered that the documents which had by then been prepared were "totally inadequate" and that "a proper agreement was needed".

92 Counsel for Expectation also put to Dr Jacques that, throughout July 2000, he had constantly been involved in negotiations with various persons seeking to settle the composition of Pinnacle's board. Dr Jacques acknowledged that this was so and also that it had become a matter of "utmost priority" to him. However, when it was put to him that it was for that reason, amongst others, that the Collaboration Agreement did not make a great deal of progress during July, he responded by saying, "No, I don't think that's fair at all." When asked what was the problem during July, he responded by saying that he "received nothing from Mr Smith with respect to the collaboration agreement whatsoever". When it was put to him that this may have been because he was constantly involved in negotiations as regards the composition of Pinnacle's board, he responded by saying, "That didn't prevent Mr Smith from sending information to me." I have earlier mentioned that he also said that it would not have prevented him from dealing with that information had it been presented to him. When it was put to him that he had not chased Mr Smith up, he said

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that he "thought … [that he had] sent enough emails within 1 week to get their attention".

93 Notwithstanding that no objection was taken to the paragraphs to which I have referred in Dr Jacques' statement, and notwithstanding, also, that most of the evidence in respect of Mr Smith's intransigence or delay was elicited by counsel for Expectation in the course of cross-examination, counsel for Expectation maintained the proposition that it had not been open to the trial Judge to have regard to that evidence in considering whether or not Pinnacle had failed to negotiate in good faith for the making of the Collaborative Venture Agreement because the evidence had come late, no reasonable notice of it was given, it was not covered by the pleadings and it had not been put to Mr Smith, so as to enable him to comment on it.

94 In my opinion, the trial Judge was entitled to have regard to this evidence in the manner in which he did so.

95 First, it seems to me (as it did to his Honour: see [24] of his second judgment) that the evidence went directly to a pleaded issue, namely that pleaded in par 4E of Expectation's statement of claim and in pars 4E(a), 4E(c) and 4G(c)(i) of Pinnacle's defence. Also, Pinnacle had, in par 4(3) of its written opening submissions, expressly contended that "the failure by Pinnacle to enter into … [the] collaborative venture agreement was not in breach of clause 6 of the letter agreement".

96 Next, as I have said, no objection to any of the evidence now complained of was made. Nor was any request made to the trial Judge for Mr Smith to be recalled in order to comment on what Dr Jacques had said. While counsel for Expectation said that he did not then appreciate the significance of the evidence, the fact is that he cross-examined on it at some length in an endeavour to get Dr Jacques to agree with the proposition that it had been Pinnacle, and not Mr Smith, who had been the cause of the delay. As will be apparent, he also sought, unsuccessfully, to get Dr Jacques to agree with the proposition that, because of his distraction with board affairs, he would not have advanced the making of the Collaborative Venture Agreement even if Mr Smith had responded to his proposals in that regard. It should be kept in mind that it was for Expectation to prove its allegation of breach, by Pinnacle, of cl 6 of the Letter Agreement and to lead, or attempt to elicit, such evidence in support of that allegation as it saw fit to lead or attempt to elicit. It was always open to Pinnacle to rely upon any evidence, or any omission in the evidence, so led or elicited in support of its proposition that the allegation

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of breach had not been made out. It was also always open to Pinnacle to rely, for that purpose, on any evidence led by it to which no objection was taken.

97 It follows, in my opinion, that Expectation's third proposition has not been made good.

Conclusion

98 I would consequently dismiss the appeal.

99 MCKECHNIE J: I agree with Steytler J for the reasons he advances that this appeal should be dismissed.

100 JENKINS J: I have had the advantage of reading, in draft, the reasons to be published by Steytler J. I agree with those reasons and have nothing to add.