Forbes Engineering (Asia) Pte Limited v Forbes (No 4) - [2009] FCA 675

FEDERAL COURT OF AUSTRALIA
Forbes Engineering (Asia) Pte Limited v Forbes (No 4) [2009] FCA 675
CONTRACTS – breach of guarantee – damages claimed from respondents for breach of guarantee of profit shortfall of company – profit guarantee originally given by vendor companies in share sale agreement – respondents guaranteed any profit shortfall of company the subject of share sale agreement in 1998 and 1999 – applicants leased property from respondents - any profit shortfall to be made up by reduction of rent payable to applicants in respect of lease – profit shortfall claimed by applicants in 1998 and 1999 – respondents failed to refund rent to purchaser company in amounts of profit shortfall – whether oral variation of agreed profit shortfall for year ending 1998 – whether audit report for 1999 compliant with machinery of calculation in share sale agreement – whether profit shortfall for 1998 understated – whether change in control of company discharged respondents from guarantee – whether acquisition of a new business by the company discharged respondents from guarantee – whether valid consideration for guarantee – whether written variations to the principal share sale agreement discharged guarantee – whether applicants’ claim statute barred – whether managing director of first applicant represented that guarantee would not be enforced – Order 20 rule 2 of the Federal Court Rules – whether claim was abuse of process due to missing source financial material
EVIDENCE – whether audit report detailing profit shortfall in 1999 admissible – whether audit report akin to a banker’s certificate – whether provision for audit report in relation to profit shortfall in share sale agreement a “Dobbs Clause” – audit report on 1999 profit shortfall based on source financial source material now missing – whether audit report prejudicial to respondents and inadmissible under section 135 and section 136 of the Evidence Act 1995 (Cth) – whether audit report a business record under section 69 of the Evidence Act 1995 (Cth) – whether subsequent report created for the purpose of litigation and inadmissible under section 69(3) of the Evidence Act 1995 (Cth)
AGENCY – whether co-surety second respondent liable for 1998 profit shortfall guarantee amount orally varied by first respondent and the first applicant – whether first respondent had ostensible authority to bind second respondent to oral variation of profit shortfall amount for 1998
Held: application successful in part – first respondent liable for damages to applicants for 1998 profit shortfall in the amount of $127,284 – oral variation of profit shortfall for 1998 bound first respondent but not second respondent – first respondent did not have ostensible authority to bind second respondent to variation of guarantee – provision in share sale agreement for audit report on profit shortfall not a “Dobbs Clause” – audit report not akin to a banker’s certificate – impossible to test accuracy of audit report or whether it complied with machinery of calculation in share sale agreement because of absence of source financial documentation – no admissible evidence as to 1999 profit – claim as to 1999 profit shortfall not made out – no representation made by managing director of first applicant to first respondent that the profit shortfall guarantee would not be enforced – change in control of company and acquisition of new business by company did not discharge liability of respondents under profit shortfall guarantee – variations to principal share sale agreement did not discharge liability of respondents under profit shortfall guarantee – valid consideration provided for guarantee – claim not abuse of process – audit report a business record but inadmissible for unreliability and prejudice under section 135 of the Evidence Act 1995 (Cth)
Corporations Act 2001 (Cth) ss 180(1), 181(1), 182(1)
Evidence Act 1995 (Cth) ss 69, 135, 136
Federal Court of Australia Act 1976 (Cth) s 51A
Income Tax Assessment Act 1936 (Cth) s 177
Federal Court Rules O 20 r 2
Supreme Court Act 1995 (Qld) s 48
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FORBES ENGINEERING (ASIA) PTE LIMITED (COMPANY NO 1997 020 35N) and FORBES ENGINEERING HOLDINGS (AUSTRALIA) PTY LIMITED (ACN 010 832 023) v MARK FORBES and KAREN LEE FORBES
NSD 636 of 2005
COLLIER J
22 JUNE 2009
BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY

NSD 636 of 2005

BETWEEN:
FORBES ENGINEERING (ASIA) PTE LIMITED (COMPANY NO 1997 020 35N)
First Applicant

FORBES ENGINEERING HOLDINGS (AUSTRALIA) PTY LIMITED (ACN 010 832 023)
Second Applicant

AND:
MARK FORBES
First Respondent

KAREN LEE FORBES
Second Respondent

JUDGE:

COLLIER J

DATE OF ORDER:

22 JUNE 2009

WHERE MADE:

BRISBANE

THE COURT ORDERS THAT:
1.In relation to the amended application filed 31 March 2006:
(a)the applicants are entitled to damages as against the first respondent for breach of the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee in the amount of $127,284;
(b)the first respondent is pay the applicants interest at the annual rate of 10% on the sum ordered to be paid in sub-paragraph 1(a) herein pursuant to section 51A of the Federal Court of Australia Act 1976 (Cth), to be calculated from the date the applicants’ cause of action arose;

(c) the application is otherwise dismissed.

2. In relation to the notice of motion filed 12 September 2007:
(a)pursuant to section 135 of the Evidence Act 1995 (Cth) pages 130-192 of annexure “PK1” to the affidavit of Poh Kiat affirmed on 25 October 2005 are excluded from evidence admitted, or to be admitted, in this proceeding;

(b) the notice of motion is otherwise dismissed.
3.The applicants are to file and serve submissions as to costs, and copy them in electronic form to the associate, by 4.00 pm on 6 July 2009.
4.The respondents are to file and serve submissions as to costs, and copy them in electronic form to the associate, by 4.00 pm on 20 July 2009.
5.The applicants are to file and serve submissions as to costs in reply, and copy them in electronic form to the associate, by 4.00 pm on 27 July 2009.
6.The issue of costs is to be decided on written submissions without the necessity for a hearing unless either party should contact my chambers and the other party by 4.00 pm on 30 July 2009 and request a hearing or unless the Court schedules a hearing to hear oral submissions.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

The text of entered orders can be located using eSearch on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY

NSD 636 of 2005

BETWEEN:
FORBES ENGINEERING (ASIA) PTE LIMITED (COMPANY NO 1997 020 35N)
First Applicant

FORBES ENGINEERING HOLDINGS (AUSTRALIA) PTY LIMITED (ACN 010 832 023)
Second Applicant

AND:
MARK FORBES
First Respondent

KAREN LEE FORBES
Second Respondent

JUDGE:

COLLIER J

DATE:

22 JUNE 2009

PLACE:

