Hayle Holdings Pty Ltd v Australian Technology Group Ltd

[2000] FCA 1242

FEDERAL COURT OF AUSTRALIA

Hayle Holdings Pty Ltd v Australian Technology Group Ltd [2000] FCA 1242

TRADE PRACTICES – misleading and deceptive conduct – alleged representations during negotiations for, and after completion of, agreement for provision of venture capital – whether, but for the alleged misleading and deceptive conduct, the applicants would not have entered the agreement – whether, but for the alleged misleading and deceptive conduct, the applicants would have gone to the United States in April or November 1995 in search of alternate venture capital – whether the third applicant acted in reliance upon the representations made by the respondent – whether concealment of, or failure to disclose that a condition of the deal had not been withdrawn constitutes misleading and deceptive conduct for the purposes of s 52

DAMAGES – loss of opportunity – damages for loss of a chance - causation – whether, had the applicants gone the United States in November 1995, they could and would have obtained alternate venture capital, and established a successful business in the United States – whether the opportunity to obtain alternative venture capital has been lost, by reason of the respondent’s misleading and deceptive conduct

DAMAGES – damages for trading losses incurred as a result of the postponement of the decision to close down the Sydney operation

Trade Practices Act 1974 (Cth) ss51A, 51A(2), 52

R v Murphy [1985] 4 NSWLR 42 referred to
Watson v Foxman (Supreme Court of NSW, McLelland J, 3 August 1995, unreported) applied
Christofidellis v Zdrilic [1999] FCA 39 cited

Paramedical Services Pty Limited v Ambulance Service of NSW [1999] FCA 548 cited
Jaldiver Pty Limited v Nelumbo Pty Limited (1993) ATPR (Digest) 46-097 cited
Lam v Ausintel Investments Australia Pty Limited (1989) 97 FLR 458 applied
Demagogue Pty Limited v Ramensky (1992) 39 FCR 31 applied
Poseidon Limited v Adelaide Petroleum NL (1991) 105 ALR 25 referred to
Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 applied
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 applied
Bennett v Minister of Community Welfare (1982) 176 CLR 408 applied

HAYLE HOLDINGS PTY LTD & ORS v AUSTRALIAN TECHNOLOGY GROUP LTD & ANOR

NG 1136 OF 1998

HELY J
5 SEPTEMBER 2000
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1136 OF 1998

BETWEEN:

HAYLE HOLDINGS PTY LTD
FIRST APPLICANT

PANCO ENTERPRISES PTY LTD
SECOND APPLICANT

NEVILLE JAMES BROWNE
THIRD APPLICANT

AND:

AUSTRALIAN TECHNOLOGY GROUP
FIRST RESPONDENT

BARRY WESTLAKE
SECOND RESPONDENT

JUDGE:

HELY J

DATE OF ORDER:

5 SEPTEMBER 2000

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.There be judgment for the applicants in the sum of $488,270.

2.There be reserved for further consideration the question of whether any relief should be granted to parties other than Hayle Holdings Pty Ltd in relation to the incurring of a liability to ATG in the sum of $300,000 pursuant to the agreements of 29 January 1996.

3.There be hearing of argument on the question of costs.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 1136 OF 1998

BETWEEN:

HAYLE HOLDINGS PTY LTD
FIRST APPLICANT

PANCO ENTERPRISES PTY LTD
SECOND APPLICANT

NEVILLE JAMES BROWNE
THIRD APPLICANT

AND:

AUSTRALIAN TECHNOLOGY GROUP
FIRST RESPONDENT

BARRY WESTLAKE
SECOND RESPONDENT

JUDGE:	HELY J
DATE:	5 SEPTEMBER 2000
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. At all material times the third applicant (“Mr Browne”) controlled the corporate applicants.  It is not necessary for the purposes of these proceedings to distinguish between the applicants or to examine the corporate structure.  Where appropriate I shall refer to all or any of the applicants simply as “Hayle”.

