Fubilan Catering Services Limited v Compass Group (Australia) Pty Ltd
[2007] FCA 1205
•9 August 2007
FEDERAL COURT OF AUSTRALIA
Fubilan Catering Services Limited v Compass Group (Australia) Pty Ltd
[2007] FCA 1205TRADE PRACTICES – unconscionable conduct – special disadvantage – taking advantage – lodgment of tender for mining company catering contract by landowner company in Papua New Guinea – preparation of tender in conjunction with experienced catering company – catering company to enter into management agreement with landowner company – catering company acquiring competing tenderer – variation of tendered rates to level acceptable to mining company – whether constituted unconscionable conduct by manager against landowner company – independent advice to landowner company – involvement of landowner company representative in process – no special disadvantage – no taking advantage – no unconscionable conduct
TRADE PRACTICES – misleading or deceptive conduct - precontractual representations – promissory character – alleged failure to honour promises in performance of contract – no express pleading of absence of reasonable grounds – invocation of s 51A of Trade Practices Act 1974 – inappropriate pleading of section – operation of section – evidential burden on representor – persuasive burden not reversed – misleading or deceptive conduct not established – loss and damage – requirement for causal connection – no causal connection to loss
EQUITY – fiduciary duty – whether fiduciary relationship existed – contractual relationship – outside settled categories – reluctance to impose fiduciary relationship – whether fiduciary obligations to landowner company by catering company under Management Agreement with respect to catering contract – no fiduciary relationship – no breach of fiduciary obligation – no relevant loss
TORT – negligence – whether breach of duty of care in performance of Management Agreement by management company in management of catering contract for landowner company – whether loss or damage sustained
CONTRACT - construction of contract – background of contract – commercial purpose - whether breach – no relevant breach – no relevant loss or damage
Trade Practices Act 1974 (Cth)
Australian Competition and Consumer Commission v CG Berbatis Holdings Pty Ltd ( 2003) 214 CLR 51 cited
Australian Competition and Consumer Commission v Samton Holdings Pty Ltd (2002) 117 FCR 301 cited
Commercial Bank of Australia v Amadio(1983) 151 CLR 447 cited
Wardley Australia Ltd v Western Australia (1995) 175 CLR 514 cited
Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526 cited
Marks v GIO Australia Holdings (1998) 196 CLR 494 cited
Ting v Blanche (1993) 118 ALR 543 cited
Phoenix Court Pty Ltd v Melbourne Central Pty Ltd (1997) ATPR (Digest) 46-179 cited
Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276 cited
Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 cited
Bill Acceptance Corporation Ltd v GWA Limited (1983) 50 ALR 242 cited
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 cited
Breen v Williams (1996) 186 CLR 71 cited
Phipps v Boardman [1967] 1 AC 46 cited
Norberg v Wynrib (1992) 92 DLR (4th) 449 cited
Paul Dainty Corp Pty Ltd v National Tennis Centre Trust (1990) 22 FCR 495 cited
Elders Trustee and Executor Co Ltd v EG Reed Pty Ltd (1987) 78 ALR 193 cited
Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 cited
Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 cited
Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 citedMeagher, Heydon and Leeming, Equity Doctrines and Remedies (4th ed, Butterworths, 2002)
Lehane JRF, “Fiduciaries in a Commercial Context” in Finn P (ed) Essays in Equity (Law Book Co, 1985)FUBILAN CATERING SERVICES LIMITED (INCORPORATED IN PAPUA NEW GUINEA) AND MINERAL RESOURCES STAR MOUNTAINS LIMITED (INCORPORATED IN PAPUA NEW GUINEA) v COMPASS GROUP (AUSTRALIA) PTY LTD (ACN 000 683 125), EUREST (SOUTH PACIFIC) LIMITED (INCORPORATED IN PAPUA NEW GUINEA) AND COMPASS GROUP PLC (INCORPORATED IN THE UNITED KINGDOM)
WAD 252 OF 2003FRENCH J
9 AUGUST 2007
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD 252 OF 2003
BETWEEN:
FUBILAN CATERING SERVICES LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
First ApplicantMINERAL RESOURCES STAR MOUNTAINS LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
Second ApplicantAND:
COMPASS GROUP (AUSTRALIA) PTY LTD
(ACN 000 683 125)
First RespondentEUREST (SOUTH PACIFIC) LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
Second RespondentCOMPASS GROUP PLC (INCORPORATED IN THE UNITED KINGDOM)
Third RespondentCOMPASS GROUP (AUSTRALIA) PTY LTD
(ACN 000 683 125)
First Cross-ClaimantEUREST (SOUTH PACIFIC) LIMITED (INC IN PAPUA NEW GUINEA)
Second Cross-ClaimantCOMPASS GROUP Plc (INCORPORATED IN THE UNITED KINGDOM)
Third Cross-ClaimantMOROCCO HOLDINGS PTY LTD
First Cross-RespondentWILLIAM FENWICK
Second Cross-Respondent
JUDGE:
FRENCH J
DATE OF ORDER:
9 AUGUST 2007
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1.The application is dismissed.
2.The applicants are to pay the respondents’ costs of the application including indemnity costs in respect of the proceedings against the third respondent;
3. The cross-claim is dismissed.
4. Liberty to the parties to apply in respect of the costs of the cross-claim.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
WAD 252 OF 2003
BETWEEN:
FUBILAN CATERING SERVICES LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
First ApplicantMINERAL RESOURCES STAR MOUNTAINS LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
Second ApplicantAND:
COMPASS GROUP (AUSTRALIA) PTY LTD
(ACN 000 683 125)
First RespondentEUREST (SOUTH PACIFIC) LIMITED (INCORPORATED IN PAPUA NEW GUINEA)
Second RespondentCOMPASS GROUP PLC (INCORPORATED IN THE UNITED KINGDOM)
Third RespondentCOMPASS GROUP (AUSTRALIA) PTY LTD
(ACN 000 683 125)
First Cross-ClaimantEUREST (SOUTH PACIFIC) LIMITED (INC IN PAPUA NEW GUINEA)
Second Cross-ClaimantCOMPASS GROUP Plc (INCORPORATED IN THE UNITED KINGDOM)
Third Cross-ClaimantMOROCCO HOLDINGS PTY LTD
First Cross-RespondentWILLIAM FENWICK
Second Cross-Respondent
JUDGE:
FRENCH J
DATE:
9 AUGUST 2007
PLACE:
PERTH
REASONS FOR JUDGMENT
1. Introduction
Fubilan Catering Services Ltd (Fubilan) is a subsidiary of Mineral Resources Star Mountain Limited (MRSM). They are the applicants in these proceedings. Both are companies incorporated in Papua New Guinea (PNG). MRSM is the trustee of the Star Mountain Landowner Trust. It holds an interest in the Ok Tedi copper and gold mine in the West Province of PNG in trust for local landowners.
At the end of 1999 MRSM won a tender to provide catering services for Ok Tedi Mines Limited (OTML) at the Ok Tedi mine. A landowner company, Fubilan, was set up to provide the services under the OTML Contract. It was a requirement of OTML that a successful landowner tenderer secure the management services of a company with an international reputation in catering of the kind required under the contract.
As a result on 6 January 2000 MRSM and Fubilan, together with a statutory corporation, Mineral Resources Development Company Ltd (MRDC) entered into a Management Agreement with two members of the Compass Group of companies. One was the first respondent Compass Group (Australia) Pty Ltd then, and until 9 May 2003, known as Eurest (Australia) Support Services Pty Ltd (Eurest (Australia)). Prior to 19 March 1999 it was known as SHRM (Australia) Support Services Ltd. It is a company incorporated in Australia. The other Compass Group company which was party to the agreement was the second Respondent, Eurest (South Pacific) Ltd (Eurest). It is a company incorporated in PNG. The two companies had been acquired by the Compass Group in November 1999. Under the Management Agreement, Eurest was the manager and Eurest (Australia) guaranteed its performance. The catering contract with OTML, referred to in these reasons as the OTML Contract, was signed by Fubilan on 11 January 2000.
The relationship between Fubilan and Eurest was difficult from the outset and continued to be difficult for the life of their agreement. Fubilan, and its consultant Mr William Fenwick, alleged wrongdoing of various kinds by Eurest in connection with the formation and implementation of the agreement. They alleged mismanagement by Eurest and that Eurest (Australia) had obtained and retained the benefit of rebates and discounts in purchasing goods in Australia and PNG for use in the provision of services under the OTML Contract. Fubilan endeavoured to set up its own supply chain with intermediary companies in which it and Mr Fenwick would hold interests. At the end of 2001 Fubilan attempted to terminate its relationship with Eurest and substitute another manager. However OTML’s approval for the termination was necessary and was withheld. Ultimately, and despite the commencement of these proceedings in 2003, the catering contract was renewed in August 2005 on the basis of an ongoing management relationship between Fubilan and Eurest which continues to this day.
MRSM and Fubilan commenced these proceedings in 2003 against Eurest, Compass Group (Australia) Pty Ltd, Eurest and Compass Group Plc, the United Kingdom holding company. No less than 18 causes of action were raised. They relied, inter alia, upon the Trade Practices Act 1974 (Cth) (TPA), breaches of fiduciary obligations, negligence and breach of contract. The trial of the action occupied 22 hearing days but much of the evidence was documentary. The total number of documentary exhibits was 523.
For the reasons that follow, the applicants fail on all their causes of action. They will have to bear the costs of these proceedings that were ill-conceived and made little commercial sense.
2. Factual History
2.1 The Ok Tedi MineThe Ok Tedi copper and gold mine is a large open pit mine located in the Highlands of the Western Province of PNG near its border with Indonesia. It is situated at Mt Fubilan, roughly in the geographical centre of the island of New Guinea. A road links the mine site to a town called Tabubil, which is 12 kilometres south-east of the mine. Tabubil is linked by road to the town of Kiunga on the Fly River where there is a port facility for the transport of ore from the mine on barges.
The mine site lies within a special mining lease. There are four villages within the lease area. They are Bultem, Kavorobip, Finalbin and Atemkit (SML villages). Another six villages are located on land leased for purposes connected with the mine. They are Kumgit, Ankits, Niosikiui, Oktidetau, Wangbin and Migalsimbip (LMP villages). The SML villages together with two LMP villages, Wangbin and Migalsimbip are occupied by members of the Wopkaimin tribe. The tribe is subdivided into clans. The SML villages comprise the Aplamkrmin Clan. The two LMP villages comprise the Kamfaiwolmin clan. The remaining LMP villages belong to another tribe.
The ore deposit was discovered in 1968. Mining commenced in or about 1983. It is conducted under an agreement with the PNG government which is the subject of the Mining (Ok Tedi Agreement) Act 1976. The mine is operated by OTML. Until 2002 BHP Ltd had a majority shareholding in OTML. Following protracted litigation involving landowners in connection with environmental damage to the Fly River, BHP entered into an agreement with the PNG government and relinquished its 52% shareholding in OTML in favour of a company newly formed as the trustee of the PNG Sustainable Development Trust (Aua 6-7).