BRISBANE

REASONS FOR JUDGMENT

The amended application for relief filed by the applicants in these proceedings arises from claimed breaches of covenants in a share sale agreement, breaches of guarantees related to that agreement, and alleged breaches of ss 180(1), 181(1) and 182(1) of the Corporations Act 2001 (Cth) (“the Corporations Act”). The applicants claim by way of relief:
1.Specific performance of the guarantee accompanying the share sale agreement.
2.Damages for breach of a share sale agreement and the guarantee.
3.Damages for breach of duty as a director pursuant to s 1317H of the Corporations Act 2001 (Cth).
4.Interest pursuant to a share sale agreement or pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth).
5.Costs.
The respondents submitted that the applicants have abandoned aspects of their claim relating to breaches of duty under the Corporations Act. Although there was no express abandonment of the Corporations Act claims by the applicants, in my view the respondents’ submission is substantiated by the facts that:
·there is no reference to the Corporations Act claims in the applicants’ written submissions;
·there is no reference to the Corporations Act claims in the applicants’ oral submissions;
·there is no reference to the Corporations Act claims in the applicants’ Statement of Facts, Issues and Contentions filed 9 October 2007.
I consider it appropriate to treat this aspect of the applicants’ claim as abandoned.
BACKGROUND
Relevant Parties
At all material times, the first applicant (“Forbes Asia”) was a company incorporated in Singapore, and a subsidiary of Teamsphere Ltd which was also a Singapore-based company. Mr Poh Kiat, who gave evidence on behalf of the applicants at the hearing of this matter, and who was a key witness in these proceedings for the applicants, was at all material times Managing Director of both Forbes Asia and Teamsphere Ltd.
The second applicant (“Forbes Australia”) was, at all material times, a company incorporated in Australia which carried on business both within and outside Australia. Prior to September 1997, Forbes Australia was a specialised company based in Brisbane which provided services to the concrete industry, notably in relation to establishment of plants and the construction of equipment for transportation of concrete. After the sale of shares of Forbes Australia in September 1997 the company continued to carry on business in the same industry.
Until September 1997 the owners of the shares in Forbes Australia were two companies, Pearlbunch Pty Ltd (“Pearlbunch”) and Talrate Pty Ltd (“Talrate”), both of which were controlled by the first respondent, Mr Forbes, as sole director. Mr Forbes was sole shareholder of Pearlbunch, and was also the sole director and (with Mrs Forbes) a shareholder of another company, Forbes Screens Pty Ltd (“Forbes Screens”).
At the time of the share sale agreement executed by Forbes Asia as purchaser and Pearlbunch and Talrate as vendors on 22 September 1997 by which the shares in Forbes Australia were transferred to Forbes Asia (“share sale agreement”), Mr Forbes was the managing director and chief executive officer of Forbes Australia. He retained this position until 22 February 2000.
At all material times Mr Forbes and Mrs Forbes were joint owners of certain property described as Lot 8 on RP 229240, County of Stanley, Parish of Toombul (“Lot 8”). Until 15 June 2000, Forbes Screens owned an adjoining property (“Lot 9”).
Leases of Lot 8 and Lot 9
On 17 September 1997 Mr Forbes and Mrs Forbes entered into a lease of Lot 8 with Forbes Australia. On 22 September 1997 Forbes Screens entered into a lease of Lot 9 with Forbes Australia.
Share Sale Agreement
The shares in Forbes Australia were transferred to Forbes Asia on 22 September 1997 for a purchase price of $3.9 million. The share sale agreement took place following what appear to be extensive negotiations during July, August and September 1997 between the parties. The initial negotiations in respect of the acquisition took place primarily between Forbes Asia represented by Mr Poh, and the interests of the vendors of the shares in Forbes Australia represented by Mr Forbes. Formal discussions in the period prior to execution of the share sale agreement involved the parties’ legal representatives (including Mr Steven Grant for Mr Forbes and the vendors and Mr Freddy Chan for the purchasers) and accounting advisers. I shall return to consider these negotiations later in this judgment, because findings in respect of the negotiations are important in relation to a number of the applicants’ claims in this case.
Key provisions of the share sale agreement for the purposes of these proceedings were cl 2.3 and cl 3.3, Annexure 1 and cl 3.4.
The purchase price for the shares in Forbes Australia was to be paid in three tranches or “cash injections”. Clause 2.3 of the share sale agreement provided for the circumstances of the payment of third cash injection in the amount of $1,099,999. Of that amount, $500,000 (referred to as “the Retention Sum”) was to be retained in escrow unless the terms of cl 3.4 were satisfied and the balance of the purchase price was paid.
Clause 3.3 provided as follows:
3.3 The Vendors shall guarantee, ensure and cause the Company to achieve the following audited profits before tax during the following financial years of the Company provided always that the audited said profit before tax is calculated by reference to the formula set out in Annexure 1 attached hereto:-
3.3.1 For the financial year ending 31st December 1997 – A$1,300,000.00
3.3.2 For the financial year ending 31st December 1998 – A$1,400,000.00 and
3.3.3 For the financial year ending 31st December 1999 – A$1,500,000.00
For the financial year ending 31st December 2000, the Vendors shall use its best endeavour to cause the Company to achieve an audited profit before tax of A$1,600,000.00.
(The guarantees referred to in cl 3.3 were referred to throughout the proceedings, and shall be referred to in this judgment, as “the profit guarantees”.)
Annexure 1 to which cl 3.3 referred provided:
Clause 3.3: Formula for calculating the audited Profit before tax of the Company:-
The calculation for the audited profit before tax of the Company shall be in accordance to Australian Accounting Standards as per audited financial statements but excluding extraordinary items, abnormal items, gain or loss on disposal and/or revaluation of assets, expenses relating to research and development, provisions for long service leave and additional depreciation and amortisation resulting from the value of any item (for depreciation or amortisation purposes) being increased over that item’s value for that purpose as at 30 June 1997.
In summary, cl 3.4 required the vendors’ solicitors to hold the $500,000 Retention Sum for 365 days from the date of the agreement in their trust account, following which the monies would be withdrawn and specifically applied towards payment of certain accounts.
Side Letters Containing Written Indemnity and Guarantee Agreement
On 22 September 1997, the same day as execution of the share sale agreement, Mr Forbes and Mrs Forbes executed two “side letters”.
Forbes Guarantee
The first side letter executed by the respondents (the “Forbes Guarantee” also referred to in the proceedings as the “1st Lot 8 Side Letter”) was addressed to Forbes Asia. It recited the execution of the share sale agreement and the lease of Lot 8. The document then continued:
1. We hereby unequivocally and irrevocably admit and acknowledge that:-
1.1 the Vendors are our nominee and it was at our requests that you agreed to enter into the SS Agreement with the Vendors;
1.2 in view of paragraph 1.1, all the warranties and representations and covenants and obligations made or assumed by the Vendors under the SS Agreement are actually our representations and warrants and our covenants and obligations; and
1.3 as regards the Vendor’s (and hence our) covenants under Clause 3.3 of the SS Agreement, it was agreed that in the event that the audited profits before tax of FEH shall fall short of the amount guaranteed by the Vendors (and hence us), we, as Lessors under the Lease shall agree to reduce the total rent (“Rent”) payable by FEH during the twelve (12) months period immediately following the last day of that particular financial year of FEH where the amount of the audited profit before tax so guaranteed is not achieved.
2. In consideration of you entering into the SS Agreement with the Vendors at our requests, we hereby agree, covenant and undertake as follows:-
2.1 guarantee the performance and compliance by the Vendors of all the Vendor’s obligations and covenants under the SS Agreement and:-
2.1.1 do, execute and perform such things, documents and acts as requested by you at any time and from time to time to ensure that the Vendors shall so comply with their obligations under the SS Agreement; and
2.1.2 indemnify you for all loss and damages suffered and costs and expenses incurred by you as a result of the Vendor’s failure to so comply with the Vendor’s obligations and covenants under the SS Agreement; and to pay to you on demand such losses and damages and costs and expenses;
2.2 as regards the reduction of the yearly rent for the Lease under paragraph 1.3 above, we agree to and covenant in terms of the provisions set out in paragraph 3 below; and
2.3 use our best endeavours to ensure that the suppliers and trade creditors of FEH and Forbes Industries Pty Ltd (“FI”) will accept the take over of FI’s debts with them by FEH’s new subsidiary, Forbes Industries (Australia) Pty Ltd (“FIA”) and that such suppliers and trade creditors shall continue to offer to FIA such credit terms which are not less favourable than those now enjoyed by FI.
Reduction of Rent under the Lease
3.1 If the audited profit before tax (“Pretax Profit YE/97”) of FEH calculated in the manner as provided under the SS Agreement for the period 1.1.97 to 31.12.97 (“YE/97”) shall not be more than A$1,300,000.00 (“P/Profit Target”) then we hereby irrevocably and unequivocally discharge and release FEH of all obligations to pay to us such proportion of the Rent payable by FEH to us for the period 1.1.98 to 31.12.98 (“YE/98”) which is equivalent to the difference (“Profit Shortfall”) between the said P/Profit Target for YE/97 and the said actual audited Pretax Profit YE/97. If the Profit Shortfall exceeds 100% of such Rent, then we shall release and discharge FEH of FEH’S obligations and liabilities to pay to us the Rent for YE/98. If the Profit Shortfall is less than such Rent, then FEH shall deduct such Profit Shortfall from the Rent for YE/98. Such deductions shall be recovered by FEH by deductions of the same amount to the Rent payable by FEH to us under the Lease (for the YE/98).
3.2 As regards the Rent payable by FEH to us for the period 1.1.99 to 31.12.99 (“YE/99”), the same formula set out in paragraph 3.1 above shall apply save and except the following difference:-
3.2.1 the Rent for YE/99 shall be calculated based on the rate set out in the Lease; and
3.2.2 the P/Profit Target for YE/98 shall be A$1,400,000.00
3.3 As regards the Rent payable by FEH to us for the period 1.1.2000 to 31.12.2000 (“YE/2000”) the same formula set out in paragraph 3.1 above shall apply save and except the following differences:-
3.3.1 the Rent for YE/2000 shall be calculated based on the rate set out in the Lease:
3.3.2 the P/Profit Target for YE/99 shall be A$1,500,000.00
4. We hereby waive all our rights to defences available to (sic) in respect of the above guarantee and indemnity under the laws of Queensland, and shall pay to you on demand all monies, losses and damages and costs and expenses, suffered or incurred by you as a result of the Vendors’ breach or failure to comply with the Vendors’ obligations and covenants under the SS Agreements.
5. All covenants and agreement herein made by us are so made by us jointly and severally and binding on our respective successors-in-title, heirs and personal representatives.
Forbes Lot 8 Lease Guarantee