2. Hayle devised the “HayleSystem”, which it promoted as the world’s most advanced exercise training and monitoring system.  The system involves the prescription, administration and remote audit of a personalised exercise program.  It uses a pager-sized heart-monitor (called the “HeartWatch”) to assess the client’s heart rate and prescribe a heart rate based exercise protocol.  The client exercises (normally brisk walking) while wearing the individually programmed HeartWatch.  The HeartWatch guides and monitors performance of the protocol.  After the client has finished exercising, the HeartWatch communicates, by the telephone, with a remote-coaching centre where a professionally qualified physiologist considers the information thus transmitted and leaves a voicemail message for the client commenting on the progress achieved.  A detailed written report is submitted monthly.  A promotional brochure produced by Hayle includes the following:

   “The HayleSystem™ is like having your own personal trainer living at home ... showing you what to do, helping you do it, and giving you all of the feedback and encouragement you’ll need to stay motivated.”

3. By November 1994 Mr Browne had personally invested more than $3M in Hayle.  He had been the only source of funds for the project.  His sole source of income at that time was the interest which he earned on cash deposits of about $1.5M, which was not sufficient to meet his personal and business commitments.

4. Prior to November 1994 two attempts had been made to launch the HayleSystem in Sydney.  The first was an attempt to market the system through the medical profession.  That was a failure.  The second was an attempt to market the system directly to the public.  The marketing campaign was reasonably successful; the technology was working well, the clients were happy, but there were insufficient clients to cover operational costs.  Hayle was advised by its sales and marketing consultants that a substantial advertising budget would be needed to recruit additional clients.

5. Around mid-November 1994, in the light of those circumstances, Mr Browne says that he made the following decisions:

   -he would not fund a new sales and marketing campaign;

   -for the next few months he would aggressively seek venture capital in Australia and the United States;

   -he would keep Hayle operating hand-to-mouth for a few months in the hope that venture capital could be found.  At the same time he would try to increase the client base without allocating any meaningful sales budget;

   -if by the end of April 1995, the client base had not increased to break even, or he had not attracted venture capital, he would close down operations and continue to seek venture capital or a licensing deal;

   -on no account would he invest any more of his personal funds into keeping Hayle operating.

6. Whether Mr Browne made or adhered to the last of those decisions is one of the many factual issues which arise in these proceedings.

7. Business Plans were drawn up for both the Australian and the USA markets.  The funding which was being sought was $AUD4.8M for the Australian side of the business and $US8M for the United States.  Mr Browne hoped to secure this funding in exchange for a maximum of 49 per cent equity.

8. On 27 November 1994 Mr Browne travelled to the USA to investigate the opportunities there.  On this visit he met (amongst others) Dr Robert Cooper, a successful author and consultant who specialised in “personal-wellness” programs, and Mr Alan Dalfen who was the semi-retired ex-president of the world’s largest manufacturer of “personal fitness” equipment.  In mid-December 1994 Hayle entered into a consulting agreement with Dr Cooper.  Dr Cooper undertook to endorse the HayleSystem and contribute to launching of the HayleSystem in the USA.

9. On 21 January 1995 Mr Browne returned to the USA.  He had a series of meetings with executives of the 3M company.  The object of the meetings was to persuade 3M to fund a trial of the HayleSystem over a twelve month period involving 1,000 employees.  The trial was expected to take place at 3M’s premises in St Paul.

10. In February 1995 Mr Browne approached around twenty Australian venture capital sources.  Interest in the proposal varied, but by the end of February 1995 it was apparent to Mr Browne that none of the Australian venture capital sources were interested in investing in Hayle.  Investment in the USA market would have involved closing down the Australian operation, and concentrating exclusively on the USA market.  It would be necessary for Mr Browne to move to the USA.  He did not have an insuperable objection to doing so, but, given a choice, he would rather not.  His family situation at that time was an obstacle to his relocation to the United States, but it was an obstacle which he claims was capable of being overcome.

11. The first respondent (“ATG”) is a technology commercialisation company investing in early stages of business development of Australian technology, ultimately for commercial use within Australia and internationally.  ATG provided early stage financing to businesses which lacked capital, in return for receiving equity for such investment.  The principal shareholder of ATG is the Australian Government.