The Mining (Ok Tedi Agreement) Act provided that OTML would employ Papua New Guineans in all of its activities under the agreement and in all ancillary and related activities except where the employment of non-nationals accorded with the approved training and localisation program or as otherwise approved by the State (cl 30.1). The company was required progressively to replace foreign technicians, operators, supervisors, clerical, semi-professional, professional, administrative and managerial staff employed with the approval of the State with PNG nationals in accordance with a training and localisation program. This requirement was subject to the qualification that if the training and localisation program were disrupted by circumstances or events which, in the company’s view made it difficult or impossible for it to comply with its obligations or to operate profitably by reason of the program, the company could give notice to the State with alternative or revised plans to achieve the objects of training and localisation. If the State did not approve the variations the company was bound by its original obligation (cl 30.3).
On 11 January 1991 PNG made an agreement with the Ok Tedi landowners defined in the agreement as “the members of the landowning clans represented in the Star Mountains Local Government Council”. It provided for the landowners to take up to 25% of the State’s 20% interest in the Ok Tedi mining project (ie 5% of the total equity of the project) (cl 4.1). The acquisition was to be effected by agreement between the landowners, the State and OTML shareholders and by a shareholders agreement (cl 4.2). Royalties received from the Ok Tedi mine were to be paid to the Fly River Provincial Government. Thirty per cent was to be paid by the Provincial Government to the landowners (cl 5). Twenty five per cent was to go to SML villages and 5% to the villages of Wangbin and Migalsimbip (cl 5). The PNG Government also undertook to use its best endeavours to ensure that a program to encourage participation by landowners in businesses associated with the mine operation was implemented by OTML (cl 7). The preceding history was uncontentious and I accept that it was correct.
2.2 Mineral Resources Development Company Ltd (MRDC)
There is a statutory corporation known as MRDC. It was established by the PNG Government to provide management services to landowner trustee companies in relation to assets which they held in mining and related projects. A number of MRDC officers were witnesses in these proceedings. They included:
(i) Madiu Andrew, who joined MRDC as a corporate affairs manager on 27 May 1995. From early 1996 to 1999 he served as alternate managing director to the then managing director, Dr Ila Temu. In May 1999 he became the managing director, a position he held until August 2001 when he left to begin working as a consultant. He is now PNG’s Gas Project Coordinator attached to the Office of the Deputy Prime Minister.
(ii) Michael Baitia, who began working for MRDC in 1997 as an assistant manager. He later became a commercial manager there. He is now the manager, corporate development (PNG) for Eurest.
(iii) Ronald Kolalio, who was employed by MRDC as its treasurer/accountant from December 1999. His responsibilities at MRDC included looking after treasury functions for the nine landowner companies that MRDC managed.
(iv) Melvin Yalapan, who was the company secretary for MRDC from 1997 to November 2002.
(v) William Boas, who worked with MRDC in 1999 and became its commercial manager in August 2002.
(vi) Francis Kaupa, who was appointed as the acting managing director of MRDC in October 2002 and who became managing director on 28 January 2005.
2.3 Mineral Resources Star Mountains Ltd (MRSM) – the landowners’ trustee
On 13 February 1997 MRSM was formed initially under the name Mineral Resources Ok Tedi Ltd. By Heads of Agreement dated 26 May 1997 the Star Mountain landowners decided to take up the equity in the project, offered under the 1991 agreement with PNG, to the extent of 2.5% only. The financing of their acquisition was done under an agreement by which they would forego the other half of the 5% equity offered by the State. This history appears from the recitals to a deed dated 29 April 1997 setting up the Star Mountains Landowners Trust. It was a purpose of the Trust that the trustee would hold the Ok Tedi landowners’ shares on behalf of those landowners (cl 2). MRSM was the trustee of the Trust. The beneficiaries were identified in a schedule to the trust deed as:
The landowners who are citizens and who belong to the villages listed hereof in Star Mountain Local Government Council Area, Western Province, who have land in OK Tedi Mine Area and who are accepted by custom and who severally and collectively group themselves in ten major villages of:
ATEMKIT
BULTEM
FINALBIN
KAVOROBIP
MIGALSIMBIP
WANGBIN
OKTIDETAU
NIOSIKIUI
KIMGUIT
ANKITSOn 27 March 1998 MRSM entered into an agreement with MRDC under which MRDC would manage MRSM’s corporate and business affairs. MRSM officers generally referred to MRDC officers as Management.
The directors of MRSM included representatives of the clans making up the landowner group, a representative of MRDC and a representative of the Department of Mining. The directors at relevant times were:
Madiu Andrew, he succeeded Dr Temu as Managing Director of MRDC and as MRDC’s representative on the MRSM Board from 1999.
Henry Asekim
John Atmeyok – he replaced his brother Daniel in 2000.
Daniel Atmeyok – he was a director from 1997 until 2000. He is from Kumkit village.
Kumar Aua, who represented the Department of Mining. He is now the PNG Ambassador to South Korea.
William Boas, he was appointed initially as a representative of the Treasury Department. He continued as a director after he left Treasury in 1999 and began working with MRDC. He became Commercial Manager of MRDC in August 2002.
Samson Buretam, who died on 1 February 2004. He was born in Kavorabip village.
Bill Menim – he was appointed as Chairman and remains in that office. He was born in Kavorabip village about 10 kilometres from Tabubil. He now lives in Finalbin village as he married a Finalbin woman.
Dr Ila Temu, who was Managing Director of MRDC and was appointed to the MRSM board from 1997 to 1999.Prior to PNG and the landowners agreeing that the latter would take up a 2.5% equity interest in OTML dividends received by the State in respect of its equity in OTML had been paid to the PNG Treasury Department. This practice continued even after the landowners had acquired their interest. There was about 3 million kina due to MRSM from the State by the year 2000.
After its establishment in 1998, the MRSM board began to consider ways in which it could use money received from its shareholding in OTML for the benefit of landowners. Samson Buretam suggested that MRSM become involved in the provision of catering services for OTML. Dr Ila Temu supported that idea which was endorsed by the MRSM board.
2.4 The provision of catering services at Ok Tedi by Poon Bros 1989-1999
Catering services for OTML up to 1998 had been provided by Poon Bros (Poons), a Western Australian based company that provided such services to industry and in particular to remote mine sites. It carried on business in Western Australia and in the Eastern States of Australia including Queensland.
Mr Les Fereday was Poons’ Queensland operations manager in 1980. He was based in Brisbane. He became operations manager for the Eastern Division in 1982. At about that time Poons secured a contract to manage the provision of catering services for Bechtel in connection with construction work at the Ok Tedi mine. When the contract came up for renewal in 1985 it was put out to tender and a Singapore based company called Spinneys was the successful bidder. Mr Fereday was appointed as general manager for the Eastern Division of Poons in 1987. The catering contract came up for tender again in 1989. Poons tendered through its Perth office and won the contract back.
In September 1989 the P&O Group acquired Poons’ operations. It retained the trading name of Poons so that the operations continued under that name for some time after the acquisition. Mr Fereday was appointed by the P&O Group as director/general manager of the Eastern Division of the operation. PNG was treated as part of the Eastern Division. The provision of catering services at Ok Tedi therefore fell within his area of responsibility.
Poons was catering for four camps at the time. One was at the mine on Mt Fubilan, two were in Tabubil and one was at the Ok Menga power station. The management comprised 11 or 12 expatriates predominantly from Australia. So too were the executive chefs. Most of the workforce were PNG nationals who provided unskilled or semiskilled labour. They were trained on the job to a level where they could supervise other nationals, subject to direction from chefs, catering managers and project managers.
The term of the Ok Tedi contract was four years to 1993. It was rolled over for two successive one year terms ending in 1995. In that year OTML called for tenders for a new catering contract. Poons retendered and won the contract against Niugini Catering and an Australian-based company, SHRM (Australia) Pty Ltd (SHRM). That company had operated under that name for some 30 years. However on 19 March 1999 it became Eurest (Australia) Support Services Pty Ltd. At some time in 1999 the Cooper Group acquired the Eurest companies. Much later, on 9 May 2003, Eurest (Australia) became Compass Group (Australia) Pty Ltd (Compass), the first respondent in these proceedings. In 1995 SHRM was providing catering services to remote sites in Australia. It also serviced the Bougainville copper mine and some universities and defence sites in PNG.
Poons’ catering contract was to expire in October 1999. There was no requirement in it for any ownership involvement or joint venture with local landowners. However, Roger Higgins, OTML’s executive manager, told Mr Fereday it would be something that OTML would look at for the future. Mr Fereday had already had experience between 1989 and 1995 in developing joint venture arrangements with landowner groups. In February or March 1999 Mr Fereday and Greg McGrath of Poons had some discussions with Dr Ila Temu about the possibility of a joint MRSM/Poons tender proposal. Their discussions did not lead anywhere and Poons subsequently explored the possibility of a joint venture arrangement with another landowner company, Cloudlands Investments Pty Ltd.
2.5 OTML tries to reduce costs – the Fenwick Reviews 1995-1996
Between 1995 and 1997 OTML endeavoured to reduce some of its costs. It audited a number of its service contracts, including the catering contract. The executive manager responsible for the audit of the catering contract was Mr Burt Uglinga. He had been with OTML since 1984. He became executive manager at Tabubil in 1996. He was responsible for occupational health and safety, hospital amenities (including catering), recreation and counselling.
Mr Bill Fenwick was appointed under Mr Uglinga’s supervision to review the catering operations. The appointment was made through his private company, Morocco Holdings Pty Ltd (Morocco). Mr Fenwick who had worked as a chef had a long association with Poons having been employed as their head chef in 1972 at the Windarra Nickel Mine in Western Australia. He was appointed their project manager for the Ok Tedi mine site in 1983. At that time Poons were catering for 5,500 mandays each day in the OTML catering operations. In 1985 Mr Fenwick was made Poons business development manager for Western Australia. In 1987 when Poons had lost the Ok Tedi contract and it went out to tender, he returned to endeavour to regain the contract for the company and in 1989 was successful in doing so. After that he came back to Western Australia and started his own remote site catering business called Fenwick Catering, which he sold in 1990. He moved to Cairns and ran a number of small businesses. In 1994 he returned to Western Australia and became a catering consultant through his company Morocco.
In about 1995 Mr Fenwick was contacted by Mr Bob Pink, OTML’s superintendent for town services, and asked to undertake a review of Poons’ billings under its catering contract. He prepared a report of what he described as overcharging by Poons. Mr Uglinga was concerned about the overcharging. He was told by Mr John Grubb, OTML’s managing director, he had authority to recommend how to deal with the contractor. He provided a copy of the Fenwick report to Poons. In late 1996 Mr Fereday met with Messrs Grubb and Uglinga at the OTML office in Tabubil. He then agreed to reduce monthly billing to 776,000 Kina and pay back OTML for overcharging at the rate of 80,000 Kina per month.
Mr Uglinga thought there was an opportunity for future landowner involvement in the catering contract. He discussed the possibility with Mr Martin Paining, the OTML executive manager responsible for community business development. He identified different landowner groups at the mine site and at Kiunga.
2.6 Fenwick consults to OTML - 1997
Between 1994 and 1996 Mr Fenwick acted as consultant for a number of companies. In 1997 Mr Uglinga and Francis Tike, a business development manager from OTML met with him and representatives of Kiunga landowner groups to discuss a proposal under which the landowners would tender for the catering contract in relation to the Kiunga operations. This led to the incorporation of Kiunga Catering Services Ltd (KCS).