The second side letter executed by the respondents (the “Forbes Lot 8 Lease Guarantee” also referred to in the proceedings as the “2nd Lot 8 Side Letter”) was addressed to Forbes Australia. It recited the execution of the lease of Lot 8 and continued:
In consideration of your agreeing to enter into the Lease with us at our requests, we hereby agree that we are obligated to you to effect the adjustments of Rent and/or the monthly instalments of the Rent as provided in paragraphs 3.1 to 3.3 of our above letter to Forbes Engineering (Asia) Pte Ltd and you are entitled to make such adjustments in your payment of rent to us. In the event that under such adjustments we are required to refund to you such portion of the rent as have been paid by you to us, we shall pay to you on demand such refund of rent in full immediately. If we shall have defaulted in such refund, without prejudice to your rights against us for our said default, we shall pay interest at the rate provided under Clause 6.8 of the Lease on such refund calculated from the date of our receipt of your demand until the date of actual payment of such refund.
Forbes Screens
On 22 September 1997, the same date as the execution of the two Lot 8 side letters, Forbes Screens also executed two side letters.
Forbes Screens Guarantee
The first side letter executed by Forbes Screens (the “Forbes Screens Guarantee”, also referred to in the proceedings as the “1st Lot 9 Side Letter”) was addressed to Forbes Asia. The letter referred to the share sale agreement and the lease of Lot 9, and continued as follows:
1. We hereby unequivocally and irrevocably admit and acknowledge that:-
1.1 we are a company owned and controlled by Mark Forbes (“MF”) and Karen Lee Forbes (“KF”)
1.2 the Vendors are also companies owned and controlled by MF and KF and the Vendors are their nominee and it was inter alia, at our requests that you agreed to enter into the SS Agreement with the Vendors; and
1.3 in consideration thereof, as regards the Vendors’ covenant under Clause 3.3 of the SS Agreement, we hereby agreed that in the event that the audited profit before tax of FEH shall fall short of the amount guaranteed by the Vendors thereunder, we, as Lessor under the lease shall agree to reduce the total rent (“Rent”) payable by FEH during the twelve (12) months period immediately following the last day of that particular financial year of FEH where the amount of the audited profit before tax so guaranteed is not achieved.
2. In consideration of you entering into the SS Agreement with the Vendors inter alia at our requests, we hereby agree, covenant and undertake as follows:-
2.1 If the audited profit before tax (“Pretax Profit YE/97”) of FEH calculated in the manner as provided under the SS Agreement for the period 1.1.97 to 31.12.97 (“YE/97”) shall not be more than A$1,300,000.00 (“P/Profit Target”) then we hereby irrevocably and unequivocally discharge and release FEH of all obligations to pay to us such proportion of the Rent payable by FEH to us for the period 1.1.98 to 31.12.98 (“YE/98”) which is equivalent to the difference (“Profit Shortfall”) between the said P/Profit Target for YE/97 and the said actual audited Pretax Profit YE/97. If the Profit Shortfall exceeds 100% of such Rent, then we shall release and discharge FEH of FEH’S obligations and liabilities to pay to us the Rent for YE/98. If the Profit Shortfall is less than such Rent, then FEH shall deduct such Profit Shortfall from the Rent for YE/98. Such deductions shall be recovered by FEH by deductions of the same amount to the Rent payable by FEH to us under the Lease (for the YE/98).
2.2 As regards the Rent payable by FEH to us for the period 1.1.99 to 31.12.99 (“YE/99”), the same formula set out in paragraph 2.1 above shall apply save and except the following differences:-
2.2.1 the Rent for YE/00 shall be calculated based on the rate set out in the Lease; and
2.2.2 the P/Profit Target for YE/98 shall be A$1,400,000.00.
2.3 As regards the Rent payable by FEH to us for the period 1.1.2000 to 31.12.2000 (“YE/2000”) the same formula set out in paragraph 2.1 above shall apply save and except the following differences:-
2.3.1 the Rent for YE/2000 shall be calculated based on the rate set out in the Lease;
2.3.2 the P/Profit Target for YE/99 shall be A$1,500,000.00.
Forbes Screens Lot 9 Lease Guarantee
The second side letter executed by Forbes Screens (“Forbes Screens Lot 9 Lease Guarantee”, also referred to in the proceedings as the “2nd Lot 9 Side Letter”) addressed to Forbes Australia. It referred to the lease of Lot 9 and continued:
In consideration of your agreeing to enter into the Lease with us at our requests, we hereby agree that we are obligated to you to effect the adjustments of Rent and/or the monthly instalments of the Rent as provided in paragraphs 2.1 to 2.3 of our above letter to Forbes Engineering (Asia) Pte Ltd and you are entitled to make such adjustments in your payment of rent to us. In the event that under such adjustments we are required to refund to you such portion of the rent as have been paid by you to us, we shall pay to you on demand such refund of rent in full immediately. If we shall have defaulted in such refund, without prejudice to your rights against us for our said default, we shall pay interest at the rate provided under Clause 6.8 of the Lease on such refund calculated from the date of our receipt of your demand until the date of actual payment of such refund.
I have described the guarantees executed by Forbes Screens for completeness, because the existence of these agreements is pleaded by the applicants in paras 15, 16, 17 and 18 of amended statement of claim. However the respondents plead that, as no relief is sought against Forbes Screens Pty Ltd, the matters pleaded in those paragraphs are irrelevant and embarrassing. I consider that this pleading of the respondents has merit - indeed no relief is sought by the applicants against Forbes Screens Pty Ltd.
New Directors
After execution of the share sale agreement and the side letters on 22 September 1997, Forbes Asia appointed two new directors to Forbes Australia to serve on the board of Forbes Australia with Mr Forbes. These directors, Mr Freddy Chan (appointed September 1997) and Mr Norman Lee (appointed July 1998) were associates of Mr Poh.
Variations to Share Sale Agreement
The parties to the share sale agreement executed a number of deeds of variation to that agreement (according to undisputed evidence of Mr Poh – five separate deeds: affidavit of Poh Kiat affirmed 15 March 2006 para 11).
For the purposes of these proceedings the relevant deeds were the second, third and fourth deeds of variation.
The second deed of variation was executed on 12 January 1998 by Pearlbunch, Talrate, Forbes Asia, Mr Forbes, Mrs Forbes and Forbes Screens. The deed provided that it was effective to vary the share sale agreement as from 22 September 1997.
The second deed recited that Forbes Asia, Pearlbunch and Talrate had entered into the share sale agreement, that Mr Forbes, Mrs Forbes and Forbes Asia had entered into a “Letter of Indemnity” on 22 September 1997, and that Forbes Asia and Forbes Screens had entered into a “Letter of Indemnity” on 22 September 1997. (It is clear that the “Letters of Indemnity” to which the deed refers are the Forbes Guarantee and the Forbes Screens Guarantee respectively.)
The deed recited further that an error had been discovered in cl 3.3 of the share sale agreement and cll 3.1, 3.2 and 3.3 of the Letters of Indemnity (Forbes Guarantee and Forbes Screens Guarantee).
The deed continued:
It is agreed effective 22 September 1997 that:-
1.1 Clause 3.3 of the Share Sale Agreement is deleted and replaced by the following:-
“3.3 The Vendors shall guarantee, ensure and cause the Company to achieve at least 90% of the following audited profits before tax during the following financial years of the Company provided always that the audited said profit before tax is calculated by reference to the formula set out in Annexure 1 attached hereto:
3.3.1 for the first financial year ending 31 December 1997 A$1,300,000;
3.3.2 for the financial year ending 31 December 1998 A$1,400,000; and
3.3.3 for the financial year ending 31 December 1999 A$1,500,000
For the financial year ending 31 December 2000, the Vendor shall use its best endeavours to cause the Company to achieve 90% of an audited profit before tax of A$1,600,000.”
1.2 Clause 3.1, 3.2.2 and 3.3.2 of each of the Letters of Indemnity are deleted and replaced by the following:
“3.1 If the audited profit before tax (Pretax Profit YE/97) of FEH calculated in the manner as provided under SS Agreement for the period of 1 January 1997 to 31 December 1997 (YE/97) shall not be more than 90% of $1,300,000 (P/Profit Target) then we hereby irrevocably and unequivocally discharge and release FEH of all obligations to pay to such proportion of the rent payable to FEH to us for the period 1 January 1998 to 31 December 1998 (YE/98) which is equivalent to the difference (Profit Shortfall) between the said P/Profit Target for YE/97 and the said actual audited Pretax Profit YE/97. If the Profit Shortfall exceeds 100% of such rent, then we shall release and discharge FEH of FEH’s obligations and liabilities to pay us the rent for YE/98. If the Profit Shortfall is less than such rent, then FEH shall deduct such Profit Shortfall from the rent for YE/98. Such deductions shall be recovered by FEH by deductions on the same amount to the rent payable to FEH to us under the lease (for the YE/98).”
“3.2.2 The P/Profit Target for YE/98 shall be 90% of A$1,400,000.”
“3.3.2 The P/Profit Target for YE/99 shall be 90% of A$1,500,000.”
The third deed of variation was executed by Pearlbunch, Talrate and Forbes Asia on 16 February 1998. So far as relevant, cl 2.2 of the third deed amended cl 2.3 of the share sale agreement in the following terms:
2.3 On or before the date of expiry of a period of 182 days from the date hereof and subject to Clause 2.7 below and the Purchaser having received all the documents referred to in Clause 2.4 below, the Purchaser shall pay into the FEH Accounts a further and last capital injection of $A1,099,999.00 (“3rd Injection”) by way of $$599,999.00 cash and the balance by way of 1,800,000 ordinary shares (“Teamsphere Shares”) issued by Teamsphere Ltd (Co. No 199705215 G) a public company incorporated in the Republic of Singapore and having its registered office at 1 Changi South Street 1, Changi South Industrial Estate, Singapore 486797 together with the prescribed Transfer Forms duly signed by the registered owner of the Teamsphere Shares, as the transferor thereof PROVIDED ALWAYS THAT the provisions in Clause 2.2 above shall have been complied with and the Purchaser is satisfied that the 3rd Injection shall be applied by the Company (and the parties shall ensure the company shall do so) in the following manner:-