12. Mr Browne approached ATG to discuss the possibility of ATG investing in Hayle.  He met with Dr Jessup of ATG on 2 March 1995.  Between about March and November 1995 the parties carried on negotiations for ATG to provide equity capital to Hayle to enable it to exploit the HayleSystem commercially.  As a result of those negotiations, a Shareholders’ Agreement was entered into on 13 November 1995 whereby ATG agreed to inject up to $2 million of equity into Hayle in four tranches.  By January 1996 the relationship between the parties had broken down and the November agreement was effectively determined.  Only the first of the tranches ($300,000) had been advanced.  It will be necessary to return to the detail of these events later in these reasons. 

13. In very general terms, it is Hayle’s case that in the period between 2 March 1995 and January 1996, numerous representations were made to it by officers of ATG which both individually and collectively amount to misleading and deceptive conduct.  Hayle’s case is that if the misleading and deceptive conduct had not occurred, Hayle would have gone to the USA in April 1995 or November 1995, obtained venture capital funding and established a successful business in the USA.  The Sydney office would have closed much earlier than when it actually closed in February 1996.  The pullout of ATG, just ten weeks after agreeing to the project, created an insuperable obstacle to obtaining venture capital in the USA.  Hayle claims damages for misleading and deceptive conduct.  The other causes of action pleaded in the Second Further Amended Statement of Claim (“2FASC”) were not pursued.  It will be necessary to return to the detail of the damages claim, but it includes loss of profits expected to be derived from the USA business, and loss of the capital value of that business, or alternatively, the loss of the chance to derive such profits and capital value.  Losses incurred in connection with the maintenance of the Sydney office until its closure in February 1996 are also claimed.

    The respondents’ business structure

14. In 1995 ATG employed a number of highly qualified people who were called “Business Development Directors”.  The role of a Business Development Director in 1995 was to identify investment projects, work on the development of those projects and assist with the presentation of an Investment Proposal to the Management Committee and the Board.  Amongst the Business Development Directors were Dr Jessup and Dr Westlake.  It was necessary to obtain the approval of the Business Development Director handling a particular project before ATG would contemplate investment in that project.  The Business Development Directors, the Finance Manager (Stephen Robinson) and the Managing Director (Dr Harbour) formed a committee known as the Management Committee which met regularly to discuss existing and proposed investments.  A proposed investment would not be put to the Board of Directors of ATG unless there was a consensus among the Management Committee that the proposal should be put to the Board.  If that consensus was obtained then a proposed investment would be put to the Board for its approval.  Apart from the Managing Director, the Board consisted of non-executive Directors.  Whilst its members were persons of commercial experience, they were not venture capital specialists (other than the Managing Director).  One of the representations on which Hayle relies is a representation that if the Management Committee approved a proposed investment, the approval of ATG’s directors was only a “rubber stamp”.

15. I turn then to the chronology of events insofar as they relate to the dealings between Hayle and ATG which form the basis of the present proceedings.

    The first representation: 2 March 1995, 2FASC par 6

16. It is common ground that before ATG would agree to fund a project, a Business Plan acceptable to ATG would need to be prepared and agreed to, ATG would also need to perform a “due diligence”, and be satisfied with the results.

17. Paragraph 6 of 2FASC alleges that on 2 March 1995 Dr Jessup made the following oral representations to Hayle:

    (a)ATG would not look to the applicants to provide any more funding;

    (b)ATG would definitely be able to fund by 30 June 1995 provided:

    (i)everything was as Browne had told them it was,

    (ii)there were no skeletons in the applicants’ closet, and

    (iii)Browne gave ATG the go-ahead by the end of March,

    (c)if ATG decided to go ahead it would make a clear and definite equity funding commitment of $2 million on day one;

    (d)if ATG’s Management Committee approved the application then the deal was done and the approval of ATG’s Board of Directors was only a rubber stamp.

18. 2FASC par 8 alleges that in reliance on these representations, Hayle continued to negotiate with ATG and did not pursue alternative sources of finance available to it.  In fact, between 12 and 17 March 1995 Mr Browne toured the United States of America with Dr Cooper and Mr Dalfen seeking, amongst other things, to ascertain the level of interest on the part of US venture capitalists.  One of the reasons for this visit was so that Mr Browne could weigh the option of obtaining venture capital in the USA against the option of doing so in Australia.

19. The meeting between Mr Browne and Dr Jessup on 2 March 1995 was the initial meeting between Hayle and ATG.  Mr Browne explained how the HayleSystem operated, and gave some explanation as to why it was that he was seeking venture capital.  There was no specific funding proposal which was the subject of discussion at the meeting.  It was a “getting to know you” meeting, rather than a meeting at which a negotiation took place.