Mr Fenwick was engaged by OTML to monitor Poons’ monthly billings to ensure that there were no additional charges. He said that he acted in that capacity for approximately 18 months until 1997. He referred to a written agreement between himself and OTML. That agreement however was made on 6 March 1997 and apparently pursuant to a letter of appointment dated 20 December 1996. Under the agreement Mr Fenwick’s company, Morocco, was appointed by OTML to provide contract supervision services on all contracts then administered by OTML’s Towns and Camps Administration Department. These included the catering services contract with Poons (PNG) Pty Ltd and the Kiunga catering and janitorial services contract with KCS. The obligations of the consultant under the contract with OTML included:
Check and verify all Contractors’ claims for monthly progress payments. Discuss and resolve with the Contractor all anomalies and discrepancies. If unsuccessful in resolving such anomalies and discrepancies, refer to OTML for a decision.
Morocco was also required to provide OTML with monthly reports on each contract and three monthly contract review reports.
While he was providing consulting services to OTML in 1997 Mr Fenwick contacted Mr Jeff Hayes of what was then known as SHRM in Brisbane about possible opportunities for SHRM because of the problems that OTML was having with Poons. Mr Hayes had long experience in the catering industry. He had worked for the P&O Group for one year in 1981, for SHRM for 16 years and for Compass for four years. He is presently managing director of Cater Care Services Pty Ltd which specialises in the provision of remote site catering. He wrote to Mr Fenwick on 24 April 1997 attaching price structures for catering services provided by SHRM at the Olympic Dam expansion project (OEP). Although the letter bore the group letterhead “SHRM” and the address for SHRM (Australia) Pty Ltd, Mr Hayes signed it as general manager of SHRM (South Pacific) Pty Ltd.
2.7 Landowner interest in providing catering services – the MRSM Move 1997-1998
Mr Uglinga asked OTML’s contract department to prepare a tender dealing with the Kiunga catering operations separately from those based around the Tabubil and Mt Fubilan operations. Tenders for that contract were received from KCS and Poons and KCS was the successful tenderer. It started providing catering services to OTML Kiunga at the end of 1997. KCS was a 100% landowner owned operation but employed an expatriate as manager of its catering operations. Mr Uglinga began dealing with landowners from the Ok Tedi mine site in relation to the catering contract for that site. He spoke to their representatives including Henry Asekim, Samson Buretam and Bill Menim.
The evidence about the origins of MRSM’s interest in providing catering services to OTML is a little mixed but the uncertainty is not material to the issues in this case. Mr Buretam suggested that MRSM consider it. The then managing director of MRDC, Dr Ila Temu, supported the idea. It was endorsed by the MRSM board. It was also supported by MRDC professional staff who were assisting MRSM in managing the landowner business. They were Michael Baitia, who was MRDC’s corporate affairs manager and Melvin Yalapan the company secretary for both MRSM and MRDC.
Samson Buretam took the lead in seeking the catering contract. He drafted a letter which was signed by representatives of each of the villages in the Mt Fubilan area supporting a proposal that the MRSM directors negotiate with a view to taking up the contract for the provision of catering services at Tabubil. He was a highly respected village leader and Mr Menim trusted his recommendation. It emerged from the evidence of more than one witness that Mr Buretam was very influential among the landowners, that people deferred to him and that there was a reluctance to say anything critical of him.
In 1997 Mr Uglinga introduced Mr Buretam to Mr Fenwick. Mr Buretam suggested that, because of Mr Fenwick’s knowledge of the OTML catering contract, MRSM should appoint him to assist in preparing a proposal for OTML. Mr Baitia made contact with Mr Fenwick who agreed to act as MRSM’s consultant. Mr Baitia and Mr Fenwick and MRSM’s commercial manager, Ashok Jain, worked on a presentation to put to the MRSM board.
On 8 July 1998 Mr Dasim Kel, senior accountant, business development with OTML, wrote to Mr Fenwick. He informed him that OTML wanted to bring its catering and janitorial contracts under one entity upon their expiry on 30 September 1999. At that time the catering contract was held by Poons and the janitorial contract by Camp Administration Pty Ltd (CA). Poons had been advised that if it wanted to secure the next contract it would have to have a local partner approved by OTML. CA and MRSM had been identified as two relevant local groups. Mr Kel advised Mr Fenwick:
Both the two local groups mentioned above have rejected to enter JV arrangements with Poons, instead they have opted to go 100% themselves. So far five meetings have been convened between two groups, the latest being on the 29th June 1998. At that meeting the two groups finally resolved that they would form a new company that is owned 50% each and this company would then bid for the Catering Services Company [sic] as a 100% local company.
Mr Kel said that MRSM had nominated Mr Fenwick as its candidate for any future consultancy work and that CA had nominated a Mr Graham Braisby. He asked Mr Fenwick to provide a detailed CV, the hourly charge out rate of his consultancy service, an indicative salary should he be asked to manage the catering contract and any other information he believed might assist to make his presentation to the board of OTML attractive.
Mr Fenwick said that he did not receive the letter of 8 July 1998 until probably a week or two after it was sent. He received it in Medang. He did not know who MRSM was at that time. He didn’t know Dasim Kel. He did not want to work for OTML and the letter was of no interest to him. He therefore threw it in the bin. This evidence, which was given by him in cross-examination, contrasted with his witness statement in which he acknowledged receiving the letter from OTML and at about the same time receiving a telephone call from Michael Baitia. The letter was produced by Fubilan and MRSM in the present proceedings which suggested that Mr Fenwick must have retained it and given it to them as part of their discovery. When this was pointed out to him he conceded that he had. He then said that his wife had taken the letter out of the bin, ironed it and put it in a filing cabinet. The original of the letter showed no signs of having been screwed up and ironed. When this was put to Mr Fenwick and the letter shown to him, he claimed to have confirmed with his wife on the previous evening that what he said had occurred, had occurred. This aspect of his evidence was not worthy of belief. Indeed his story about the letter which does not seem to have had any bearing upon any real issue in the case was proffered carelessly and almost recklessly and, in that respect, typified other aspects of his responses in cross-examination which tended to be highly argumentative. Mr Fenwick was on a retainer, up to the time of the trial, of $10,000 per month to assist Fubilan and its solicitors in the preparation of this case. He was financially and emotionally involved in its successful prosecution. In any event his evidence appeared to be that his initial contact with MRSM was the result of a telephone call from Michael Baitia which led to a meeting with Mr Baitia and the directors of MRSM at Port Moresby. His reconstruction, in his evidence, of a dismissive reaction to the letter of 8 July 1998 may be explicable on the basis that it came from OTML and that he regarded OTML as in the enemy camp.
2.8 MRSM and Fenwick negotiate – July 1998-September 1998
On 10 July 1998 a memorandum of understanding was executed between MRSM and Mr Fenwick, signed by him and by Mr Yalapan. It was done without the prior authority of the MRSM board. The document stated briefly:
Mineral Resources Star Mountains and Bill Fenwick agree that:
.Bill Fenwick will prepare a complete business plan for actual takeover of catering services in September 1999 by (MRSM).
.In planning, the consultant will always act in the best interest of MRSM to ensure that the proposal is complete within three (3) months.
.Continually consult with MRSM board of Directors and OTML business development (Francis Tike) for all updates plans. [sic]
On 8 September 1998 Mr Fenwick sent a letter to the MRSM board under the letterhead of Morocco. The letter affirmed “this company’s acceptance to provide MRSM with professional Consultancy services”. The services were to include detailed provisions of a business plan and supporting data with a view to presenting a proposal for providing catering services to OTML. A draft copy would be prepared and presented for review at the next board meeting. The letter gave information about Morocco and major clients serviced by it, elements of the proposed business plan, the need for a mobilisation plan and a management plan. Under the heading “Management Plan” Mr Fenwick said:
Management, where possible will be recruited in-country, this can be focused in the final proposal. Providing the client offers sufficient notice of contract award there will be ample opportunity to source a local management team.
He listed other strategies for discussion including MRSM’s decision to monopolise the business. This “strategy” had as its objective control by the company of its own business so that it would not be controlled or managed by an offshore company. Mr Fenwick asked for a monthly retainer of A$4,500 initially and a negotiated success fee in the amount of $25,000 payable on contract award. Future project management rates were to be negotiated. He sought reimbursement of approved travel and accommodation. His writing style as evidenced in that letter and in other documents was awkward and rhetorical and frequently involved inappropriate use of words. This is no gratuitous observation as his authorship of various communications made in the name of other persons was a material part of the history of the events which have led to these proceedings.
Mr Fenwick prepared documents for consideration by the board of MRSM at its meeting in September 1998. One was entitled “DRAFT PROPOSAL for MRSM “Business Planning””. Another was entitled “BUSINESS PLAN MRSM 1999-2003” comprising 15 pages of text followed by various charts and diagrams relating to income and expense analysis and the like. A third document was entitled “BUSINESS PLAN PRESENTATION”. It also bore the subheading “Port Moresby 14/8/98”. Mr Fenwick said that the latter document was presented at the September board meeting. In cross-examination he would not remember whether it was a document he used in Port Moresby or at Ok Tedi.Its content suggests it was his speaking notes prepared to commend himself to MRSM. In addition to citing his personal experience and background they referred to opportunities for expansion based on “exhaustive management training measures to facilitate the opportunities”.
The “DRAFT PROPOSAL for MRSM “BUSINESS PLANNING”” recited that the directors of MRSM were “well capable people and appear expert in their engineering field” and that they had appointed Morocco “to help define their business and formalise a plan to stimulate future growth”. The proposed methodology involved Morocco “directing MRSM through the processes of a Business Plan”. The document referred to as the “Business Plan” bore the endorsement “Prepared by Morocco Holdings Pty Ltd (September 1998)”. However it seems unlikely that it was prepared for the board meeting of 28 September 1998. Mr Fenwick was not sure when it was prepared or presented.
A meeting of the board of MRSM was held on 28 September 1998. Messrs Menim, Asekim, Daniel Atmeyok, Buretam and Temu were present along with Melvin Yalapan and Damien Ase. Francis Tike of OTML was present as was Mr Fenwick. The minutes recorded the Memorandum of Understanding of 10 July 1998 noting that it had been entered into without the approval of the full board. The board asked Mr Fenwick to present the draft business plan. He told them that his assumptions were based on real experience in catering contract activities with OTML. The board should approve his engagement so he could complete the business plan before December 1998 and present it to OTML leaving enough time for its consideration before the contract was awarded. MRDC Management and/or Mr Yalapan, explained to the board that under the current trust arrangement a new company had to be incorporated for the purpose of the catering contract. The company would be wholly owned by MRSM and its dividends put into the trust to be distributed to the beneficiary landowners. The name “Fubilan Catering Services” was discussed. It was then resolved:
1.That the Board formally engage the Consultant, Mr Bill Fenwick to prepare the proposal and plan for the OTML Catering Contract.
2.That a subsidiary company to be called Fubiland [sic] Catering Services be incorporated for purpose of running the OTML Catering Contract. The company will be 100% owned by MRSM.