2.3.1 firstly, to pay on behalf of the Vendors, such part of the Said Dividend (which are payable by the Company to the Vendors and the Vendors hereby irrevocably authorise such payment), amounting to A$500,000.00 by way of the delivery of all the Teamsphere Shares (together with the aforesaid signed Transfer Form) with the Vendors’ Solicitors namely Cleary Hoare Solicitors of 1st Floor, 145 Eagle Street Brisbane (hereinafter called “the Vendors’ Solicitors) which said Teamsphere Shares shall hereinafter collectively be referred to as “the Retention Sum”. The Retention Sum shall not be released or drawn upon without the written consent of the Purchaser, unless in pursuant to the terms set out in Clause 3.4 below and the BPP shall have been paid by the Purchaser to the Vendors on the Completion Date (as hereinafter defined) in pursuant to Clause 2.4 or pursuant to Clause 5.1 or 5.2. For the purpose of Clause 5.1 and 5.2, the Teamsphere Shares shall be treated as if each of them is cash of equivalent of the greater of:-
1. their market value; or
2. A$0.2778
2.3.2 secondly, payment to the Vendors such part of the Said Dividend declared and shall have been due and payable to the Vendors by way of cheque for the sum of A$371,000.00 drawn in favour of FEH subject to the Purchaser having received the following:-
2.3.2.1 a letter by the Vendors to the Purchaser authorising the payment of the said A$371,000.00 on behalf of the Vendort to Hevenfleet Pty Ltd as trustee for the Forbes Family Trust (“FFT”) directly;
2.3.2.2 a letter by FFT to the Purchaser to pay the same A$371,000.00 (due to FFT pursuant to Clause 2.3.2.1) directly to FI; and
2.3.2.3 a letter by FI to the Purchaser to pay the same A$371,000.00 (due to FI pursuant to Clause 2.3.2.2) directly to FEH;
2.3.3 thirdly, payment to the Vendors of a sum of A$228,999.00 as full and final payment by FEH to the Vendors of the Said Dividends; and
2.3.4 fourthly, to pay on behalf of FIA, a sum of A$1.00 to FI towards full and final settlement of the net total purchase price of A$1,300,000.00 under the SB Agreement.
The fourth deed of variation executed by Pearlbunch, Talrate, Forbes Asia and Mr Poh on 23 March 1998 acknowledged the earlier variations of the share sale agreement. So far as is relevant, the parties in this deed of variation varied the share sale agreement to enable the provision of 1,800,000 ordinary shares in Teamsphere Ltd referred to in cl 2.3 of the share sale agreement to be satisfied by the transfer of 180,000 shares in Teamsphere Ltd.
Acquisition of Favco
In October 1998 an opportunity arose for Forbes Australia to acquire the business of Hood Favco Pty Ltd (“Favco”), a Sydney-based business operating in the same field as Forbes Australia. Correspondence took place between Mr Forbes and Mr Poh in relation to, inter alia, the terms upon which the acquisition of Favco was to take place.
Liquidity Problems
It appears that subsequent to the acquisition of Favco, Forbes Australia experienced liquidity problems. Indeed there is some evidence before the Court that at one point Forbes Australia was subject to voluntary administration under Pt 5.3A of the Corporations Act (affidavit of Poh Kiat affirmed 18 December 2006 para 4).
Demand
On 6 April 2001 the applicants demanded the respondents pay to Forbes Australia the amounts of $127,284 and $1,691,284. These sums represented profit shortfalls alleged by the applicants to have been experienced by Forbes Australia in the years ending 31 December 1998 and 31 December 1999 respectively. The applicants’ demands were made pursuant to the profit guarantees in cl 3.3 of the share sale agreement and as stated in the letter of demand “the relevant side letters”.
CLAIMS OF THE APPLICANT
As I observed at the commencement of this judgment, it appears that the applicants have abandoned claims against Mr Forbes in respect of breach of director’s duties. The remaining claims of the applicants as found in the amended statement of claim are:
·In breach of the Forbes Guarantee:
oMr Forbes and Mrs Forbes have failed to guarantee the performance and compliance by the vendors of the profit guarantee;
oMr Forbes caused or allowed Forbes Australia to pay rent under the Lot 8 Lease and Lot 9 Lease without any deduction for the Agreed 1998 Profit Shortfall Amount or the 1999 Profit Shortfall Amount;
oMr Forbes and Mrs Forbes failed to reduce the rent under the Lot 8 Lease or discharge and release Forbes Australia from the obligation to pay:
▪$127,284.00 of such rent for the year ending 31 December 1999; and
▪$138,690.16 of such rent for the year ending 31 December 2000;
oMr Forbes and Mrs Forbes failed to pay Forbes Australia or Forbes Asia for the Agreed 1998 Profit Shortfall Amount and the 1999 Profit Shortfall Amount.
·In breach of the Forbes Lot 8 Lease Guarantee:
oMr Forbes and Mrs Forbes failed to refund to Forbes Australia in respect of the Lot 8 Lease;
▪ for the year ending 31 December 1999 - $127,284.00;
▪ for the year ending 31 December 2000 - $138,690 (being all of the rent paid in that year).
·By reason of these breaches, Forbes Australia has suffered loss and damage in the amount of the Agreed 1998 Profit Shortfall Amount and the 1999 Profit Shortfall Amount.
·By reason of these breaches, Forbes Asia has suffered loss and damage.
Forbes Asia therefore claimed the following relief:
(a)a declaration that Forbes Asia is entitled to have the Forbes Guarantee specifically performed and carried into execution; and
(b)an order that the respondents specifically perform and carry into effect the Forbes Guarantee by paying Forbes Australia the amount of $1,818,568.00;
(c)alternatively, an indemnity pursuant to the Forbes Guarantee for loss and damage;
(d)interest pursuant to the Federal Court of Australia Act 1976 (Cth);
(e)costs; and
(f)such other orders as the Court thinks fit.
Forbes Australia claimed the following relief:
(a)damages in the amount of $1,818,568.00;
(b)alternatively, damages in the amount of $265,974.16 for breach of the Forbes Lot 8 Lease Guarantee;
(c)interest pursuant to the Federal Court of Australia Act 1976 (Cth);
(d)alternatively interest from 12 April 2001 pursuant to the Forbes Lot 8 Lease Guarantee;
(e)costs; and
(f)such other orders as the Court thinks fit.
DEFENCE
The respondents filed a third further amended defence on 13 February 2008. The respondents conceded that cl 3.3 of the share sale agreement was in the nature of a guarantee of performance by the vendors. Notwithstanding this concession, in substance the respondents plead as follows:
·The share sale agreement did not permit any calculation, ascertainment or proof of the audited profit before tax of Forbes Australia by:
othe mere fact of preparation of a document or documents (including documents styled as audited financial statements) in purported conformity with cl 3.3; or
othe presentation or delivery of such document or documents;
by Forbes Asia to any person who might be liable in respect of the guarantee under cl 3.3 (para 4B(ba)(i)).
·The share sale agreement upon its proper construction permitted the parties who were potentially liable in respect of the guarantee under cl 3.3 to undertake their own assessment, and challenge any assertion as to, inter alia, the profit earned by Forbes Australia in each of the 1997, 1998, and 1999 calendar years (para 4B (ba)(ii)).
·The guarantee under cl 3.3 was, upon its proper construction, premised on the continuation of certain matters set out in cl 3.1 of the share sale agreement, namely that the vendors were and remained entitled to control the make up of the board of Forbes Australia. This did not occur – instead Forbes Asia controlled the make-up of the board of Forbes Australia and appointed new directors as and when it saw fit. Accordingly, the guarantee under cl 3.3 was discharged (para 4B(c)).
·Alternatively, prior to the formation of the share sale agreement, Mr Forbes provided profit forecasts to Forbes Asia in respect of Forbes Australia’s business as it then was, namely based entirely in Brisbane. Forbes Asia knew that the profit forecasts were based upon Forbes Australia’s Brisbane-based business as it then was. The profit guarantees in cl 3.3 of the share sale agreement were based on the Brisbane-based business of Forbes Australia. In 1999 Forbes Australia’s business was altered significantly and substantially by the acquisition of Favco. The acquisition of Favco rendered the profit forecasts originally provided by Mr Forbes inapplicable to Forbes Australia’s business after the acquisition. Accordingly, the acquisition of Favco was a fundamental alteration to the transaction guaranteed by the respondents and discharged the respondents from any liability under the profit guarantees (para 4B(d)).
·The respondents deny that they incurred any liability under the Forbes Lot 8 Lease Guarantee; alternatively that there was no valid consideration for it and accordingly it was void (para 4D).
·While the respondents admit the existence of the deeds of variation to the share sale agreement:
othe third deed of variation replaced the existing cl 2.3 of the share sale agreement with an entirely new and materially different clause. Neither of the respondents agreed to extend any existing guarantee or indemnity provided by them to Forbes Asia. The Forbes Guarantee was discharged by the third deed of variation or alternatively was unenforceable (para 4F(d));
oalternatively, the fourth deed of variation substantially amended cl 2.3 of the share sale agreement which meant that the Forbes Guarantee was discharged or alternatively was unenforceable (para 4F(e)).
·In defence of the entire claim the respondents say that the applicants’ cause of action arose more than six years prior to the commencement of the claim and is thereby statute barred (para 12 – see also TS p 16 and p 17).
·Alternatively, the respondents say that Forbes Asia is estopped from relying on the profit guarantees in circumstances where:
oon or about 15 or 16 September 1997, prior to the execution of the share sale agreement and the side letters in respect of Lot 8 and Lot 9, Mr Poh on behalf of Forbes Asia said to Mr Forbes that the profit guarantees would never be enforced by Forbes Asia and were just matters necessary to be included to satisfy the demands of its parent company Teamsphere Ltd;
oin reliance on this representation Mr Forbes executed the documents;
osubsequent to the execution of the documents, Mr Poh on behalf of Forbes Asia has repeated to the respondents that it would not enforce the Profit Guarantee thereby maintaining the representation.
ISSUES FOR DECISION