20. The alleged representations are grounded in the following conversation which, on the evidence of Mr Browne (Affidavit 29/5/99 par 43), occurred on this occasion:

    “(d)I said:       ‘There are three things that are absolutely critical to the deal.  The first and most important is that I do not want to personally invest any more into the business.  I’m down to my safety nest-egg.  I will not be involved in any finance which has any form of personal guarantee involved, or requires any further investment from me.  That is an absolutely inflexible position.’

    (e)He said:     ‘ATG is a venture capital company and we wouldn’t expect any personal guarantee.  We’re used to the fact that the entrepreneur already has everything in the deal ... his house, the lot.  So we’re not looking for any more funding from that direction.’

    (f)I said:       ‘But I’m a little different.  I still have available resources but I want it absolutely clear that I will not risk any more on this project.’

    (g)He said:     ‘Fair enough.  I guess you wouldn’t be here talking to us and be willing to give up equity unless you had reached that conclusion.’

    (h)I said:       ‘I just want it absolutely clear that I will not risk any more of my personal funds.  The second critical point is timing.  The business can only survive for another few months so I need to know that a deal with ATG can be funded in that time.  If there’s any chance that you can’t do it that quickly please tell me now while I still have the time to pursue the alternatives.’

    (i)He said:     ‘When it comes to the timing, we are in a position to act faster than any other source of funding you might be considering.  Although we are owned 99% by the Federal Government we have complete autonomy when it comes to investment decisions.  I am a member of a very small Management Committee at ATG.  Once you’ve decided to work with us, I’ll conduct a mini-due-diligence and convince myself that the deal is doable.  I’ll then work with you to clean up the Business Plan and submit the investment application to the Management Committee.  If the Management Committee approves the application then the deal is a done deal.  It still will require formal Board approval but that is only a rubber stamp.  They never have rejected any deal which has been approved by the Committee.  The whole process is non-bureaucratic and entrepreneurial and could be completed in no more than six to eight weeks.’

    (j)I said:       ‘Does that mean that if I give you the go-ahead by end-March then the funding could be completed by the 30^th of June at the latest?’

    (k)He said:     ‘Absolutely!  You have told me that your balance-sheet is very clean and debt-free, and you have no skeletons in your closet, so, providing everything is as you say it is, then we would definitely be able to fund by June 30^th.  Because we are such a small infrastructure with a “rubber-stamp” Board of Directors we can move lightening fast.’

    (l)I said:       ‘It’s not just the cash-flow that makes timing so important.  There’s also the Business Plan for the Australian side of the business.  On the assumption that we’ll get the funding we’re gearing up to launch again this Spring.  When you read the Plan you’ll see what we have in mind.  It’s essential to launch any exercise product in September or early October in order to catch the right market mood.  We’ll need to have the funding commitment locked in place by end June so that the Spring launch will be possible.  A summer or winter launch would be a big problem.’

    (m)He said:     ‘Like I said, I really don’t see a problem with timing providing you give us the go-ahead by end March.’

    (n)I said:       ‘The third and final issue that’s really crucial is having a partner who is clearly committed to the project and the Business Plan.  We’re looking for $4.8 million to fund the Plan in Australia and we would want you locked in for the full amount up front.  There’s no point having a piece-meal commitment.  We want to be able to employ staff, enter contracts and other commitments, and generally be able to plan long-term with the assurance that we have a partner in it for the long haul.’

    (o)He said:     ‘Are you saying that you would expect ATG to fund the full $4.8 million up front?’

    (p)I said:       ‘The actual funds would only need to be provided as needed but the commitment would have to be up-front ... no escape hatches.  I don’t want to be in a “suck-it-and-see” relationship.  A business can’t survive if it lives in constant fear of abandonment.’

    (q)He said:     ‘First, I’m sure I’ll convince you that both of us are better off if Hayle only gets $2 million from ATG and the balance from another round of financing.  You’ll keep more equity that way and the approval will be a lot easier for ATG if it is kept to $2 million.  When it comes to ATG’s commitment for the $2 million, I can assure you that if we decide to go ahead with you, we will make a clear and definite commitment for the full amount up-front.  Our only way out will be if we discover that you’re a crook or that you failed to disclose something critical to us about the business.  In other words, if you’ve played it straight with us, we’ll be locked in for the full $2 million.’