3.That both the Chairman, Mr Menim, and Dr Temu execute the agreement to engage the Consultant, Mr Fenwick.
4.That the company pays the bills for the Consultant upon receipt of receipts which includes initial expenses incurred by the Consultant.
The landowner directors resolved to bid for the Ok Tedi catering contract. It was suggested at the meeting that MRSM could assist the landowners by:
1. Providing financial assistance or a guarantee to secure the catering contract.
2. Put into place a catering proposal to be submitted to OTML.
The requirements for securing the contract were identified including a demonstrated ability by the proponent to efficiently provide the services to OTML.
On 26 October 1998 Dr Ila Temu, the managing director of MRDC and also an MRSM director, wrote to Mr Fenwick and informed him of the board’s approval of his engagement for consultancy work. The new consultancy agreement superseded the MOU of 10 July 1998. He said:
As agreed, the fees for the Consultancy services will be K4,500.00 per month and a success fee of K25,000 upon successfully securing the contract for the OTML Catering Services. The payment of the consultancy fee will start from September 1998 when you first started work for the Company and includes any costs and expenses incurred.
Mr Fenwick’s handwriting appears on his copy of the letter where he crossed out the references to figures in PNG currency and substituted the same figures in Australian dollars. Terms of Reference for the consultancy were attached. They recited the board’s decision and required Morocco to prepare a detailed catering contract proposal for the Ok Tedi mine operation. It was to include proposals for financing arrangements, supply lines for food stuffs, the volume and value of stock to be available on site, cash flow forecasts and an indicative management structure. Mr Fenwick was also required to ensure that the catering contract proposal met and complied with OTML contract requirements.
The consultancy agreement required Morocco to perform work in accordance with the Terms of Reference to assist MRSM to secure the catering contract from OTML. The agreement was to commence as of September 1998 and would continue until December 1998 unless earlier terminated or extended by mutual agreement. Morocco was to be reimbursed for the costs incurred in performance of the agreement with a total estimated amount payable of A$4,500 per month. A success fee of A$25,000 would be payable if MRSM successfully secured the catering contract from OTML.
2.9 Mr Fenwick’s business plan for MRSM – October/November 1998
Mr Fenwick’s business plan stated that MRSM was formed in 1997 to provide local landowner groups with a vehicle to tender for catering services to OTML. It stated that MRSM would employ 80 staff and four senior managers and that the operation would be managed from Tabubil.
Mr Fenwick recited features of the existing catering arrangements for OTML no doubt based upon his own knowledge of those matters derived from his employment by OTML. He referred to the difference which he said was little between Lump Sum/Unit Rate then in use by OTML and the more commonly used Manday method of billing. The latter was gauged by an average daily camp occupancy over the month with set incremental rates inclusive of operational costs, product and profit.
Sales figures for 1997 and 1998 were set out with the words “Our sales figures are as follows”. Projected figures for 1999 through to 2001 were included in his table. Mr Fenwick conceded in cross-examination that he had used information obtained in confidence as an OTML consultant to prepare the table. Under the heading “Proof of Sales and Profit” there appeared the statement:
* MRSM have excellent historical data offering a high degree of commercial comfort.
It was put to Mr Fenwick that the “historical data” referred to OTML data. He conceded that indirectly it was. The business plan went on to say that:
MRSM would pursue and implement the promotion of local Management. Greater emphasis would be given to training to support to [sic] ensure this achievement.
He agreed emphatically with the proposition that this meant he was to implement the promotion of local management. Under the heading “Company Strategy Highlights” the following words appeared:
Successfully gaining the Ok Tedi contract
All vehicles to be replaced immediately.
Review purchasing procedures.Under the heading “Unique Features” the business plan stated:
MRSM will have the best locally managed catering service in the country after initializing new training strategies.
Mr Fenwick accepted that MRSM would need a period of training before it could be locally managed. There had been a history of failed local landowner companies and ventures which might cause OTML to take a negative view of MRSM-based management. He proposed a management team which would include a project manager who would be a person experienced in camps and catering and having field experience in PNG. He also contemplated an assistant project manager, a catering manager and an assistant catering manager. Under the heading “Consulting Project Management Management” [sic] he wrote:
There will be a requirement for short term Project Management either through Morocco or through a preferred International Catering Group. This can be outlined in detail when MRSM decide their preferred option.
He accepted in cross-examination that the project manager contemplated could be his company or a preferred international catering group. His strategy even at that stage appears to have been to bring in a major catering company as a management contractor and then to phase it out. In answer to that proposition in cross-examination he said “it had possibilities” .
The business plan appended financial forecasts and cash flow budgets. He projected sales of K8 million in 1998 with a gross profit of K2.4 million and a net profit of K1.2 million. For the following year he projected sales of K9 million, with a gross profit of K2.7 million and a net profit of K1.35 million. It may be noted that at this time on Mr Fereday’s evidence Poons were making about K800,000.
2.10 SHRM/Eurest expresses interest in MRSM – late 1998
Late in 1998 Mr Fenwick contacted Jeff Hayes who was then the general manager of SHRM (South Pacific) to discuss its possible commercial involvement. Mr Hayes met with Mr Fenwick in Brisbane in early or mid November 1998. Mr Fenwick asked him whether he was interested in exploring an arrangement with MRSM in relation to the pending tender. Mr Hayes and his company “were naturally interested in the project”. After the meeting Mr Hayes sent a letter dated 25 November 1998 to the MRSM directors thanking them for their “… approach to discuss the possibility of working with MRSM for the provision of Catering and Janitorial Services at the Ok Tedi mine, Tabubil”. He expressed SHRM’s interest in developing partnership arrangements suitable to OTML and in keeping with stated OTML policies and directions. He referred to the experience of SHRM (South Pacific) in PNG for over 25 years and attached an outline of projects which it had undertaken over that period together with work currently in hand. SHRM (South Pacific) had recently obtained the catering contract in Port Moresby for the PNG Defence Forces. His letter also said that through SHRM’s involvement in PNG it had relied heavily on supporting local business, employment and training and that this was most effectively demonstrated through its management of the Bougainville project:
The training provided by SHRM during those years has produced many of the senior chefs, managers and supervisors currently working in PNG.
Mr Hayes attached examples of SHRM’s competency-based training modules. He said:
Our commitment is always training and remains one of our highest priorities.
The letter also referred to SHRM’s considerable purchasing power which enabled it to purchase “at the best possible price”. He wrote:
This competitive pricing would be passed on directly to the project.
He also said:
All goods, services and labour ordered or supplied on behalf of the project would be reconciled every four weeks, substantiated by the appropriate auditable paperwork.
In the penultimate paragraph of the letter he wrote:
It is our understanding that all costs will be reimbursable to SHRM (South Pacific) Pty Ltd and a Management Fee would apply for the provision of the services, purchases and training.
After the September board meeting Mr Fenwick made contact with a number of catering firms to see if they were interested in providing management support for MRSM in connection with the provision of catering services to the Ok Tedi mine. On 16 December 1998 Mr Greg McGrath, the manager of Poon (PNG) Catering and Services wrote to him confirming that P&O (PNG) was keenly interested in discussing with MRSM “possible management, or other mutually beneficial, arrangements associated with tendering for the next OTML catering contract” .
2.11 MRSM approaches OTML – January 1999
On 5 January 1999 Dr Temu wrote to Mr Fenwick informing him that MRDC supported the catering proposal in principle and would assist MRSM in seeking financing. He said that the MRDC board decision should pave the way for a formal proposal to be submitted to OTML management and that he was in the process of writing to OTML’s managing director, Roger Higgins, advising him of MRSM’s intention and MRDC’s support. He concluded:
We are conscious of the timing factor once the Contract is open up for public tendering. We intend to undertake this before the end of the month. You will be advised on the timing of MRSM presentation to OTML as you will be MRSM’s advisor on the proposal.
On 14 January 1999 Dr Temu wrote to Mr Higgins at OTML on behalf of the directors and shareholders of MRSM to express its interest in providing catering services for OTML. He referred to the MRSM board meeting of September 1998, the engagement of Mr Fenwick and his formal submission of the catering proposal on 14 December 1998. He referred to an MRDC board meeting held on 17 December 1998 which had considered the MRSM catering proposal and given its support to assist MRSM in seeking financing for the proposal. He said:
We are indeed grateful for an opportunity to formally present to you, MRSM’s Catering Services proposal. We intend to submit this proposal to you in Tabubil at the end of January 1999.
Mr Yalapan drafted both this letter and the letter of 5 January 1999.
On 19 January 1999 Mr Fenwick wrote to Mr Baitia at MRDC enclosing “limited notes for the meeting at Tabubil”. He emphasised the importance of the opening presentation in overcoming OTML resistance. He said:
Whilst there is a necessity to display professionalism, I would still favour/suggest some landowner oral participation.
A fax from Mr Baitia to Mr Fenwick on 20 January 1999 attached details of arrangements for the MRSM board meeting and presentation of its proposal to OTML management. At this time however the Ok Tedi landowners had threatened to shut down the mine. A further fax from Mr Baitia to Mr Fenwick on 22 January stated that MRSM’s “Commercial Manager”, a reference to MRDC, was seeking:
1. Poons’ current charges for each category of service item.
2. The basis for Mr Fenwick’s cost estimate for each of the items.
Mr Baitia also sought cash flow forecasts for the remaining years of the mine life.
On 23 January Mr Higgins replied to Dr Temu’s letter of 14 January. He referred to the threats of landowner closure in the following week. This closure was evidently related to a dispute between landowners and the national government. Mr Higgins said:
I am not prepared to meet them to discuss the catering contract while this threat exists, or if it is carried out.
He said that OTML expected to issue bid documents in late March and would be seeking cost effective services of high quality. He said:
Our early communications from MRSM on the subject of the catering contract focused on their position as a preferred-area bidder, with no attention to capabilities, cost or quality. This has given me considerable concern, which I have expressed to the MRSM directors.
Mr Fenwick prepared a document entitled “MRSM Expression of Interest Catering Services OTML” apparently for presentation to OTML. It set out cash flow assumptions for the period January 1999 to December 1999 and cash flow budgets designated 1A, 1B, 2 and 3 for the period 1 January 1999 to 31 December 1999. The proposed budgets were based on different assumptions about the level of initial capital, stock purchases and catering plant and equipment.
On 25 January 1999 Ashok Jain, the manager-commercial of MRDC sent a memorandum to Dr Temu raising questions about the Fenwick proposal. These questions were referred to Mr Fenwick by fax on the same day. As Mr Jain saw it the economic viability of the proposal depended upon assumptions about sales volume, sales price and cost of food and raw material. There had been no supporting information provided. Mr Fenwick had assumed that sales would be made at a 220% profit margin. There was no information to confirm whether such a margin was typical and allowed for food wastage etc. No working capital had been considered. Normally it would be taken as three months’ operating costs which would be K2 million. The assumed depreciation for tax purposes of 20% could be higher than what was permissible. Other cost items not considered included rent for the canteen, consumables, recruitment costs and the repairs and maintenance of plant and equipment. The management fee for the catering contract at K100,000 seemed low. There was no sensitivity analysis in the figures provided. There is no record of a response to that inquiry from Mr Baitia.