It is important as a threshold point to note that Pearlbunch, Talrate and Forbes Screens are not parties to these proceedings. The proceedings do not involve an attempt by Forbes Asia to enforce the terms of the share sale agreement against the vendors of shares in Forbes Australia, nor do the applicants seek any relief from Forbes Screens. Accordingly, relief sought by the applicants in the amended application for damages for breach of the share sale agreement is without foundation, because the vendors of the shares who were parties to the share sale agreement are not named as respondents to this litigation.
The key issues in these proceedings relate to the enforceability or otherwise of guarantees given by Mr and Mrs Forbes in terms of the profit guarantees in the share sale agreement. Mr and Mrs Forbes were parties to the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee.
In my view, the following issues require decision.
1.Did Forbes Australia experience a profit shortfall in the financial year ending 31 December 1998?
2.What is the position of Mrs Forbes in relation to the 1998 profit shortfall?
3.Was the effect of cl 3.3 and Annexure 1 of the share sale agreement such that the production of audited figures for the financial year ending 31 December 1999 was conclusive evidence of those figures, consistent with the decision of the High Court in Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643?
4.Was the change of control of Forbes Australia from the vendors to Forbes Asia an alteration in the factual substratum sufficient to discharge the respondents as guarantors?
5.Did the third and fourth deeds of variation to the share sale agreement result in the discharge of the respondents as guarantors?
6.Did the transaction resulting in the acquisition of Favco by Forbes Australia result in the discharge of the respondents as guarantors under the Forbes Guarantee?
7.Even if the vendors’ profit guarantees as articulated in cl 3.3 of the share sale agreement are valid, are the applicants estopped from relying on them because of the alleged representations of Mr Poh as pleaded in para 13 of the respondents’ defence?
8.Was the applicants’ cause of action statute barred?
9.Was the Forbes Lot 8 Lease Guarantee enforceable?
10.What are appropriate rulings in relation to the notice of motion filed 12 September 2007?
I now turn to each of these issues.
1. Did Forbes Australia experience a profit shortfall in the financial year ending 31 December 1998?
So far as concerns the 1998 financial year the applicants submit in their Statement of Facts, Issues and Contentions as follows:
·On 14 January 1999, in a meeting attended by Mr Forbes, Mr Poh, Mr Terry Brauer (Forbes Australia’s accountant) and Mr Kang Ching Hong (the internal auditor of Teamsphere Ltd), Mr Forbes and Mr Poh agreed to the amount of the 1998 Profit Shortfall under the share sale agreement to be $127,284.
·Forbes Australia thereafter recorded that sum as a prepayment of rent payable under the Lot 8 lease in its books.
·In a letter dated 22 July 1999, Mr Poh instructed Mr Ajit Singh, the financial controller of Forbes Australia, to recover from Mr Forbes the amount of $127,284 through amortising the rent which had been prepaid under the Lot 8 Lease. Further, during a board meeting of Forbes Australia held on 27 August 1999, Mr Freddy Chan and Mr Forbes discussed amortisation of the prepaid rent over the remainder of the financial year.
·Claims by the respondents that sales took place in 1998 which actually must have occurred in 1997 must fail because:
oeach of the relevant invoices bear a container number and a date of shipment from Brisbane in November or December 1997;
othis was conceded by Mr Forbes and Mr Brauer during cross-examination.
·Both Mr Brauer and Mr Poh asserted that Forbes Australia accounted on an accruals basis and that on that basis the earlier invoices indicated that the sales occurred in the 1997 calendar year (TS p 327 l 24 affidavit of Poh Kiat filed 5 February 2008 para 14).
The respondents submitted in summary:
·Mr Forbes agreed with Mr Poh that the agreed profit shortfall for the 1998 calendar year was $127,284 but the agreement was founded upon a misapprehension on the part of Mr Forbes that there had been a proper accounting of all of Forbes Australia’s sales for the 1998 calendar year.
·Forbes Australia had failed to record approximately $241,000 in sales, which sales had occurred in 1998 rather than 1997.
·Although invoices were issued in November and December 1997, Forbes Asia asked for invoices to be re-issued to suit Forbes Asia, and therefore new invoices were issued in respect of the same goods in February 1998.
·Forbes Asia, by its request for the issuing of credit notes in respect of those sales, knew that the sales had occurred in 1998. Had those sales been taken up on Forbes Australia’s accounts for the 1998 calendar year, there would have been no profit shortfall that year.
·The respondents submit that those sales should have been recorded in Forbes Australia’s 1998 calendar year accounts.
·Notwithstanding statements of Mr Brauer and Mr Poh in relation to the accruals accounting basis of Forbes Australia:
othere is no evidence as to whether Forbes Asia treated the sales as having occurred in 1997 or 1998;
othe re-issued invoices state that title to the goods does not pass until payment for the goods is received (affidavit of Terrence Brauer filed 18 January 2008 exhibit “TB 5” invoices 23295 and 232396);
oMr Lytras’ evidence, which was not tested or challenged, its that on the face of the relevant invoice documents it is not possible to tell without access to Forbes Australia’s books and records whether the sales should properly be attributed to the 1997 or 1998 calendar years (affidavit of Elia Lytras affirmed 11 February 2008 para 4 and para 5).
·Accordingly, it would be unconscionable to permit the applicants to enforce the agreement formed on 14 January 1999.
·In any event, the agreement formed on 14 January 1999 did not involve, and was not binding upon, Mrs Forbes.
·Further and alternatively, it is an abuse of process to permit the applicants to enforce the agreement of 14 January 1999 because Forbes Australia has failed to maintain its financial records, meaning that the respondents cannot reasonably and properly identify Forbes Australia’s correct sales for the 1998 calendar year.
Consideration
For the moment placing to one side the issue of whether the basis on which the agreement was reached was flawed – it is clear from the evidence before the Court that an agreement was reached by Mr Poh and Mr Forbes at a meeting held on or about 14 January 1999. The agreement was to the effect that Forbes Australia had suffered a profit shortfall of $127,284 for the financial year ending 31 December 1998. It appears that this profit shortfall was calculated by Mr Brauer, the accountant for Forbes Australia, and Mr Kang Ching Hong, the internal auditor for Teamsphere Ltd, and accepted by Mr Poh and Mr Forbes. It also appears that at that meeting the parties discussed the method by which the profit shortfall would be remedied by Mr Forbes. Subsequently Forbes Australia recorded the sum of $127,294 as a prepayment of rent payable under the Lot 8 lease in the books of account of Forbes Australia. A clear inference may be drawn that this action was in accordance with both the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee which as already noted provided respectively that Mr and Mrs Forbes guaranteed certain profits and that any profit shortfall would be met by way of waiving lease payments.
The fact that the oral agreement between Mr Poh and Mr Forbes did not result in a written amendment to the Forbes Guarantee does in my view detract from the validity of the agreement with respect to the 1998 profit shortfall so far as concerns Mr Forbes, where the agreement was implemented by reference to journal entries in the accounts of Forbes Australia (cf Koenigsblatt v Sweet [1923] 2 Ch 314).
Notwithstanding the agreement reached by Mr Poh and Mr Forbes however, it also appears clear that despite the relevant journal entry Forbes Australia continued to pay Mr Forbes rent in respect of the Lot 8 lease (TS p 302 ll 9-11). Subsequently a journal entry reversing the prepayment was entered in Forbes Australia’s general ledger on 30 June 1999. The fact that this event occurred does not appear to be in doubt (for example evidence that it occurred was given by Mr Brauer in his affidavit sworn 25 January 2006 para 28).
Prima facie on these facts, it follows that if the 1998 profit shortfall agreed by the parties on 14 January 1999 is enforceable, not only is that amount ($127,284) outstanding from the respondents, but because Forbes Australia continued to pay rent of Lot 8 and Lot 9 and any purported prepayment of rent was reversed in the accounts, the applicants have substantiated their claims that:
·Mr Forbes caused or allowed Forbes Australia to pay rent without any deduction for the shortfall; and
·both respondents failed to reduce the rent under the Lot 8 lease or discharge and release Forbes Australia from the obligation to pay rent.
However despite the agreement of 14 January 1999, the respondents contend that it should not be enforced. Three relevant issues arise. The first issue is whether any finding as to a profit shortfall or otherwise can be made in the absence of the books and records of Forbes Australia for 1998, which books and records are no longer available. The second issue concerns the claim by the respondents that in fact the agreement of Mr Poh and Mr Forbes was based on a false assumption as to the value of sales which took place in 1997, but which in fact should have been accounted as having taken place in 1998. The third issue concerns the position of Mrs Forbes, which I will consider later in the judgment.
Absence of source financial documentation
The history of these proceedings reflects the steps taken by the respondents to obtain source financial documentation of Forbes Australia. It became clear prior to the trial of the substantive proceedings that the second applicant simply had not retained source financial documentation relating to its affairs in the 1998 and 1999 calendar years. Further, it appears that notwithstanding an order of this Court for third party discovery, Deloitte Touche Tohmatsu (which conducted an audit of the accounts of Forbes Australia for the calendar year ending 31 December 1999) did not have this documentation. I accept the submissions by the applicants that the respondents had not asked for source financial documentation until October 2006, which is after the seven year retention period in relation to the documents had elapsed. There is no suggestion that source documentation had been deliberately destroyed. In my view no adverse inferences can be drawn in relation to the absence of the relevant source financial documentation.
The courts have recognised the importance of access to source financial documentation in the face of conflicting financial evidence (for example, Hamilhall Pty Ltd v AT Phillips Pty Ltd (1994) 54 FCR 173, ALF No 12 Pty Ltd v Starkey [2006] QSC 297). However the fact that source financial documentation is not available does not mean that the Court is unable to make a determination on a question of financial position (for example, David Towney v Minister for Land & Water Conservation for NSW [1997] FCA 656, ALF No 12 Pty Ltd v Starkey [2006] QSC 297).
In this case, notwithstanding that the books and records of Forbes Australia from the 1998 financial year are not available, the evidence is clear that Mr Poh and Mr Forbes, assisted by informed accounting advisors, agreed on 14 January 1999 that on available figures the profit shortfall for 1998 would be $127,284. I do not consider that the absence in these proceedings of the source financial documents of Forbes Australia from 1998 undermines the existence of that agreement or in any way gives rise to an abuse of process with respect to this aspect of the claim (an issue to which I will return later in the judgment). As to the lack of an audit for that period, I note that Mr Poh deposed in his affidavit affirmed 5 January 2008 as follows:
28. I refer to paragraphs 5 to 9 of my First Affidavit affirmed on 25 October 2005. Following what Mr Forbes had said during that meeting, I understood that there had been agreement between Mr Forbes and myself that the amount of the 1998 profit shortfall was $127,284 for the purposes of the Profit Guarantee. I expected that the shortfall would be made up by Mr Forbes in the manner described. Consequently, I did not arrange for Forbes Australia to have its accounts audited by the company auditor (Deloitte Touche Tohmatsu) for the year ended 31 December 1998. Because I understood that there was an agreement as to the amount of the 1998 profit shortfall and expected it to be honoured, I considered the cost of an audit to be unnecessary.
In my view this evidence is consistent with the fact that Mr Poh and Mr Forbes agreed as to the profit shortfall of Forbes Australia for 1998, leaving an audit unnecessary.
Were Forbes Australia’s sales for 1998 actually understated by $240,866.42?
Of greater concern is the possibility that information which came to the parties’ attention after 1998 demonstrated that in fact the agreement of 14 January 1999 was based on inaccurate data. Mr Forbes in his affidavits deposes as to this belief – in particular in paras 29-32 of his affidavit of 18 January 2008 wherein he deposes as follows:
29. I refer to paragraph 34 of Kiat’s 2nd Affidavit. In paragraph 35 of my First Affidavit, I say that I verily believe that the profit figure for the year ended 31 December 1998 exceeded the Profit Guarantee figure of $1.4 million by $151,156.00. My belief was based on calculations made by Forbes Australia’s staff that were provided to my (sic) early in 2000. The calculations were given to me in the form of a handwritten note, a true copy of which is Exhibit “MF-9” to this Affidavit. My recollection is that at or shortly after the time I received this note I referred them to Terry Brauer.
30. I have since been informed by Terry Brauer that he no longer holds the view that the 1998 sales were understated by the sum of $418,000.00 and that the credit notes issued by Forbes Australia at the direction of the First Applicant all appear valid to the extent that the sales recorded in the invoices to which the credit notes relate are recorded elsewhere.
31. I have since reviewed the relevant invoices and credit notes myself and say that:
(a)the sales recorded in invoices numbered 23701 and 23702 (both dated 29 January 1998) are the same as those recorded in invoices numbered 23217 to 23224 (all dated 20 November 1997) and 23451 and 23452 (both dated 8 December 1997);
(b)the credit notes issued in 1998 in respect of invoices numbered 23701 and 23702 should have been issued in respect of invoices numbered 23217 to 23224 inclusive and invoices numbered 23451 and 23452, because the sales were not actually made until 1998 as indicated in invoices numbered 23701 and 23702 (both dated 29 January 1998).
32. In the circumstances, Forbes Australia’s profit for the 1998 calendar year was understated by $240,866.42 (not $418,000.00 as I indicated in my First Affidavit) when account is taken of the fact that credit notes were issued, at the request of the First Applicant, in respect of sales that actually took place in 1998 rather than the end of 1997.
Mr Forbes’ evidence was supported by evidence of Mr Brauer who deposed that the understated profit for the 1998 was the result of the sale of various concrete mixers by Forbes Australia to the Asian subsidiaries of Teamsphere Ltd, and that following an examination of Forbes Australia’s accounts he discovered that these sales had been reversed and were not treated as income in the accounts of Forbes Australia (affidavit of Terrence Brauer affirmed 25 January 2006 para 32 and para 33).
Indeed Mr Forbes in his affidavit deposed that sales in 1998 had been understated by $240,866.42, which is the sum total of the sales referred to in Invoices 21701 and 23702. Invoice 23702 refers to the same mixer serial numbers as those supplied pursuant to Invoice 23701, however Invoice 23702 is an invoice for the labour to assemble those mixers. These invoices are exhibited to the affidavit of Mr Brauer sworn 18 January 2008.
However it became clear during cross-examination of Mr Forbes and Mr Brauer that the sales which the respondents claimed should have been credited to the 1998 year actually took place in 1997, and were properly accounted as 1997 sales, as claimed by the applicants. In fact, the sales which took place in 1997 were, as the applicants claimed, simply reinvoiced in 1998. I note in particular Counsel’s cross-examination of Mr Forbes (TS p 284 et seq) with respect to Invoice 21701, (dated 20 February 1998) which Invoice referred to the supply of ten hydraulic mixers and the serial numbers of mixers, and which on the face of the invoice totalled $140,000. As Mr Jones’ cross-examination demonstrated, Invoice 23701, dated 20 February 1998, merely reflected sales that were invoiced and shipped in 1997. Further, I note that Mr Brauer conceded during cross-examination that the sales referred to in Invoice 23701 actually took place in 1997 (TS p 327 ll 21-24).
Mr Poh deposed that the two invoices 23701 and 23702 were not actual sales but repeat billings for the sales made in November and December 1997, and the Credit Notes 485 and 549 exhibited on pp 36 and 37 of exhibit TB5 to Mr Brauer’s affidavit sworn 18 January 2006 were correctly issued to reverse those repeat billings. In my view this evidence correctly represents the position with respect to the sales referred to in those invoices.
I note further that the expert evidence in relation to the existence (or otherwise) of a Forbes Australia profit shortfall for 1998 is conflicting and of marginal assistance. Expert evidence tendered by both parties was qualified by the absence of audited financial statements for 1998. The expert report prepared by Mr Blackwood for the applicants and dated 18 September 2006 calculated a profit shortfall for the year ended 31 December 1998 as either $195,397 or $171,096, depending on a number of variables. Mr Lytras in giving expert evidence for the respondents deposed that from the information available and given the multiple invoices, it was not possible for him to definitively determine the calendar year in which the sales of hydraulic mixers the subject of invoices 23701 and 23702 took place (affidavit of Elia Lytras affirmed 11 February 2008). However I consider that Mr Lytras’ evidence in relation to this issue is of little value in light of the concessions made by both Mr Forbes and Mr Brauer during cross-examination.
On this basis, contrary to evidence of Mr Forbes and affidavit evidence of Mr Brauer, I do not accept that that the profits of Forbes Australia were understated by $240,886.42 in 1998, or that the agreement of Mr Poh and Mr Forbes on 14 January 1999 as to the profit shortfall experienced by Forbes Australia in 1998 was based on inaccurate data.
Conclusion
The law is clear that contractual provisions in a guarantee are to be construed strictly, and, in relation to provisions for the benefit of the principal, contra proferentum: Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549 at 561; Apple Computer Australia Pty Ltd v Mekrizis [2003] NSWSC 126 at [127]. In relation to the 1998 profit shortfall however, it is clear that the fact and amount of a profit shortfall for 1998 were agreed, on an informed basis, by Mr Poh on behalf of both applicants and Mr Forbes. Failing other reasons which have been advanced by the respondents, and to which I shall turn shortly, in my view the amount of $127,284 represents the profit shortfall for the year ending 31 December 1998 for the purposes of cl 3.3 of the share sale agreement and is recoverable from Mr Forbes by the applicants pursuant to the Forbes Guarantee.
2. What is the position of Mrs Forbes in relation to the 1998 profit shortfall?