    (r)I said:       ‘I have no problems with that.  If we go ahead with this deal you’ll find out in the due-diligence that we’re squeaky clean and everything I’ve told you will prove to be accurate and truthful.  It would seem that ATG can handle my three concerns: no further personal investment, funding by end June, and a locked-in commitment.  ATG is certainly an attractive option but I’ll need some time to weigh up the alternatives before agreeing to give you exclusivity and cut off other possibilities.’

    (s)He said:     ‘That’s understandable.  We don’t want to invest any time in investigating the project unless we have an exclusivity arrangement with you.  Why don’t you go to the US next week as planned and give me a call when you get back.’”

1. Dr Jessup denies the making of the pleaded representations (Jessup Affidavit 26/7/99 pars 9-10).  His evidence with respect to the three “critical” matters can be summarised as follows: first, Mr Browne did not inform him at this meeting that he did not wish to invest further funds in the project.  At another meeting, at least a month later, in response to an enquiry made by Dr Jessup, Mr Browne said that he was not funding the project because he had a specific level of wealth which he wished to retain, and he did not wish to go below that.  Second, he did not give the timing assurances for which Mr Browne contends.  “If Mr Browne had said words to the effect of 43(h) I would have told him that ATG could not meet his timetable” (Jessup Affidavit 26/7/99 par 10.4).  Normally it takes about three months to complete a deal after a Letter of Intent is signed, and some time would be consumed in getting to that stage.  Third, he did not tell Mr Browne that ATG would be prepared to invest unconditionally the total sum of its intended investment.  ATG’s philosophy, when investing in this type of project, was to insist on milestones and tranching.  It was his practice, at initial meetings with investment sources, to inform them of this policy:

   “I would have said to Mr Browne words to the following effect: ‘When investing in these types of projects it is normal for ATG to insist upon milestones being met at various stages of their investment and to invest by tranches’.  He said: ‘We will need the money up front.’  I said: ‘Well it’s just not negotiable from ATG’s point of view.  ATG will insist on this type of arrangement.’”
   (Jessup Affidavit 26/7/99 par 10.7)

   Mr Browne denies this conversation, and says that the first hint of tranching occurred when Dr Jessup sent his “Expression of Interest” letter on 28 April 1995 (Browne Affidavit 21/10/99 par 15).  Dr Jessup says (T 800-801) that had the issue of a commitment for the funds up front arisen at this meeting, “it would have been a huge problem to me at that stage, and if he had [raised it] I would have totally rejected it.”

2. ATG’s “Management Business Plan” contains a section on funding.  It includes the following:

   “Depending upon the requirements of the investee, the ATG prefers to allocate funds on an incremental basis, with cash injections based upon achievement of agreed business milestones.”  (AB 1/69)

   Dr Jessup’s evidence was (T 789) that in fact ATG’s practice was more rigid than the document suggests.  Except in the case of a small investment, there is no way a proposal would get past the Management Committee without milestones.

3. Dr Jessup’s evidence on the issue of “rubber stamp” is: “At no stage would I have said the Board would merely rubber stamp any investment.” (Jessup Affidavit 26/7/99 par 10.5)  Dr Jessup was aware that the Board customarily took a “hands on approach” and might insist on changes to proposals recommended by the Management Committee.  Whether or not Mr Browne was told that the Board was a rubber stamp may have some bearing upon timing and risk.  Mr Browne does not suggest that had he been informed that the Board was not a rubber stamp, he would have terminated his negotiations with ATG and sought to raise finance in USA (T 387). 

4. Dr Jessup made a file note of this meeting about one month later, on 1 April 1995.  It includes:

   “Wants

   ·    financial partner;

   ·    help with running business;

   ·    operational partner.

   Actions
   NB will visit US;
   GJ to visit Hayle.”