Mr Fenwick prepared some presentation notes for the meeting with OTML. These set out the history of MRSM, the function of MRDC and the relationship between the two companies. It referred to the relevant landowners and in support of the catering contract proposal stated:
.MRSM HAS THE NECESSARY FUNDS IMMEDIATELY AVAILABLE TO FINANCE THE CATERING CONTRACT.
.MRDC IS COMMITTED TO ASSISTING MRSM IN PUTTING TOGETHER THE FINANCING FOR THIS CONTRACT.
.THE STATE WILL ALSO PROVIDE THE NECESSARY GUARANTEE AS PROVIDED FOR UNDER THE OK TEDI MOA WITH THE LANDOWNERS.
Under the heading “PROFESSIONAL MANAGEMENT” the notes stated:
.MRSM IS CONSCIOUS OF THE REQUIREMENT OF COMPETENT PROFESSIONAL MANAGEMENT
.MRSM HAS OBTAINED “EXPRESSIONS OF INTERESTS” FROM SEVERAL REKNOWN [sic] CATERERS (INCLUDING THE CURRENT)
.THESE EXPRESSIONS OF INTERESTS PROVIDE OPPORTUNITY FOR A FAVOURABLE MANAGEMENT GROUP.
.BELOW ARE THE COMPANIES THAT HAVE EXPRESSED INTEREST IN PROVIDING MANAGEMENT TO MRSM;
i) SHRM/EUREST
ii) SODEXHO/GARDINER MERCHANT
iii) P&O CATERING & SERVICES [sic]Mr Fenwick claimed in his notes that MRSM had obtained expressions of interest from three major food suppliers, one of which was the supplier to the current contractor. He stated that supply management and purchasing options were available to MRSM and would be further discussed and agreed with the successful supplier. Food stock from the current caterer would be purchased at value (on site/in transit). All other capital items and vehicles would be negotiated.
On 11 February 1999 the MRSM board held a special meeting in Tabubil. Madiu Andrew presented Mr Fenwick’s proposal. He said MRDC would not provide a financial guarantee to MRSM but was prepared to assist in sourcing funds for the contract if required. Mr Baitia explained the components of the proposal and told the board that the information used to formulate the business plan was based on the content of the current scope of works and billing method. He said financing was a critical factor and that OTML would want to be convinced that the company had the funds available to offer the assurances required initially to finance the contract. He pointed to the two cash flow scenarios covered in the proposal. He also advised the board that a management arrangement would be the best option for the company. The board resolved:
That the Board approve the Catering Contract has presented by the Management (sic)
That the Board approve the Management of the Contract to be managed by a professional catering company under a Management Agreement.
It was also resolved that the proposal be presented to the OTML management with the assistance of Mr Fenwick and that his reengagement be approved as consultant for a further period of three months to put the contract and management arrangements together.
2.12 MRSM presents a proposal to OTML – February 1999
The evidence does not indicate the precise date upon which the MRSM proposal was presented to OTML. The recollections of witnesses seemed to vary. It appears likely from the documentary record that it occurred between 11 February 1999 when the board of MRSM met at Tabubil and 16 February 1999 when Michael Baitia wrote to Mr Hayes of SHRM, a communication which will be referred to below.
Mr Baitia’s evidence was that he and Mr Fenwick made a presentation to OTML representatives comprising Mr Higgins, the managing director, Paul Cox-Martin, the contract superintendent, and three executive managers, Burt Uglinga, Bill Blenkhorn and Martin Paining. Mr Higgins told them that OTML supported landowners and wanted to see them succeed but that MRSM did not have the financial resources or the management experience necessary to undertake the catering contract. It would need to appoint professional offshore management. During the four year term of the contract the landowners would be able to learn how to manage the catering contract properly so they would be in a position to tender for it in their own right when it was next reviewed.
2.13 MRSM approaches various catering companies – February 1999
Following MRSM’s presentation to OTML Mr Andrew asked Messrs Fenwick and Baitia to try to obtain expressions of interest from professional offshore management companies, to screen those expressions of interest and to preselect a company for consideration by the MRSM board in about three months. Mr Baitia and Mr Fenwick, with input from Ashok Jain, drafted a request for expressions of interest directed to professional offshore management operators identified by Mr Fenwick and Mr Baitia. They approached Sodexho, SHRM, Crocodile Catering and Poons. In his fax to them Mr Baitia said:
As per your Expression of Interest to MRSM in late November, last year, we wish to advise that we have begun discussions with OTML Management on the above. As such we advise that MRSM intend to enter into a Management Arrangement for the Ok Tedi Catering Contract which will be up for renewal before the end of this year.
Attached herewith please find the Terms of Reference for provision of management arrangement for the Ok Tedi Catering Contract.
Please submit a proposal with a management budget covering the Terms of Reference to us by the end of this week. For details on this matter please contact Mr Bill Fenwick on (675) 325 3855.
The attachment was drafted by Mr Baitia and Mr Fenwick. It included the term “Supply to be tendered at a fixed price”. Mr Baitia did not recall what he had meant by that. He said he had heard a little about the question of rebates at that time but not the mechanics or technicalities of it. That was a matter he regarded as Mr Fenwick’s area.
The terms of reference in the attachment contemplated that the management agreement would cover project management, supply, training and performance bonuses. The project management component involved the provision and oversight of catering supervision, administration of contract obligations, client and contract liaison, provision of quality food and service, provision of monthly accounts and quarterly reports to the MRSM board and assurance for providing and sustaining the management team. Suppliers were to be nominated and supply to be tendered at a fixed price. Terms of payment were to be 60 days and:
All rebates attributable to this contract are to be geared towards MRSM for training programs.
Mr Hayes of SHRM (South Pacific) responded to Mr Baitia with a letter dated 19 February 1999. He attached a summary entitled “Outline of Management Contract”. He said that it should serve to outline items that would need to be considered. He said that SHRM (South Pacific) had specific experience in the kind of operation proposed and would work with MRSM to obtain maximum benefit for all parties concerned. He referred to current Australian operations of SHRM at Century Mine and at Roxby Downs. All of these included initiatives relevant to the OTML project. He said:
In summary we propose a moderate Management Fee clear of operating expenses integrated with a specific Gain-sharing arrangement that allows for remuneration based on performance.
The outline attached to the fax proposed that the contract would represent a combination of reimbursable costs and lump sums and, depending on performance, an opportunity for additional fee payments to SHRM through the provisions of an incentive payment program. Compensation estimates would include reimbursable costs. One element of the reimbursable costs was said to be “Consumables and Supplies” although explanatory notes indicated that this comprised consumables, tools and supplies required to perform the work other than catering supplies. I find that the outline of the contract was related to the provision of management services and did not address arrangements for securing food for use in the catering services.
Mr Baitia received responses from all the management companies to whom he wrote although the response from Poons was so late it was effectively not considered. Crocodile Catering were unlikely to be in a position financially to properly manage the contract so they were not further considered. The only real prospects for the provision of management services were Sodexho and SHRM.
Mr Fenwick’s evidence-in-chief suggested that he had had a meeting with Mr Hayes in Brisbane which post dated the OTML presentation and that he had had that meeting in or about November 1998. Mr Hayes said he had been contacted by Mr Fenwick in the second half of 1998. He recalled the meeting which preceded his letter of 25 November 1998 and Mr Fenwick saying that he had been advised by OTML that it was prepared to consider engaging a landowner company provided it was managed by an offshore manager. Mr Fenwick had mentioned the need for such a manager to train MRSM personnel and that such training would be an important task for an offshore manager. Training previously provided by Poons had not been adequate. Despite some conflict abut the dates of their meetings, I accept that Mr Fenwick did make known to Mr Hayes between November 1998 and the end of February 1999 that OTML would only engage the services of a landowner catering company if it were supported by offshore professional management.
On 5 March 1999 Mr Hayes wrote again to Mr Baitia outlining his understanding of a “Cost Reimbursable Contract Management Fee”. He identified as priorities, “Transparency of transaction, Accuracy of reporting, Quality of performance assessment, Equality of gain share distribution and Accuracy of initial budget criteria”. Under the heading “Transparency of Transaction” he said, inter alia:
In establishing any partnership, it is imperative that all transactions are recorded, reported and presented in a professional transparent way, issues such as:
. Payroll costs and ancillaries.
.Food purchases and tendering.
.Rebates negotiated and received.
.Administration costs.
.Legislative and legal costs.
.Insurances.
.Capital expenditure.2.14 Fenwick’s catering management options for MRSM – 5 March 1999
In a letter of the same date to Mr Baitia, Mr Fenwick suggested three options for catering management for MRSM. They were:
1. SHRM/Eurest
2. Sodexho/Gardiner Merchant
3. Self-appointed management
The third option was explained thus:
Option #3 would offer the Group a more favourable position financially/administratively, however OTML would resist/oppose this, preferring commercial stability and professional support. This option, should not be ruled out, as it has been frequently stated by OTML that they are interested in retaining competitiveness. This being the case then the writer would find it difficult to justify the exorbitant cost of retaining off shore Project Management in favour of self management. OTML could not expect MRSM to subsidise Project Managers and at the same time retain equal competitiveness. The bottom line result could show the P/Managers to cost MRSM K40,000/K45,000 per month and for this the writer would question “is the cost prohibitive?” MRSM should take the opportunity to submit their own Management Team with the necessary professional support systems to perhaps encourage/display the Group’s ability.
This observation disclosed what was said, by counsel for the respondents, to be a personal agenda pursued by Mr Fenwick to have himself appointed as professional manager for the landowner catering company. He denied in cross-examination that the reference to “the necessary professional support systems” was a reference to himself. Under the heading “Supply” in his letter, he wrote:
Food supply to site should be at a fixed contract rate (6 months). Contracting food prices in this manner affords MRSM the opportunity to forecast budgets and reduces the possibility of price hedging through rebating and re invoicing off shore.
Mr Fenwick also observed in the letter that should MRSM manage its own project it would be necessary to open supplier accounts.
Mr Baitia remembered receiving the letter from Mr Fenwick. He accepted that self-appointed management was an option considered by MRSM. He had not discussed with Mr Fenwick the proposition that contracting food prices at a fixed contract rate would reduce the possibility of price hedging through rebating and reinvoicing offshore. He could not recall whether the proposal that food supplies should be at a fixed contract rate was ever accepted by MRSM. Asked whether Mr Fenwick’s technical recommendations were taken up, he said:
I cannot comment on that because really that matter was at his – when he was appointed all the technical discussions on the – so I – I cannot comment on the technicalities on that.
He said that he deferred to Mr Fenwick’s judgment in matters of his expertise.
Mr Fenwick was cross-examined on his observations about the desirability of a fixed contract rate. By that he meant that the food to site should be “a fixed contract rate without a rebate and a net net situation, whereas the current goes through, you know, as I know it, current contractor was rebating and keeping a lot of the profits elsewhere”. This characterisation was inconsistent with the terms of his letter. Mr Fenwick’s role as advocate rather than witness of the truth in issues of importance in the case emerged early in his evidence.