Notwithstanding any findings by the Court in relation to the position of Mr Forbes, the respondents deny that Mrs Forbes is bound to the agreed 1998 profit shortfall amount of $127,284 on the basis that she was not present during discussions about this issue.
The respondents claim further that Mrs Forbes cannot be bound by any agreement of Mr Forbes to the 1998 profit shortfall amount because Mr Forbes had no authority to act on behalf of Mrs Forbes. This is because:
·there was no suggestion that Mrs Forbes had vested Mr Forbes with any authority during the course of negotiations leading up to the execution of the share sale agreement and the various side letters; and
·Mr Poh’s evidence is that, at the meeting of 14 January 1999, Mr Forbes informed Mr Poh that Mr Forbes and Mrs Forbes had separated.
Specifically, the respondents point to Mr Poh’s evidence as deposed in para 8 of his affidavit affirmed 25 October 2005 which is as follows:
I recall having a conversation at the meeting with Mr Forbes to the following effect:
Poh Kiat:        “Do you accept the figures by the accountants?”
Mark Forbes:    “Yes.”
Mr Forbes did not deny any responsibility for paying the 1998 profit shortfall.
Poh Kiat:        “When are you going to pay the shortfall?”
Mark Forbes:    “I don’t have the cash available to pay the debt at this time.”
Poh Kiat:“Forbes Australia could raise a pre-payment of rent in its financial accounts in relation to Forbes Australia’s leases of its Brisbane premises [leased from Mark Forbes, Karen Forbes (the Second Respondent) and Forbes Screens Pty Ltd]. The pre-payment of rent could be used to pay Forbes Australia’s rent on the leases of Lots 8 and 9 for the next seven months.”
Mark Forbes:    “I can’t accept your proposal because I have separated from my wife [Karen Forbes] and do not know what property settlement will be made.”
Poh Kiat:“I will accept a repayment schedule from you setting out how the pre-payment of rent will be applied against rent as it becomes due.”
By this arrangement I meant that only a portion of the rent falling due each month would be paid by application of the pre-payment of rent.
Mark Forbes:    “I accept that arrangement. But if Forbes Australia achieves a profit over and above the 1999 profit target, I will use my entitlement of 10% of that profit to pay the 1998 shortfall.”
Poh Kiat:        “I accept your proposal.”
Further, the respondents point to evidence of Mr Poh in his affidavit affirmed 5 February 2008 where Mr Poh deposed at para 28:
I expected that the shortfall would be made up by Mr Forbes in the manner described.
The respondents submit that the effect of any such agreements between Mr Poh and Mr Forbes was that any obligation of Mrs Forbes in relation to the 1998 calendar year was replaced by an obligation upon Mr Forbes’ alone to pay, by some form of gradual repayment over time, the sum of $127,284.
The applicants submit that Mrs Forbes had allowed Mr Forbes to carry out all of the dealings in respect of these transactions, including the contractual negotiations, and in those circumstances she clothed him with ostensible authority to reach the agreed 1998 profit shortfall on her behalf.
Consideration
In my view the submissions of the respondents concerning the liability of Mrs Forbes for the agreed 1998 profit shortfall have merit.
The Forbes Guarantee specifically referred to the profit guarantees in cl 3.3 of the share sale agreement and the formula in Annexure 1 to that agreement, both of which in turn referred to the machinery for calculating audited profits before tax. The agreement reached between Mr Poh and Mr Forbes as to the 1998 profit shortfall, clearly in substitution of the machinery of calculation provided in the share sale agreement, was a material alteration to the terms of the Forbes Guarantee with respect to the 1998 year. Mr Poh has submitted that it is binding, and, as I have already found, it is binding on Mr Forbes.
The position is, however, different with respect to Mrs Forbes. It is not in dispute that Mrs Forbes was not present at the meeting of 14 January 1999 when the agreement as to the 1998 profit shortfall was reached by Mr Poh and Mr Forbes. Indeed in this case there is no evidence of any contact between either applicant and Mrs Forbes in relation to the agreed 1998 profit shortfall (or any other matter), and certainly no actual agreement.
Principles of actual and ostensible authority in agency law are well-known. A succinct explanation was given by Diplock LJ in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 at 502:
An “actual” authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of trade, or the course of business between the parties …
An “apparent” or “ostensible” authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed upon him by such a contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.
We have already indicated that actual authority may be implied. It is, however, important to emphasise that the authority impliedly granted by the principal to the agent must be such as could be validly granted by express agreement.
These principles represent the law in Australia (Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co Pty Ltd (1975) 133 CLR 72, Northside Developments Pty Ltd v Registrar-General (1990) 170 CLR 146, Pacific Carriers Ltd v BNP Paribas [2004] 218 CLR 451).
The applicants submit that Mrs Forbes had clothed Mr Forbes with authority to conclude such an agreement on her behalf. However the only evidence before the Court relevant to Mrs Forbes in the context of the meeting of 14 January 1999 and the agreement there reached is that the applicants were aware that Mr Forbes and Mrs Forbes had separated. In the absence of evidence to the contrary (of which there is none before me) such circumstances run counter to any claimed representation that Mr Forbes had authority to bind Mrs Forbes to an agreement with the applicants in any respect. Further, I agree with the respondents that the agreement concluded between Mr Poh and Mr Forbes in relation to the 1998 profit shortfall was couched only in terms of Mr Forbes’ obligations.
It is settled law that a surety will be discharged from his or her obligations where there is a fundamental alteration to the guaranteed obligations to which the surety has not consented: Ankar (1987) 162 CLR 549, Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49 at [302]. As the majority said in Ankar (1987) 162 CLR 546 after discussing a number of English cases:
These statements of principle … indicate that the principle is the by-product, not so much of the general law of contract, as of the special relationship between creditor and surety arising out of the suretyship contract upon which equity fastened to protect the surety when the creditor’s conduct affected the surety’s liability: Holme v Brunskill. According to the English cases, the principle applies so as to discharge the surety when conduct on the part of the creditor has the effect of altering the surety’s rights, unless the alteration is unsubstantial and not prejudicial to the surety. The rule does not permit the courts to inquire into the effect of the alteration. The consequence is that, to hold the surety to its bargain, the creditor must show that the nature of the alteration can be beneficial to the surety only or that by its nature it cannot in any circumstances increase the surety’s risk, e.g. a reduction in the debtor’s debt or in the interest payable by the surety. The mere possibility of detriment is enough to bring about the discharge of the surety. (at 559-560)
In Holme v Brunskill [1877] 3 QBD 495 Cotton LJ (Thesiger LJ concurring) said:
The true rule in my opinion is, that if there is any agreement between the principals with reference to the contract guaranteed, the surety ought to be consulted, and that if he has not consented to the alteration, although in cases where it is without inquiry evident that the alteration is unsubstantial, or that it cannot be otherwise than beneficial to the surety, the surety may not be discharged; yet, that if it is not self-evident that the alteration is unsubstantial, or one which cannot be prejudicial to the surety, the Court, will not, in an action against the surety, go into an inquiry as to the effect of the alteration, or allow the question, whether the surety is discharged or not, to be determined by the finding of a jury as to the materiality of the alteration or on the question whether it is to the prejudice of the surety, but will hold that in such a case the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged. (at 505-506)
In my view Mrs Forbes is not bound by the agreement reached by Mr Poh on behalf of the applicants and Mr Forbes in relation to the 1998 profit shortfall. Further, the substituted agreement with respect to the 1998 profit shortfall represented a material alteration to the calculation of that shortfall, the terms of the principal agreement and in particular the liability of the guarantors with respect to the amount guaranteed for the year ending 31 December 1998. It is not claimed, and there is no evidence, that this alteration in any way benefited Mrs Forbes. Accordingly, any liability of Mrs Forbes in relation to a profit shortfall for the calendar year ending 31 December 1998 pursuant to the Forbes Guarantee and cl 3.3 of the share sale agreement was discharged in light of the substituted agreement reached by Mr Poh and Mr Forbes in respect of that year, and to which she has not consented.
3. Was the effect of clause 3.3 and Annexure 1 of the share sale agreement such that the production of audited figures for the 1999 financial year was conclusive evidence of those figures, consistent with the decision of the High Court in Dobbs v National Bank of Australasia Ltd (1935) 53 CLR 643?
In relation to the year ending 31 December 1999 the applicants submit that Forbes Australia recorded an audited loss before tax, calculated by reference to the Formula in Annexure 1 of the share sale agreement, of $341,284.00. This loss, recorded in Forbes Australia’s audited financial report for that year prepared by Deloitte Touche Tohmatsu, together with the failure of Forbes Australia to reach the guaranteed profit of $1,350,000 (being 90% of $1,500,000 in accordance with cl 3.3.3 of the share sale agreement as varied) resulted in Forbes Australia experiencing a profit shortfall for that year of $1,691,284. The applicants submit further that the fact that the loss was recorded following an audit in accordance with Annexure 1 of the share sale agreement means that it is conclusive evidence of that loss. The applicants refer to the decision of the High Court in Dobbs (1935) 53 CLR 643 as authority for this proposition.
The applicants’ case in relation to the claimed 1999 shortfall was helpfully summarised by Counsel in closing submissions, as follows:
Mr Jones: Your Honour, the applicant’s case is very straight forward, and that is the terms of the share sale agreement, clause 3.3 says that the profit guarantee – the amounts of the profit guarantee are to be referenced by the audited accounts. Now, in evidence is the only document which fits within that description. It’s the audit by Deloittes, the company auditors. They are the audited accounts. If they are not audited accounts, and if they are not audited accounts to which that clause refers, then, one may ask rhetorically what conceivably could possibly fit that description of audited accounts. There’s no suggestion, there’s no pleading that that audit report, those accounts are in any way were fraudulently prepared or are not what they say they are… There’s much complaint raised that, “Oh, we can’t test it.” That’s true to a point, insofar as that every single document which those auditors would have seen are no longer available, and there’s the evidence, particularly, that the correspondence between the instructing solicitors explain why that is, and, namely, that the company went into a period of administration for a period of time, and lost control of all of its records, and when it came out of administration it never got those – all of those records back. And for some reason the accountants – the administrators no longer have them, and unfortunately Deloittes no longer have everything either. Now, but it’s… And it’s a novel proposition put by the respondent that the plaintiff, in particular a company can’t rely on its own audited accounts, which is what we’re seeking to do. Now, if your Honour accepts that they are the audited accounts of the company for the period 31 December 1999, then, in our submission, that is the end of the story. They fit the description of the accounts referred to in the profit guarantee clause, and clearly on their face, they comply with the terms in the share sale agreement. My friend, in his submissions, put to your Honour that they don’t, they merely – there’s a further step that needed to be done, and that hasn’t been done, is the effect of my friend’s submission. If you Honour will turn to exhibit 1A, at page 148, which is at the end of the audit report – Deloittes audit report. There it is.
There it is. That’s the calculation in accordance with clause 3.3 of the share sale agreement. So the applicant has done all it can conceivably, in terms of establishing what the profit was or – and rather the loss was, and what the profit shortfall was, in this case. And you have the subsequent to that report is the report of Ernst and Young which merely confirms the position of the Deloittes calculation. But your Honour need not, strictly speaking, rely on refer to it as the only report, because the Deloittes report is what it is, the audited reports of the company. (TS pp 391-392)
The respondents’ case with respect to the claimed loss in the 1999 calendar year falls into three parts – namely an attack on the applicants’ interpretation of cl 3.3 as a matter of law, submissions with respect to the Deloitte Touche Tohmatsu report itself, and submissions as to the admissibility of the report.
In relation to the applicants’ interpretation of cl 3.3, the respondents submit that the applicants’ claims with respect to the final and conclusive nature of an audit report allegedly produced in compliance with cl 3.3 of the share sale agreement are unsustainable in light of ordinary principles of interpretation applicable to commercial contracts because:
·Clause 3.3 refers to “audited profit before tax”. The formula in Annexure 1, at most, a “machinery of calculation”.
·There is no reference or suggestion that a nominated individual shall undertake the calculation of Forbes Australia’s audited profit before tax, and even if there were there is no basis for asserting that such a calculation would be final and binding on the parties to the share sale agreement upon the mere production of audited profit statements.
·Any clause that purports to specify how a particular issue will be determined so as to preclude the parties from subsequently ventilating that issue in court must be expressed in the clearest of terms.
·There is no suggestion that in any of the negotiations on 15 and 16 September 1997 prior to the execution of the share sale agreement that any party suggested that Forbes Australia’s audited profit before tax would, or should, be determined by a particular person, and that such determination would be reduced to a document that would bind the parties.
·The guarantee under cl 3.3 exists for the benefit of Forbes Asia. If there were to remain any doubt as to the proper construction of cl 3.3 it ought to be resolved contra proferentem in favour of the vendors (and the guarantors).
·The share sale agreement does not admit of the construction submitted by the applicants. The applicants contended that the profit guarantee was necessary to protect Forbes Asia because it was unable to undertake a proper due diligence of Forbes Australia prior to purchase, however this is at odds with, inter alia, a not insignificant due diligence undertaken by Forbes Asia, the retention of a significant portion of the purchase price for one year, the payment priorities specified by cl 3.4 of the share sale agreement, the purchaser’s audit rights under cl 3.8 and cl 3.9, the extensive vendors’ warranties in cll 4.1-4.29, the rights of rescission expressed in cl 5.1, the agreed damages provision in cl 5.2, and the provisions in cl 17. It therefore does not follow that the profit guarantee was “essential protection” for Forbes Asia.
·Clause 3.3 is not a “Dobbs Clause”, unlike for example cl 3.4.2.
Further submissions of the respondents with respect to the authority of the Deloitte Touche Tohmatsu report are in summary:
·A number of qualifications are expressed on p 5 of the report, including that Deloitte Touche Tohmatsu was unable to audit the opening balances as at 1 January 1999.
·Deloitte Touche Tohmatsu state that, with a number of exceptions, the financial report was in accordance with the Corporations Law and other mandatory professional reporting requirements. The respondents submit that those are opinions of law as well as opinions of fact, but the reasoning underpinning any of those conclusions is not set out in the report.
·The report includes a directors’ declaration as to a number of facts including the solvency of Forbes Australia, however the respondents submit that those are opinions of law as well as fact and the reasoning underpinning any of those conclusions is not set out anywhere in the report.
·On p 19 of the report is a calculation for the audited profit for Forbes Australia for the year ending 31 December 1999, however a number of items are excluded from the profit calculation but no amount is excluded on the basis of any abnormal item. The reasons for excluding certain items from the profit calculation and making no allowance for any abnormal items, are not stated in the report.
·There is no line-by-line analysis as to how the consolidated operating loss before income tax for Forbes Australia for the year is calculated.
·The report cannot be evidence of the facts that either the accounts or the audit complied with applicable Australian Standards because:
othe authors of the report should have been called to verify that the report was so prepared, and this was not done;
othe failure of the applicants to call the authors of the report suggests that the evidence of the authors of the report would not have assisted the applicants.
·Original source financial documentation which was the basis for the report is not available.
·In summary even if the applicants’ construction of cl 3.3 of the share sale agreement were to be accepted, the formula in Annexure 1 of the share sale agreement required:
othe production of accounts audited in accordance with Australian Standards, not the mere production of a document that itself asserts to have so complied; and
othe exclusion of a number of specific items from the profit calculation in the audited accounts, which in turn requires a consideration of source financial documents.