5. I propose to defer resolution of credibility issues and conflicting testimony until the completion of the chronology.

6. Mr Browne’s affidavit evidence is that the statements made by Dr Jessup at 2 March 1995 meeting were “very significant” to him.  In particular:

   -it was “fundamental’ that ATG accept his requirement that he would not be called upon personally to contribute further funding to the venture in any way;

   -it was of “critical importance” that the ATG funding could be completed by 30 June 1995; [but, as a businessman, Mr Browne was used to making an allowance for slippage in timetables (T 210)].

   -it was of “vital importance” that Dr Jessup understood and agreed in principle to the concept that Hayle needed to have the full $2 million committed up front.

   (Affidavit 29/5/99 par 44)

7. But for the representations by Dr Jessup at this meeting, Mr Browne claims in par 44(g) of his first affidavit that he would have closed Hayle’s Sydney operations and pursued venture capital in the USA, as it was his belief that he had otherwise exhausted all possibilities in Australia.  At that time there was no identified source of venture capital funds in USA available to Hayle.  The March 1995 Business Plan for USA (AB 1/255) indicates that Hayle had not then decided whether to proceed using venture capital or some other financing arrangement.

8. Mr Browne’s letter of 2 March 1995 to ATG, written after this meeting, simply says (1/279):

   “After our initial meeting it would seem that we may be able to work together.

   I have enclosed the copies of the patent documents and our promotional video.  I will send you a copy of the latest US Business Plan next week.

   I will give you a call after I return from New York on March 22^nd.

   Thank you for your time and best regards.”

9. Whilst Mr Browne says that he relied upon the matters referred to in par 26 above to shape his own conduct (T 197), there is no reference to any of those matters in the somewhat bland letter of 2 March 1995.  The letter is consistent with Dr Jessup’s evidence that it was “a very much preliminary, do I like the product; do I like the market type of meeting” (T 793).

10. On 20 March 1995 Mr Browne wrote to Mr Dalfen enclosing business cards received on the USA trip (AB 1/283).  He said he was “going to let the dust settle for a couple of weeks before suggesting our next move”.  A couple of short lists should be developed, one for venture capital sources, another for strategic partner sources.

    Second representation: 24 March 1995, 2FASC par 9

11. Paragraph 9 of 2FASC alleges that on 24 March 1995 Dr Jessup made the following oral representation to Hayle:

    “ATG saw no problem with funding by the end of June 1995”.

    It is alleged that in reliance on that representation Hayle continued to negotiate with ATG, and did not pursue other sources of finance.

12. The evidence of Mr Browne on which this representation is based (Affidavit 29/5/99 par 50) is a phone conversation on 24 March 1995 when the following conversation took place:

    “(a)Browne:          ‘I’m confident I could get funded in the US but it would mean closing Sydney and I’d prefer to get Australian finance and keep Sydney operating.  But timing is everything.  Are you certain we can fund by June 30th?’

    (b)Jessup:           ‘I’ve looked through all of the material you sent to me and it all looks fine.  I’d like to visit you at the Hayle office next Friday and go over everything.  I’ve already briefed the Management Committee and they are supportive so I really don’t see any problem with funding by end-June.’”

13. In par 51 of his affidavit, Mr Browne describes this conversation as an assurance by Dr Jessup that funding could be completed by 30 June 1995.  That strikes me as an exaggeration of what Dr Jessup is alleged to have said.  Mr Browne says that the assurance was vital to him.  It reaffirmed to him that the option of funding through ATG continued to be very viable and it encouraged him to keep Hayle’s Sydney operation going.  It also convinced him to lessen the focus on the USA option and to continue to devote time and resources to pursuing the ATG deal.  Without that assurance as to timing, he says that he would have closed Hayle’s Sydney operations, and pursued venture capital available in the USA, as he believed that he had otherwise exhausted all the possibilities in Australia.  But there was an element of negotiating posture (T 209) in his assertion that timing was everything.  At that time Mr Browne did not have any other negotiations for venture capital going on.  Apart from ATG all he had (T 218) was “a couple of expressions of sort of very tentative prima facie interest” in the USA.

14. Dr Jessup denies the making of this representation.  He says it would be impossible to commit to funding within a three month period.  He says that he never commits to a date, as distinct from working towards a date (T 805, 807).

    Third representation: 31 March 1995, 2FASC par 12

15. Par 12 of 2FASC alleges that on or about 31 March 1995 Dr Jessup made the following oral representation to Hayle:

    “ATG would go ahead on the basis of providing equity funding commitment of $2 million on day one.”