On 8 March 1999 Dr Temu wrote to Mr Fenwick advising him formally of the resolutions of the MRSM board on 11 February and requesting him to undertake a profitability analysis on cash flows over the life of the mine. He also asked Mr Fenwick, when he had done that, to begin the review of any professional managers who had expressed interest in working with MRSM. He said:
This process should begin in Port Moresby next week. SHRM have expressed interest whilst Sodexho/Eurest are yet to submit theirs. Poons Catering may respond to us by early next week.
Mr Baitia and Mr Andrew were involved in the preparation of the letter. Underlying it was the hope that MRSM could be part of the contract for the life of the mine.
On 30 March 1999 Mr Baitia sent a fax to Mr Fenwick attaching a letter to Mr Fenwick of the same date from Dr Temu and documents received from Poons, although rather late in the piece. Dr Temu asked Mr Fenwick to undertake a comparative/assessment review of SHRM, Sodexho and Poons and to advise MRSM. His advice would form the basis of their final selection.
2.15 Hayes makes a presentation to the MRSM Board – March 1999
Following his letter of 5 March 1999, and on a date which is not clear from the evidence, Mr Hayes travelled to Port Moresby to give a presentation to the MRSM board. He was accompanied by Marcus Gosling. He told the board that SHRM had experience in Papua New Guinea and that it regarded training as important and would implement appropriate programs. He did not say anything about the details of training or give any commitment about the outcome of training programs. During the presentation he handed out brochures which included an SHRM profile and played a corporate video. Following the video, according to Mr Baitia, Mr Hayes told the board that SHRM had the experience and the ability to manage the OTML contract and was committed to working with the landowners to achieve the landowners’ objectives. He said that the involvement of SHRM would only be in a limited role as after the initial contract period of four years the landowners would be in a position to move forward without professional offshore management. SHRM was serious about working back-to-back with the landowners and this would provide a real opportunity for it to get back into PNG on a large scale. With the closure of the Bougainville site, SHRM’s largest contract in PNG had been terminated. According to Mr Baitia, Mr Hayes said that SHRM had trained PNG people to management level and were committed to ongoing training in management beyond the level of chef and relating to administration, accounts and site management. He pointed out the difference between the attitude of Poons who did not train nationals and that of SHRM. Mr Hayes said that SHRM’s training programs had supported the Lae Technical College which they relied upon to train their caterers and also to provide a source of employees with some training and experience. Mr Gosling also spoke of his experience in the management of catering on remote sites and the level of experience he could bring to the operation. Mr Baitia said that at the end of the meeting he thanked Mr Hayes for his presentation.
Mr Fenwick’s recollection of the same presentation was that Mr Hayes provided a profile of SHRM and a document entitled “SHRM Profile”. During his presentation he had spoken about the necessity for training. Mr Hayes also asserted that for 20 years Poons had done nothing in relation to training.
Samson Buretam who was at the meeting had met Mr Hayes previously. They had been introduced by Mr Fenwick at Tabubil. At the time Mr Hayes was at Tabubil to discuss options for OTML with Mr Fenwick and Teraupo Apoki of OTML if OTML were not able to resolve the problems they were having with Poons. Mr Buretam recalled Mr Hayes’ presentation to the MRSM board taking place at the Ninth Floor of Pacific Place in Port Moresby in the MRDC boardroom. He confirmed that Mr Hayes said that SHRM would provide an effective management service and training for PNG nationals above chef to management level. They would have an open book approach and the board would have access to the accounts. Madiu Andrew recalled the presentation as being “focussed on transparency and honesty”. He believed that Mr Hayes and Mr Gosling were trustworthy and felt that the directors were excited by their presentation.
Following Mr Hayes’ presentation he and his associate left the room and the board then agreed to go ahead and engage SHRM. Messrs Baitia and Fenwick were asked to open negotiations with SHRM with a view to developing a tender proposal.
The documentary records show that on 7 April 1999 Mr Hayes wrote to Mr Baitia enclosing what he called “a proposal for the mobilization of the OKTEDI contract”. The stated intention was to more specifically define the processes involved, SHRM’s perception of the priority and suggest some timeframes for implementation. The document was to assist with initial discussions and to develop the basis of a firm plan to manage and monitor progress. He said he looked forward to meeting Mr Baitia in the near future. The letter, although signed by Mr Hayes as general manager of SHRM (South Pacific), was on a Eurest (Australia) letterhead. (X 21) In cross-examination Mr Hayes accepted the description of the document as a program of work to be done to get to the point of submitting a tender.
2.16 MRSM decides to engage SHRM/Eurest as catering manager – 30 April 1999
The board of MRSM next met on 30 April 1999 in Port Moresby. Among the papers placed before it was a letter dated 15 April 1999 from Mr Fenwick attaching his assessment of SHRM, Poons and Sodexho as potential project managers for the catering services contract with OTML. He described SHRM as having a very professional approach. The Eurest group had recently purchased SHRM and this would “put them amongst the world leaders in remote Site Catering and Services”. Mr Hayes was “an extremely astute individual with excellent credentials …”. He referred to SHRM’s existing work for the defence forces in PNG and at PNG universities and colleges. They had offered a far more competitive price than Poons with a further opportunity to restructure and negotiate.
Directors present at the meeting on 30 April 1999 were Messrs Menim, Aua, Henry Asekim, Daniel Atmeyok, Buretam and Temu. Michael Baitia and Damien Ase were also in attendance. Mr Baitia led the presentation on the OTML catering contract management proposals. He told the board that it needed to make a decision then and appoint the catering manager of its choice before the current contract between OTML and Poons expired. He pointed to the need for MRSM to enter into a memorandum of understanding with the management company to put tender documents together and value the assets. Supply lines would have to be established and a mobilisation process begun. The board then resolved:
THAT SHRM/Eurest be engaged to provide management service for MRSM to manage the OTML Catering Contract upon successful tender and awarding of the contract.
THAT Fubilan Catering Services be incorporated to hold the OTML Catering Contract for the company and to enter into Management arrangements with the management company to manage the contract.
The board was also presented with a report on its 1999 management accounts. Its share of the dividend payment received from OTML represented income of K2,273,684. There was discussion about the imposition of 25% income tax and the desirability of having OTML pay the dividends directly to MRSM and not through the Department of Treasury and Planning.
The board resolved, in light of its decision to engage SHRM to provide management services for the OTML Contract, Mr Fenwick’s service as a consultant should come to an end. Mr Baitia in cross-examination could not recall whether that resolution was acted on. As appears from the documentary record, Mr Fenwick was offered a new consultancy with MRSM just over six weeks later, on 18 June 1999. Mr Baitia accepted in cross-examination that the reappointment of Mr Fenwick was done essentially to safeguard MRSM’s interests in the preparation of tender documentation by SHRM.
Following the board meeting Madiu Andrew kept in contact with Mr Higgins of OTML. He spoke to Mr Higgins to keep him informed of MRSM’s interest in the catering contract when dealing with him in relation to other issues. He also lobbied the executive manager, Robyn Moyna to support the proposal with Mr Higgins. Mr Higgins told him that he supported the proposal for landowner involvement in the catering contract and took comfort from SHRM’s involvement as it dealt with his concerns about ensuring a consistent quality of service to OTML employees.
On 10 May 1999 Mr Andrew, on behalf of MRDC, wrote to Mr Hayes informing him that the MRSM board had considered the SHRM/Eurest proposal and had directed that it be discussed in more detail as a necessary step before finalising a Management Agreement. Tender documents were expected at the end of May. It was important that before the tender was put out by OTML discussions proceed with SHRM to firm up details of a management agreement. In a fax dated 14 May 1999 Mr Hayes informed Mr Baitia that he was booked to arrive in Port Moresby on 24 May 1999 and depart on 28 May 1999 and would be able to meet with him during that time.
Mr Hayes met with Mr Yalapan and others on 25 May 1999. This resulted in a letter to SHRM/Eurest dated 3 June 1999 in which Mr Yalapan, who signed himself as acting managing director, offered terms of a management agreement between MRSM and SHRM/Eurest. In the meantime on 1 June 1999, Mr Baitia obtained a copy of the OTML tender document. It comprised information to tenderers, tender requirements, the form of tender and the contract documents including general and special conditions, compensation, scope of work, specifications and OTML’s standard supplementary conditions. The deadline for tenders was 5pm on Monday, 5 July 1999. Part 1 of the information to tenderers under the heading “Localisation and Local Business Development” stated that, consistent with the requirements of the Ok Tedi agreement, OTML had a policy of giving preference to competitive bids from PNG businesses and individuals, particularly those businesses and individuals originating from the Preferred Area which was defined as the Kiunga and Telefomin sub provinces of Western Province. Foreign companies and companies outside the Preferred Area were strongly advised to consider operating in joint venture or similar suitable arrangements with a local business group. Clause 10.2 of Pt 2 of the tender information stated that OTML would not be bound to accept the lowest or any tender. The statement of preference to tenderers who originated from the Preferred Area was repeated.
In his letter of 3 June 1999 to SHRM/Eurest, Mr Yalapan put MRSM’s offer. Its essential elements were that SHRM/Eurest would manage the catering services contract on behalf of MRSM and would prepare a proposal for the tender to OTML as MRSM’s catering contract manager. The tender proposal would be subject to MRSM’s prior approval and formally submitted by MRSM. A draft MOU would be prepared to formalise the arrangement and would be superseded by a management agreement between the parties to be entered into in July 1999. MRSM would cooperate with SHRM/Eurest in providing its financial commitment to the contract and other necessary information to facilitate the tender proposal. The letter was countersigned by Mr Hayes on 9 June 1999 and endorsed with the following words in his handwriting:
Subject to demonstration that MRSM has adequate funds to finance the operation of mobilization of the OTML Contract 99046.
On 9 June 1999 the prospective tenderers went to Tabubil for what was described as a “Bidwalk Visit”. Messrs Gosling and Hayes attended from SHRM/Eurest, Messrs Moore, Fereday and McGrath from Poons and two representatives from Crocodile Catering. Mr Baitia attended from MRSM. OTML was represented by Messrs. Cox-Martin, Ani, Musio and Artekain.
2.17 MRSM reengages Fenwick – mid June 1999
In the middle of June 1999 Mr Fenwick was reengaged by Mr Baitia as a consultant of MRDC and MRSM in relation to the preparation of the tender documents. His consultancy services were set out in his letter of 16 June 1999. They included ensuring that SHRM/Eurest provided a quality tender document, preparing budgets from the bid document, negotiating the most attractive financial arrangement for the group in association with SHRM/Eurest and outlining and discussing strategies for reducing operational expense. He also offered to ensure that the training program provided would meet OTML’s expectations. He offered to scrutinise the Management Team Proposal and Localisation Schedule. He offered professional advice in relation to the nomination of food supply agents and the putting in place of period contracts. He proposed a fee of A$5,500 per month for a total period of two months and reimbursement of travel, accommodation and meals expenses, together with a vehicle for his use in Brisbane.