Accordingly, this aspect of the respondents’ defence fails.
9. Was the Forbes Lot 8 Lease Guarantee enforceable?
The terms of the Forbes Lot 8 Lease Guarantee are as follows:
Re: (1)Lease of all that piece of land held under Title Reference 17447194 for Lot 8 on RP 229240 in the County of Stanley, Parish of Toombul, Queensland, Australia (“Land”) by us to FEH pursuant to a Lease Agreement dated 22 September 1997 (“Lease”) which Land represent the land whereupon the main factory and offices of FEH is located.
____________________________________________________________________
In consideration of your agreeing to enter into the Lease with us at our requests, we hereby agree that we are obligated to you to effect the adjustments of Rent and/or the monthly instalments of the Rent as provided in paragraphs 3.1 to 3.3 of our above letter to Forbes Engineering (Asia) Pte Ltd and you are entitled to make such adjustments in your payment of rent to us. In the event that under such adjustments we are required to refund to you such portion of the rent as have been paid by you to us, we shall pay to you on demand such refund of rent in full immediately. If we shall have defaulted in such refund, without prejudice to your rights against us for our said default, we shall pay interest at the rate provided under Clause 6.8 of the Lease on such refund calculated from the date of our receipt of your demand until the date of actual payment of such refund.
Dated: 22 September 1997.
The document was addressed to Forbes Australia, and signed by Mr Forbes and Mrs Forbes in the presence of witnesses.
It is not in dispute that Mr Forbes and Mrs Forbes entered into a lease of Lot 8 with Forbes Australia on 17 September 1997.
The respondents admit the existence of the Forbes Lot 8 Lease Guarantee, but deny that the respondents incurred any liability to the applicant under the agreement. As the purported consideration for the agreement was the respondents’ agreement to enter into the Lot 8 Lease – a past event – the respondents also plead that the agreement is not supported by valid consideration.
Further, the respondents contend:
·It does not appear that the applicants rely upon the Forbes Lot 8 Lease Guarantee in relation to their claim in relation to either the alleged 1998 profit shortfall or the alleged 1999 profit shortfall; and
·In any event, it is plain that only past consideration was given in relation to the Forbes Lot 8 Lease Guarantee, rendering it unenforceable.
Consideration
The applicants plead the Forbes Lot 8 Lease Guarantee in both the Amended Statement of Claim and the Reply. Paragraph 13 and para 14 of the Amended Statement of Claim provides:
13. On or about 22 September 1997 Mark Forbes and Karen Forbes entered into a written agreement with Forbes Australia in respect of the Lot 8 Lease (the “Forbes Lot 8 Lease Guarantee”)
Particulars
Agreement dated 22 September 1997 (also known as “Lot 8 side letter 2”)
14. The Forbes Lot 8 Lease Guarantee included the following express terms:
(a) Mark Forbes and Karen Forbes were obligated to Forbes Australia to effect the adjustments of rent as provided in clauses 3.1 and 3.3 of the Forbes Guarantee; and
(b) In the event that Mark Forbes and Karen Forbes are required to refund to Forbes Australia such portion of the rent as has been paid, Mark Forbes and Karen Forbes shall pay to Forbes Australia on demand such refund of rent in full immediately.
In relation to the respondents’ contention with respect to lack of consideration, the applicants plead in para 1 of the Reply:
(a) Forbes Australia expected that the Respondents would be bound by the terms of the Lot 8 Lease Guarantee.
Particulars
The basis for the expectation are the facts pleaded at paragraphs 13 and 14 of the Amended Statement of Claim
(b) The Respondents induced Forbes Australia’s expectation pleaded at paragraph 1(a) above.
Particulars
The Plaintiff repeats paragraphs 13 and 14 of the Amended Statement of Claim
(c) In reliance on the expectation pleaded at paragraph 1 (a) above Forbes Australia did not insist on the Lot 8 Lease Guarantee being in the form of a Deed
(d) In the circumstances the Respondents knew and intended that Forbes Australia would rely on the Lot 8 Lease Guarantee
(e) Forbes Australia will suffer detriment if the Respondents do not honour the terms of the Lot 8 Lease Guarantee.
Particulars
Forbes Australia will be unable to recover the rent paid to the Respondents
(f) The Respondents have failed to avoid the detriment to Forbes Australia by refusing or failing to honour the terms of the Lot 8 Lease Guarantee.
(g) In the circumstances pleaded at paragraphs 1 (a) to (f) above the Respondents are estopped from relying on the defence pleaded.
The respondents are in error in submitting that the applicants do not rely upon the Forbes Lot 8 Lease Guarantee in relation to their claim in relation to either the alleged 1998 profit shortfall or the alleged 1999 profit shortfall. In para 30 of the amended statement of claim, the applicants plead:
In breach of the Forbes Lot 8 Lease Guarantee:
(a) Mark Forbes and Karen Forbes failed to refund to Forbes Australia in respect of the Lot 8 Lease:
i. For the year ending 31 December 1999 - $127,284.00;
ii. For the year ending 31 December 2000 - $138,690.16 (being all of the rent paid in that year).
As I have already found, a journal entry was made in the books of Forbes Australia whereby the agreed profit shortfall for 1998 was treated as a pre-payment of Forbes Australia’s rent in respect of the Lot 8 Lease (presumably in accordance with the Forbes Lot 8 Lease Guarantee) but this journal entry was subsequently reversed on 30 June 1999. The evidence is clear that Forbes Australia continued to pay the respondents rent in 1999 notwithstanding the agreed existence of the 1998 profit shortfall and the terms of the Forbes Lot 8 Lease Guarantee, and that the respondents did not refund the rent notwithstanding the agreed 1998 profit shortfall.
It does not appear to be in contention that Forbes Australia paid the respondents rent in 2000 in the amount of $138,690.16 although having made this observation I note that the applicants claim no relief referable to the year ending 31 December 2000.
The applicants plead that, by reason of the alleged breaches of both the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee, both applicants suffered loss and damage (amended statement of claim para 31 and para 32).
It is clear that the amounts in respect of loss and damage which the applicants claim arise from the breaches of the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee are alternative, not cumulative.
Accordingly, I do not accept the respondents’ contention that the applicants do not rely on the Forbes Lot 8 Lease Guarantee in relation to their claims (although clearly more reliance is placed on the terms of the Forbes Guarantee).
Of more substance is the claim by the respondents that, because the nominated consideration for the respondents entering the Forbes Lot 8 Lease Guarantee was the previous agreement of Forbes Australia to enter into the Lot 8 Lease with the respondents, the consideration for this agreement is past consideration and invalid. Of particular moment is the fact that the Forbes Lot 8 Lease Guarantee is not in the form of a deed, where consideration would have been unnecessary (Morley v Boothby (1825) 3 Bing 107; 130 ER 455).
It is trite law that past consideration is no consideration (Eastwood v Kenyon (1840) 11 A & E 438, 113 ER 482, Roscorla v Thomas (1842) 3 QB 234, 114 ER 496, and see the discussion in such learned texts as Chitty on Contracts (30th ed, Vol 1, Sweet & Maxwell, 2008) at 270 et seq and Carter JW, Carter on Contract (Vol 1 looseleaf, Butterworths, 2002) at [06-230] et seq). However where the giving of the consideration and the making of the promise are substantially one transaction, the exact order of events is not decisive and the consideration is treated as executed consideration rather than past consideration (Carter JW, Carter on Contract (Vol 1 looseleaf, Butterworths, 2002) at [06-250], Chitty on Contracts (30th ed, Vol 1, Sweet & Maxwell, 2008) at 271). So, for example, a contract to erect buildings on land and a contract to grant of lease of land were in fact one transaction, notwithstanding that the lease was not entered until the relevant buildings were completed: Westminster City Council v Duke of Westminster [1991] 4 All ER 136, discussed in Chitty at 271). Further, executed consideration is good consideration in circumstances where an act is done at the request of the promisor, it is understood that payment would be made, and the payment is legally recoverable (re Casey’s Patents [1892] 1 Ch 104, Pao On v Lau Yiu Long [1980] AC 614 at 629).
In this case I consider that the Forbes Lot 8 Lease Guarantee is enforceable, for the following reasons:
·The nominated consideration, namely the entry of Forbes Australia into the Lot 8 Lease, was at the request of the respondents. There is no contest with respect to the enforceability of the Lot 8 Lease.
·Although the Lot 8 Lease was executed 10 days prior to the Forbes Lot 8 Lease Guarantee, I consider it clear that they were part of the same transaction because:
oThe events were close in time.
oA clear factual relationship exists between the agreements whereby the shares in Forbes Australia were sold to Forbes Asia by companies under the control of one or both of the respondents, a fresh lease was executed by Forbes Australia in relation to Lot 8 which was owned by the respondents, and guarantees were given by the respondents in relation to both profits to be attained by Forbes Australia and the rent to be paid by Forbes Australia to the respondents; and
oAlthough there is some evidence that the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee were drafted by Mr Poh’s legal representatives (evidence of Mr Grant during cross-examination, TS p 343 ll 39-40), it is not in dispute that the respondents received legal advice from Mr Grant at all times during the negotiations and the contract execution period. I do not accept the evidence of Mr Grant in cross-examination that it was not envisaged that the side letters would be part of the contractual documentation between the parties (TS p 343 ll 23-25). The Forbes Lot 8 Lease Guarantee is clearly drafted in terms such as to impose legal liability on the respondents.
To the extent that the respondents claim that the Forbes Lot 8 Lease Guarantee is unenforceable I consider that the respondents’ defence fails.
10. The Notice of Motion filed 12 September 2007
On 12 September 2007 the respondents filed a notice of motion moving for the following orders:
1. An order pursuant to Order 20 rule 2 of the Federal Court Rules, or the inherent jurisdiction of the Court, that this proceeding be permanently stayed as an abuse of process.
2. Alternatively an order pursuant to s.135 of the Evidence Act 1995 (Cth) that
2.1 pages 130 -192 of annexure “PK1” to the affidavit of Poh Kiat affirmed herein on 25 October 2005;
2.2 paragraphs 34 and 35 of, and pages 13-54 of annexure “PK2” to the affidavit of Poh Kiat affirmed herein on 15 March 2006;
2.3 the Expert Report dated 18 September 2006 prepared for the Applicants to be excluded from evidence admitted, or to be admitted, in this proceeding.
3. Alternatively an order pursuant to s.136 of the Evidence Act 1995 (Cth) that the Applicants not be permitted to rely on representations of fact and expressions of opinion contained in:
3.1 pages 130 -192 of annexure “PK1” to the affidavit of Poh Kiat affirmed herein on 25 October 2005;
3.2 paragraphs 34 and 35 of, and pages 13-54 of annexure “PK2” to the affidavit of Poh Kiat affirmed herein on 15 March 2006;
3.3 the Expert Report dated 18 September 2006 prepared for the Applicants
as evidence of the truth of the facts stated therein, or as evidence of any facts upon which opinions are stated therein.
4. An order that the Applicants pay the Respondents costs of and incidental to the Application
5. Such further or other order or direction as this Honourable Court deems necessary or appropriate.
The notice of motion came before Tracey J on 26 September 2007 however his Honour ordered that the hearing of the notice of motion be adjourned to the trial of the substantive proceedings.
Abuse of process
As was clear from the respondents’ submissions, their case for permanent stay of the proceedings was founded on the absence of the financial records of Forbes Australia for the 1998 and 1999 calendar years. In summary, the respondents claimed that these documents were critical to properly investigating:
·the management accounts prepared by Mr Singh as the chief financial officer of Forbes Australia;
·the profit analysis prepared by Mr Singh in relation to the year ended 31 December 1999;
·the allegations in the letters from Freehills on behalf of the applicants dated 10 April 2000 and 8 May 2000;
·the figures in the Deloitte Touche Tohmatsu report;
·whether extraordinary items noted in the Deloitte Touche Tohmatsu report for the year ended 30 June 2000 were factored into the Deloitte Touche Tohmatsu report for the year ended 31 December 2000;
·discrepancies about how the acquisition of Favco was treated in the accounts of Forbes Australia;
·whether a large write down of trade debtors in the latter part of 1999 was the cause of the difference in the profit results in the Singh management accounts and the Deloitte Touche Tohmatsu report;
·whether the write down noted by Mr Lytras is an abnormal item within the meaning of the formula in Annexure 1 to the share sale agreement.
It was not in contention between the parties that the source financial documents were missing and unavailable. I have already considered this issue in detail. The respondents submit that:
·the true profit results for Forbes Australia for the years ending 31 December 1998 and 31 December 1999 could not “rise above a debate about the effects of scraps of information” that are available; and
·the obligation to maintain and retain Forbes Australia’s financial records for seven years after the transactions covered by the records were completed rested squarely with the second applicant in accordance with s 286(2) of the Corporations Act.
The orders sought by the respondents were pursuant to O 20 r 2 of the Federal Court Rules or the inherent jurisdiction of the Court. Prior to amendments on 25 July 2007 O 20 r 2 empowered the Court to permanently stay a proceeding where the proceeding was frivolous or vexatious or an abuse of process of the Court. Since that date O 20 r 2 has applied to proceedings commenced before 1 December 2005 and allows the Court to give summary judgment where the respondent to a proceeding has, inter alia, no defence to a claim or the defence discloses no answer to the claim. It is now s 31A of the Federal Court of Australia Act 1976 (Cth) which allows the Court to give summary judgment against a party where, inter alia, the Court is satisfied that a party has no reasonable prospects in relation to their case. The notice of motion was filed on 12 September 2007 and is not couched in the language of O 20 r 2 following the amendment. However placing to one side apparent procedural irregularities with respect to the respondents’ notice of motion and the basis of the order they seek, I find in any event that the respondents have not substantiated their claim that the applicants’ claims were in any way an abuse of process.
As Dixon J observed in Cox v Journeaux (No 2) (1935) 52 CLR 713 at 720, the jurisdiction of the Court to stay an action as vexatious is to be exercised only when the action is clearly without foundation and when to allow it to proceed would impose a hardship upon the respondents which could be avoided without risk of injustice to the applicant. His Honour also said that a litigant is entitled to submit a claim for determination notwithstanding that its foundation may be slender; and
It is only when to permit it to proceed would amount to an abuse of jurisdiction, or would clearly inflict unnecessary injustice upon the opposite party that a suit should be stopped. (at 720)
Abuses of procedure usually fall into one of three categories:
·The court’s procedures are invoked for an illegitimate purpose.
·The use of the court’s procedures is unjustifiably oppressive to one of the parties; or
·The use of the court’s procedures would bring the administration of justice into disrepute (McHugh J in Rogers v R (1994) 181 CLR 251 at 286).
In these proceedings, in summary:
·In relation to the alleged profit shortfall for the year ending 31 December 1998 an agreement was reached by Mr Poh on behalf of the applicants and Mr Forbes as to the agreed profit shortfall. The absence of source financial documentation was, as I have already found, irrelevant in relation to the validity and enforcement of that agreement.
·In relation to the alleged profit shortfall for the year ending 31 December 1999, while I consider that the absence of source financial documentation was a key issue for reasons I have already explained, I do not consider that the applicants’ claim with respect to alleged profit shortfall for that year was in any fashion an abuse of process. The applicants pleaded, inter alia, that the Deloitte Touche Tohmatsu report satisfied the requirements of cl 3.3 and Annexure 1 of the share sale agreement akin to a certificate as discussed in Dobbs (1935) 53 CLR 643. In my view this was a legitimate claim, notwithstanding that this aspect of the applicants’ claim was unsuccessful.
Admissibility of documents and section 135 and section 136 of the Evidence Act
The respondents have also sought exclusion of the material in:
·Pages 130-192 of annexure “PK1” to the affidavit of Poh Kiat affirmed herein on 25 October 2005. In summary, this material is the Deloitte Touche Tohmatsu report, a letter from Freehills on behalf of the applicants to Mr Grant dated 6 April 2001, and a report prepared by Ernst & Young, apparently at the request of Mr Poh, dated 4 October 2001.
·Paragraph 34 and para 35 of, and pp 13-54 of Annexure “PK2” to, the affidavit of Poh Kiat affirmed herein on 15 March 2006. In summary, this material is evidence of Mr Poh and working papers of Mr Poh including letters from Marsh & Partners.
·The Expert Report dated 18 September 2006 prepared for the applicants. This refers to the expert report prepared by Mr Angus Blackwood.
In relation to these documents:
·For the reasons I gave earlier in this judgment, the Deloitte Touche Tohmatsu report is inadmissible. It follows that the Ernst & Young report dated 4 October 2001 and the letter from Freehills on behalf of the applicants to Mr Grant dated 6 April 2001 are also inadmissible pursuant to s 135 of the Evidence Act. In the interests of completeness however I note that even had I not considered the Deloitte Touche Tohmatsu report inadmissible in accordance with s 135 I would have made such an order in respect of the Ernst & Young report dated 4 October 2001 on the basis that:
oWhile there is evidence that the original instructions from Mr Poh to Ernst & Young to prepare to the report were given in 2000 (and possibly prior to contemplation of litigation), evidence also demonstrates that 19 months passed before the report was delivered to the applicants during which time letters had been exchanged between the legal representatives of the parties.
oFurther, in the covering letter dated 4 October 2001 from Ernst & Young to Mr Poh delivering the report, the author notes “... the procedures were performed solely to assist you in determining the quantum and importance of certain financial issues to be raised with the previous Managing Director, Mr Mark Forbes”.
I consider an inference can be drawn from the surrounding circumstances that the Ernst & Young report was “a document prepared for or obtained for the purpose of conducting, or for or in contemplation of or in connection with, a proceeding” and accordingly excluded from the definition of “business record” by s 69(3)(a) of the Evidence Act.
·I do not consider that an order pursuant to either s 135 or s 136 of the Evidence Act should be made in relation to para 34 and para 35 of, and pp 13-54 of annexure “PK2” to, the affidavit of Poh Kiat affirmed herein on 15 March 2006. I take this view because:
oMr Poh’s evidence directly answered evidence of Mr Forbes in his affidavit sworn 16 December 2005 and Mr Brauer in his affidavit sworn 25 January 2006.
oA letter from Marsh & Partners to the directors of Forbes Group Australia dated 16 February 2000 and a letter from Marsh & Partners to Mr Forbes dated 14 March 2000, both of which are exhibited to Mr Poh’s affidavit (and found within pp 13-54 of Annexure “PK2” to which the respondents object) are also exhibited to Mr Forbes’ affidavit sworn 16 December 2005 as Annexure “MF-4”. Accordingly, it is clear that the respondents were relying on some of the same material they now seek to impugn.
oThe material is relevant to both the applicants’ claims concerning the 1998 profit shortfall and the respondents’ defence.
·I do not consider that an order pursuant to either s 135 or s 136 of the Evidence Act should be made in relation to Mr Blackwood’s expert report. In my view no grounds have been substantiated by the respondents’ to support such an order.
CONCLUSION