Mr Andrew responded to Mr Fenwick’s letter on 18 June 1999. He invited him to provide his services for two weeks to safeguard MRSM’s interest in the preparation and documentation of the tender proposal. The scope of his services was as set out in Mr Fenwick’s letter. Mr Andrew also required that the existing fee of A$4,500 be maintained on the basis that a change to A$5,500 would require a board resolution. On the same day he sent a letter to Mr Gosling, the general manager of SHRM/Eurest, advising that Mr Fenwick would be in Brisbane on Wednesday, 21 June “to team up and work the proposal with you”.
2.18 MRSM and SHRM/Eurest make an agreement – July 1999
On 24 June 1999 OTML issued a notice to tenderers designated “Notice No 3” and on 25 June 1999 another notice designated “Notice No 4”. Notice No 3 stated that preference for employment of catering staff under the new contract had to be given to PNG nationals employees of the current catering contractor. Notice No 4 extended the tender closing date by seven days from 5 July 1999 to 13 July 1999.
On 25 June 1999 Mr Baitia sent a draft Memorandum of Agreement between MRDC and SHRM/Eurest to solicitors, Fiocco Posman and Kua for their comment. The draft was copied to Messrs Hayes and Fenwick and to SHRM’s solicitor, Mr Lewin at Holding Redlich in Brisbane. On 6 July 1999 Mr Hayes wrote to Mr Baitia pointing out that the OTML contract would require undertakings and assurances from the contractor including a requirement that the Memorandum of Understanding between SHRM and MRSM be executed before lodgment of the tender.
In a Schedule of Damages dated 11 August 2005 under the heading “The amount paid to the First Respondent in excess of the cost of the original stock paid by the First Respondent” the following appeared:
14.The First Applicant paid the First Respondent 2,615,065.09 Kina in or about August 2000 for stock in the warehouse at Tabubil. The prices paid for the stock were approximately 29% higher than the prices paid for the same stock later in 2000.
15. The First Applicant’s loss or damage is approximately 758,368.88 Kina ($493,440.61) being 29% of the price paid for the stock.
That claim appears to be based on considerations entirely different from those now raised by the applicants in connection with the payment made for the opening stock. Counsel for the respondents objected to cross-examination of Mr Armstrong that proceeded on the basis that overpayments for stock in fact amounted to K3,661,000. In the event, in closing submissions the applicants claimed a total of K3,987,091.07 for alleged stock overpayments. That total was made up of the following:
(a)K816,735.79 for the over payment on stock in the warehouse at commencement of the contract [SOC 180B]; plus
(b)K2,844,456.00 for the over payment by Eurest (South Pacific) Ltd on its invoices 1311 and 1312; plus
(c)K321,707.65 for the duty component, to be deducted from the K1,798,329.30 stock figure; plus
(d)K4,191.02 for an additional overpayment on invoice 1312.
In the alternative an account of profits was claimed.
I do not propose to allow the applicants to seek the additional claims over and above the claimed overpayment of K816,735.79. The additional payments were not identified in the statement of claim nor in the Schedule of Damages. Nor was any such claim foreshadowed in the document entitled “Cross Referencing of Paragraphs in the Amended Statement of Claim to the Applicants’ Schedule of Damages” which was extracted from the applicants at trial in an endeavour to achieve some clarity about the nature of their claims.
The additional claims were based in part upon cross-examination of Mr Armstrong who was the last witness at trial. The respondents correctly contended that this effectively denied them any real opportunity to make enquiries about the cheques relied upon.
Counsel for the applicants invoked [180E.2] of the statement of claim. That was quite inapposite to the additional matters that are claimed as appears from the sequence of the pleading which are set out as follows:
180. The Second Respondent did not inform or advise the Applicant that:
180.1under the terms of the P&O acquisition the First Applicant was not required to pay for the stock held in the warehouse until October 2000; and
180.2the price of the stock in the warehouse included charges in excess of the cost of the stock to the First Respondent that the Applicants were not required to pay.
The payment of K2,615.065.09 was then pleaded [180A]. The fact that it included charges in excess of the cost of the stock to Eurest that Fubilan was not required to pay was pleaded with a promise of particulars of the excess payments after discovery [180(b)]. The fact that MRSM borrowed K2 million from the ANZ Bank to provide funds to Fubilan to make the payment to Eurest pleaded in [180A] was also pleaded together with the additional allegation that payment was not required to be made until October 2000 [180C]. The pleading then continued:
180D.By failing to inform or advise the applicants of the matters pleaded in paragraph 180 above, the First and Second Respondents breached the duty of care pleaded in paragraph 154, above.
180E.As a result of the First and Second Respondents’ breach pleaded in paragraph 180D above the applicants have suffered loss or damage and continue to suffer loss or damage.
Particulars of First Applicant’s Damage
180E.1The loss or damage suffered by the First Applicant includes the amount paid to the First Respondent for stock in excess of the cost of that stock to the First Respondent and unnecessary cost in making payments made prior to October 2000.
180E.2Further particulars of the First Applicant’s loss or damage will provided after the parties have provided discovery.
Particulars of Second Applicant’s Damage
180E.3The loss or damage suffered by the Second Applicant includes the cost of borrowing funds to provide to the first applicant was pleaded in paragraph 180C above.
180E.4Further particulars of the Second Applicant’s loss or damage will be provided after the parties have provided discovery.
The loss or damage claimed in [180E] as pleaded flowed from an alleged failure on the part of the respondents to advise the applicants of the matters pleaded in [180]. Paragraph 180E.2 did not entitle the applicants to raise additional claims of the kind which they now seek to raise and which seem to bear little relationship to the head pleading in [180]. In respect of the alleged overpayment for opening stock which, in my opinion was not made out on the evidence, I accept that, whether or not it occurred, it was covered by the settlement of 13 February 2001, which was pleaded in the defence at [115].
The various matters alleged under the general heading of “Negligence” in the Management of the Contract in [181] to [185] of the statement of claim related to alleged failures by Eurest in the period February 2000 to October 2000. They did not lead to any discrete claim for damages, but rather into the plea in [194] for the loss of opportunity to Fubilan, in its own right, to make profits by providing catering services in the national market of PNG. The various failings of Eurest alleged in [180] to [185] were covered by the settlement agreement of 13 February 2001. In any event, for the reasons already outlined, these and the other matters said to have been outlined in the KPMG report were not causative of Fubilan’s inability to provide catering services in its own right. It is significant that despite the fact that these failures were alleged against Eurest, OTML insisted on retaining Eurest as the manager in the new catering contract.
As to the contention that under the terms of the acquisition of the Poons’ stock the stock was not to be paid for until October 2000, it was a condition of the tender set out in Notice No 3 issued on 24 June 1999 that:
… if there is a change of contractor, the incoming contractor has one month to arrange transfer of personnel and purchase the stocks of food stuffs and consumables on site and in transit from the existing contractor.
In the event it was not really in dispute that at the time the Management Agreement commenced, Fubilan had no funds at all to finance its operation.
There was a claim for K65,808.90 by way of fees and interest paid by MRSM to the ANZ Bank on borrowings to fund the purchase of the stock in the warehouse. This is actually the only claim which was made by MRSM itself. The respondents point out that the cost of the loan was fully reimbursed at a profit to MRSM. The financial statements for Fubilan for the 11 months ended 31 December 2000 contain a balance sheet entry of K3,531,910 by way of borrowings. Note 11 to the financial statements reads:
During the year the Company has acquired a loan of K3.5 million from Mineral Resource Star Mountains Ltd to finance the operations of Fubilan Catering Services Ltd for the Ok Tedi Catering Contract. Security pledged under this contract is fixed and floating charge over the assets and liabilities of the Company and an unlimited guarantee from Fubilan Catering Services Ltd. Interest charge on this loan is 23.5% per annum with a term of 3 years.
For the preceding reasons, the claim based in negligence in the management of the Contract fails.
20. Breach of contract in relation to rebates
The applicants pleaded clauses 5.13(a) and 5.13(b) of the Management Agreement that Eurest was required to pass on any consideration either directly or indirectly received from suppliers, including, without limitation, discounts, rebates and incentives [198]. The provisions of cl 5.13 were concerned with the engagement by Eurest of subcontractors. They did not, for reasons already set out, have any application to Eurest’s purchasing arrangements. The allegation of breach of contract in relation to the obtaining or passing on of rebates fails. The allegations set out in [206] to [208] of the statement of claim relating to payments made out of the Fubilan bank account, which do not account for rebates, discounts or incentives, are dependent upon the construction of the Management Agreement for which the applicants contended and which I do not accept.
21. Breach of contract in relation to payments of expenses covered by management fee
The applicants pleaded cl 11 of the Management Agreement whereby Eurest was entitled to charge a fixed fee of $225,000 per annum. They then alleged that:
210.The Management Fee includes all expenses that the Second Respondent incurs in the performance or discharge of its obligations under the Management Agreement.
211At all material times from 1 February 2000 the Second Respondent has charged the First Applicant for expenses that the Second Respondent incurred in performing or discharging its obligations under the Management Agreement in excess of $225,000, including, without limitation, salaries, accommodation and travel expenses in relation to employees of the First and Second Respondents.
These unwarranted charges were said to have been paid by Eurest out of the Fubilan bank account at all material times since 11 February 2000. The payments so made were said to have been in breach of cl 4.2(a) and 11.1(a) of the Management Agreement. The loss and damage said to have been incurred was K5,907,896.92 covering a period from February 2000 to August 2005. The applicants also sought an account of the expenses of Eurest’s expatriate employees in relation to travel and accommodation.
The respondents denied the allegations generally and contended that the management fee was payable after deduction of all expenses including salaries, accommodation and travel expenses. In closing oral submissions counsel for the respondents referred to the letter dated 7 July 1999 from Mr Hayes to Mr Yalapan which was included in the tender submitted by MRSM to OTML. That letter set out what was described in it as “the legally binding intention of SHRM (South Pacific) Pty Limited … to enter into a management agreement with Mineral Resources Star Mountains Limited … in relation to the proposed tender by MRSM to carry out catering services for OTML pursuant to the Contract”. Under the heading “Fees and Financing” the letter stated:
C.2.If the tender is successful. MRSM (or its subsidiary) will pay the following to SHRM:
(a)(i) an annual management fee payable by equal monthly instalments on the first day of each month in arrears with the first payment commencing one month after commencement of the Contract. The management fee includes offshore support costs not identified as direct project related expenses; …
The letter was countersigned by Mr Yalapan and witnessed by Mr Baitia. Counsel for the respondents pointed out that the reason for the exclusion of direct project related expenses from the management fee was that they were on-billed to OTML. The management fee was intended to cover costs not recoverable from OTML. The letter of 7 July 1999 forms part of the background to the formation of the Management Agreement against which that agreement may be better understood. The construction of the agreement is to be determined by what a reasonable person in the position of the parties would have understood it to mean. As the High Court said in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 (at 462):
That requires consideration not only of the text of the document, but also the surrounding circumstances known to [the parties], and the purpose and object of the transaction.
Their Honours quoted Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 995-996, also quoted by Mason J in Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 350:
In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.
The question for determination in this case, is what the parties are taken to have intended by the reference in the definition of “Management Fee” to “all of the expenses that the Manager incurs in the performance or discharge of its obligations under this Agreement …”. In my opinion that is a reference to expenses which the manager itself must bear and which were not included in the calculation of moneys recoverable by Fubilan from OTML. It cannot have been intended that expenses which were built into the lump sum payments recoverable from OTML by Fubilan were not able to be charged to Fubilan by the manager. The Management Agreement should be read in this respect in light of the compensation provisions of the OTML Contract which formed part of the factual matrix against which it was drafted.
Section 3 of the OTML Contract dealt with compensation and the provision of, inter alia, monthly lump sum payments for fixed and variable operating and overhead costs. Clause 1.4.1 of the compensation provisions stated:
Item 2.1, Schedule 3-1 specifies the lump sum payable each calendar month as full compensation for Contractor’s operating and fixed costs for the work which shall be deemed to include, but not be limited to management, supervision and all staff costs, burden, overheads and training; motor vehicle procurement, operating and maintenance costs; office furniture, equipment, communication and consumables cost, insurance, and all other costs whatsoever incurred in operation of the contract; but shall specifically exclude landed cost of foodstuffs (including condiments and the like) and all Contractor profit for all of the Services.
Fubilan received the benefit of those costs and as such suffered no loss. The inclusion of expatriate salary costs and expenses in the calculation of the lump sum payments was confirmed by Mr Kroeger in his re-examination when he said:
… all the expats salaries and conditions are basically covered, paid for by Ok Tedi within the lump sum billing, which is done monthly back to Ok Tedi. The lump sum covers travel, salaries, etcetera for expats and also nationals award and staff.
Counsel for the respondents also pointed to cl 11.3 which provides for renegotiation of the management and incentive fees payable under the Management Agreement. The basis for that renegotiation was dependent upon variations in occupancy levels. There was no provision for negotiation based on a greater or lesser component of expatriate salaries and expenses.
In my opinion the construction of the Management Agreement for which Fubilan contends would effectively confer upon it a windfall. It would recover from OTML the monthly compensation calculated by reference, inter alia, to the salaries and expenses incurred by Eurest onshore. In my opinion this cannot have been intended. This aspect of the claim also fails.
Mr Kroeger was also asked about a bonus payment to staff dependent upon financial performance. Such a payment was disbursed by Eurest and backcharged to Fubilan. There was a percentage in the lump sum charged to OTML that was “used as a buffer for things like that in the lump sum”. The word “not” appeared in the transcript of the evidence before the word “used” but the sense of the answer suggested that that was either an error or preceded a break in the testimony.
No objection was taken that this evidence took the applicants by surprise, nor was it challenged or controverted by other evidence.
22. Breach of Contract in relation to competitive activity
The applicants alleged in the statement of claim that at all material times from 1 February 2000 Eurest has directly or indirectly engaged in businesses of a nature similar to or competitive with that carried out by Fubilan within the Contract Area [221]. The relevant activities were said to have been carried out at the Bige dredging site on the Fly River in relation to catering services provided by KCS Limited at Kiunga, operations at the Tabubil Golf Club and at the Tabubil Bakery. In engaging in each of these operations it is said that Eurest breached cl 2.4(a)(ii) of the Management Agreement as a result of which Fubilan suffered loss or damage. The nature of the loss was said to be the consideration, benefit, reward or payment that Fubilan would have been able to obtain in providing the same or similar services. A sum of K1,823,380 was claimed representing K455,845 per annum for four years. In the alternative, an account was sought. In their defence the respondents said that the Bige dredging site activities were not within the Contract Area as defined under the Management Agreement. In relation to the Tabubil Golf Club and Bakery operations, they said that both activities were in place and known to the applicants at the time the Management Agreement commenced. Both were permitted by the applicants at the time and terminated, when requested, in the normal course of business by the respondents.
Mr Poelzl gave evidence in cross-examination that in 2000 Eurest operated a number of sites in PNG and derived revenue from them. They were inclusive of the Tabubil Bakery and Bige/Lotic. A document dated 2 August 2000, tendered without objection from Eurest, showed an annual turnover for the Tabubil Bakery of K2.3 million. It also showed an annual turnover for OTML Lotic of K2.2 million.
Reliance was also placed upon a document obtained from Eurest’s discovery entitled “MONTHLY TRADING SUMMARY” which related to a number of Eurest’s operations including the Tabubil Bakery, Lotic and the Tabubil Golf Club. (X 439) It seems that the claimed profit derived from these sites was calculated as 12% of revenue from each of them. This was the only evidence referred to in closing submissions on this claim along with the reference to the cross-examination of Mr Fereday to the effect that there were two national firms tendering for catering work in PNG with some success. Bige/Lotic was not shown to be within the Contract area.
The evidence, in my opinion, was simply insufficient to establish that Fubilan was displaced by Eurest in relation to its activities in the areas pleaded or that it would have, on a stand alone basis, been able to provide the relevant services and make the profit alleged. This claim also fails.
23. Breach of Contract in relation to inability of Fubilan to bid for subsequent contracts in its own right
The applicants pleaded that it was their intention and that of the respondents and OTML in entering into the OTML Contract and the Management Agreement that Fubilan would have the opportunity during the four year term of the contract to learn enough of the business to be able to bid in its own right for the contract on renewal [225]. It was alleged that there was an implied term of the Management Agreement that Eurest would do “whatever is reasonably necessary to give [Fubilan] the benefit of the Management Agreement and to refrain from doing anything that would interfere with, frustrate or deprive [Fubilan] of the benefit of the Management Agreement” [227]. The applicants alleged that Eurest had not made available or provided sufficient training to Fubilan’s employees to the level necessary for Fubilan to gain the benefit of the Management Agreement [228]. In this respect it was in breach of the implied term [230A]. In the alternative, it was alleged that Eurest’s conduct was in breach of cl 4.2(a) of the Management Agreement [230B]. The statement of claim then alleged the non-renewal of the contract by OTML, a plea which of course has been overtaken by events with the awarding of the new contract involving Fubilan and OTML [231]. The applicants claim that as a result of the breach of the implied term and alternatively cl 4.2(a) of the Management Agreement, Fubilan suffered loss or damage [232]. The loss claimed was the loss of opportunity to make profits in providing industrial catering services in the national market of PNG in its own right [232.2]. It also claimed any fee paid to Eurest for the supervision and management of Fubilan’s conduct in providing catering services to OTML after 31 January 2004 [232.3].
It is not open, in my opinion, to imply the term which the applicants sought to imply. It amounted to a guarantee that Eurest would put Fubilan in a position to undertake the renewed management agreement in its own right. Moreover Eurest had no obligation to train a cohort of executive managers who would put Fubilan in that position. There was no evidence that any personnel with the relevant education and aptitude were available for such training. The evidence of Ms Broadbent, which was unchallenged, indicates that Eurest took its training responsibilities seriously and did what was reasonably within its power to discharge them. Nor in my opinion have the applicants shown any breach of cl 4.2(a) of the Management Agreement which could be said to be causative of the loss and damage claimed.
In the event and for the reasons already given, Fubilan was unable to take the benefit of the Management Agreement in its own right for reasons unrelated to any failures on the part of Eurest to provide training. This claim also fails
24. Breach of contract by failure to comply with directions re JLFS
The applicants pleaded the Product Supply Agreement entered into between Fubilan and JLFS on 19 February 2001 under which Fubilan was to purchase all of its supplies from outside PNG through JLFS. According to the plea, JLFS was to equal or better the prices charged by Eurest and pay a rebate of 10% of the value of purchases within 14 days of payment of any invoice. The applicants pleaded the placement of orders with JLFS in February and March 2001 and Eurest’s subsequent advice to Fubilan that the prices charged by JLFS were in excess of the prices charged by Eurest for the same or similar goods. Then the applicants pleaded that Fubilan requested JLFS to adjust the prices charged for the relevant goods to the prices supplied by Eurest. They pleaded that by a letter dated 8 May 2001 they directed Eurest to place any orders for supplies from outside PNG in accordance with the Product Supply Agreement. They alleged that Eurest was required to comply with this direction. By continuing to place its orders with Eurest (Australia) rather than with JLFS Eurest was said to have acted contrary to Fubilan’s direction and to have breached cl 10.2(a)(ii). It was alleged that, as a result of Eurest’s breach of the Management Agreement, Fubilan agreed to settle its dispute with JLFS on 26 March 2004. The terms of the JLFS settlement were pleaded. It was said that Fubilan agreed to pay JLFS based on prices provided by Eurest with a 10% rebate and to give up any claim for rebates for the balance of the three year term of the Product Supply Agreement, estimated at $900,000. In return JLFS released Fubilan from any claim arising out of Eurest’s breach of the Management Agreement.
The claim was hard to follow. In his closing oral submissions counsel for the applicants handed up a two sheet summary of what were called “the primary claims”. He accepted that the claims set out in the sheet were the only claims being advanced. There was no claim identified in that list in relation to the alleged breach of contract relating to JLFS. Nor were any such damages set out in the closing written submissions. In my opinion there was no substance in this claim and I will simply treat it as not having been pressed.
25. Eurest (Australia) breach of contract re Management Agreement
Under this heading it was alleged that, by a notice of default, the applicants made demand on both respondents for the due and punctual performance of Eurest’s obligations under the Management Agreement and that the respondents had not complied with the demand in that notice of default. It followed that Eurest (Australia) was in breach of the guarantee given under cl 15.1(a)(i) of the Management Agreement. This claim cannot succeed as it depends upon the causes of action for breach of the Management Agreement which, as I have already found, do not succeed. The claim against Eurest (Australia) will also therefore be dismissed.
26. Claim for declaration in reply
In the reply of the applicants to the amended defence, a declaration was sought pursuant to s 87 of the TPA that the settlement agreement of 13 February 2001 was void ab initio. This was on the basis of representations said to have been made to Mr Fenwick by Mr Armstrong that Mr Poelzl was the only person who could deal with the rebates issue. It was pleaded that the settlement document of 13 February 2001 related only to the accounting adjustments identified in the first and second audits and the Deloittes’ audit and did not extend to other matters in issue including the rebates and supply issues. I have already made findings adverse to the conclusion for which the applicants contended in the reply. The further contention in the reply that Mr Fenwick was induced to sign the settlement document by misleading or deceptive conduct on the part of the applicants is rejected and the claim for a declaration refused.
27. Cross Claim
The respondents cross-claim against Morocco and Mr Fenwick for an indemnity in respect of any liability that they may have to the applicants and, alternatively, for contribution under the Law Reform (Contributory Negligence and Joint Tort Feasors) Act 1947 (WA). An alternative cross claim was also raised for contribution by way of equitable contribution. The applicants having failed on all of their causes of action, the cross-claim will be dismissed.
I certify that the preceding six hundred and thirty-six (636) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Associate:
Dated: 9 August 2007
Counsel for the Applicant: Mr P Clifford and Mr A Rumsley Solicitor for the Applicant: Alan Rumsley Counsel for the Respondent: Mr M Bennett and Mr I Curlewis Solicitor for the Respondent:
Counsel for the Cross
Respondents:Solicitor for the Cross
Respondents:Lavan Legal
Mr T Retallack
Maxim Litigation Consultants
Dates of Hearing:
Final Submissions:
13 June – 4 July 2006, 14 July 2006, 25 July – 2 August 2006
11 September 2006
Date of Judgment: 9 August 2007
21
1
0