The application is successful in part. I consider that the applicants are entitled to recover the agreed 1998 profit shortfall under the share sale agreement and the Forbes Guarantee as damages from Mr Forbes, being the sum of $127,284. The applicants have also sought interest “pursuant to a share sale agreement” or pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth). The parties have not directed my attention to any interest rate specified in the share sale agreement the subject of these proceedings. However s 51A of the Federal Court of Australia Act provides:
(1) In any proceedings for the recovery of any money (including any debt or damages or the value of any goods) in respect of a cause of action that arises after the commencement of this section, the Court or a Judge shall, upon application, unless good cause is shown to the contrary, either:
(a) order that there be included in the sum for which judgment is given interest at such rate as the Court or the Judge, as the case may be, thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date as of which judgment is entered; or
(b) without proceeding to calculate interest in accordance with paragraph (a), order that there be included in the sum for which judgment is given a lump sum in lieu of any such interest.
The usual practice in the Federal Court is to adopt the rates of interest applied in the Supreme Court of the State in which the application is commenced unless there is evidence that the rates are penal or not commercial: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 688 at [7]. The current rate of interest prescribed under s 48 of the Supreme Court Act 1995 (Qld) is 10% per annum. No submissions were made by the parties as to an appropriate rate of interest. I consider that the rate of interest of 10% per annum should be applied in respect of the sum of $127,284 to which the applicants are entitled from the date the applicants’ cause of action arose.
Accordingly, the appropriate orders are as follows:
1.In relation to the amended application filed 31 March 2006:
(a)the applicants are entitled to damages as against the first respondent for breach of the Forbes Guarantee and the Forbes Lot 8 Lease Guarantee in the amount of $127,284;
(b)the first respondent is pay the applicants interest at the annual rate of 10% on the sum ordered to be paid in sub-paragraph 1(a) herein pursuant to section 51A of the Federal Court of Australia Act 1976 (Cth), to be calculated from the date the applicants’ cause of action arose;
(c)the application is otherwise dismissed.
2.In relation to the notice of motion filed 12 September 2007:
(a)pursuant to section 135 of the Evidence Act 1995 (Cth) pages 130-192 of annexure “PK1” to the affidavit of Poh Kiat affirmed on 25 October 2005 are excluded from evidence admitted, or to be admitted, in this proceeding;
(b)the notice of motion is otherwise dismissed.
In view of the mixed outcome in the case I consider it appropriate to invite the parties to make submissions as to costs orders. Accordingly I also make the following directions:
3.The applicants are to file and serve submissions as to costs, and copy them in electronic form to the associate, by 4.00 pm on 6 July 2009.
4.The respondents are to file and serve submissions as to costs, and copy them in electronic form to the associate, by 4.00 pm on 20 July 2009.
5.The applicants are to file and serve submissions as to costs in reply, and copy them in electronic form to the associate, by 4.00 pm on 27 July 2009.
6.The issue of costs is to be decided on written submissions without the necessity for a hearing unless either party should contact my chambers and the other party by 4.00 pm on 30 July 2009 and request a hearing or unless the Court schedules a hearing to hear oral submissions.

I certify that the preceding one hundred and eighty-eight (188) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.
Associate:
Dated: 22 June 2009

Counsel for the First and Second Applicants: Mr N Perram SC and Mr BL Jones

Solicitor for the First and Second Applicants: Jackson Lalic

Counsel for the First and Second Respondents: Mr R Bain QC and Mr PD Tucker

Solicitor for the First and Second Respondents: BCI Duells

Date of Hearing: 12, 13, 14 February 2008 and 15, 16 July 2008

Date of Judgment: 22 June 2009

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	NSD 636 of 2005

JUDGE:	COLLIER J
DATE OF ORDER:	22 JUNE 2009
WHERE MADE:	BRISBANE

JUDGE:	COLLIER J
DATE:	22 JUNE 2009
PLACE:	BRISBANE

Counsel for the First and Second Applicants:	Mr N Perram SC and Mr BL Jones
Solicitor for the First and Second Applicants:	Jackson Lalic
Counsel for the First and Second Respondents:	Mr R Bain QC and Mr PD Tucker
Solicitor for the First and Second Respondents:	BCI Duells

Date of Hearing:	12, 13, 14 February 2008 and 15, 16 July 2008
Date of Judgment:	22 June 2009