    The context in which this representation is said to have been made is that on 31 March 1995 there was a meeting between Mr Browne and Dr Jessup at the Hayle office in Double Bay.  There was a discussion of issues which needed to be resolved before ATG could issue a Letter of Intent.  Those issues were:

    -the Hayle Business Plan called for $4.8M investment but Dr Jessup wanted ATG to commit to $2 million only, and have another round of financing later on for the remaining $2.8M;

    -Dr Jessup needed to know how much equity Mr Browne was prepared to give up in return for ATG investment of $2 million;

    -Dr Jessup would like Hayle to fully capitalise all of the outstanding loan accounts of $4.536M.

    Mr Browne alleges (Affidavit 29/5/99 par 52) that the following conversation then occurred:

    (c)Browne:          ‘You’ve convinced me that it is in both of our interests to split the $4.8 million funding requirement into two tranches, an initial $2 million from ATG and the next $2.8 million from other sources.  I can see that I will lose less equity that way.  I will agree to ATG reducing its commitment of $2 million but only if the full $2 million is committed on day-one.  It’s vital that ATG is clearly making an unequivocal commitment to the project.  If this happens we won’t have any trouble getting the additional finance.’

    (d)Jessup  :          ‘Normally we would want to split our investment into a couple of tranches but I guess we’re already splitting the $4.8 million so I understand the point you’re making about needing to show a clear commitment and I can’t see any great problem committing the full amount up front.’

    (e)Browne:          ‘OK.  We seem to be on the same wave length.  I’ll get back to you next week about the loan-capitalisation issue and the business valuation.’”

    Mr Browne described the statement which he attributes to Dr Jessup in (d) above as “Jessup’s assurance ... that the full $2 million would be committed up front” (Affidavit 29/5/99 par 53).  Again, that strikes me as an exaggeration of what Dr Jessup is alleged to have said.  Mr Browne says that this “assurance” continued to encourage him to pay little attention to the USA option, and he claims that he kept the Sydney operation going on the basis of the second and third representations, but for which he would have closed Hayle’s Sydney operations, and pursued venture capital available in the USA.

16. Dr Jessup denies the making of this representation.  He says that had Mr Browne asked for a commitment of the full amount up front, “it would have been a huge problem to me at that stage”, which he would have totally rejected (T 801).

17. Mr Browne always knew that until ATG had committed to a transaction with Hayle there was a risk that ATG would reassess the whole deal and either decide not to go ahead at all, or only on terms different from those which Mr Browne wanted (T 391-392).  But he gave the following evidence at T 392:

    “If you had been told at the outset well I am happy to think about commitment for $2 million on day one but that’s going to depend upon consideration and we’ll have to talk about it, don’t count on it.  You wouldn’t have walked away from ATG then would you? --- I believe I would have, yes.
    ...

    ... So that the notion that you would have on 31 March started to close down the operation already being drip fed in Sydney and go to America because you were told that you couldn’t count on a commitment of $2 million day one that that would have to be thought about and considered.  That is just unrealistic, uncommercial and not true, do you agree? --- No, I don’t.”

18. On 1 April 1995, Dr Jessup prepared a file note of the meeting of 31 March 1995 (AB 1/294).  That file note includes the following:

    “Financial
    Prepared to modify plan to reflect a $2 million investment.
    Will capitalise the $4 million loan (approx $3.5M in cash and rest in salary) but wants to hold loan for up to $500K spent this year.
    Not sure about salary but agrees should be conservative.
    Will think about valuation.
    Would like to offer 15% of US company to Robert Cooper for his help in US (he set up key meetings).
    Action:
    Call next week concerning valuation and salary.”

19. On 1 April 1995 Dr Jessup wrote to Mr Browne (AB 1/297) as follows:

    “Our brief meeting was most productive and I think we should be able to proceed into due diligence if we have a similar view as to valuation.  I look forward to your thoughts on this.  I hope to be able to confirm our interest in writing by the end of this week.  As discussed, I will be requesting a period of exclusivity during which we can conduct due diligence since we incur significant expense during this period.  Enclosed are the papers you lent me. ...”

    Included in those papers was the Hayle Business Plan as it then stood with respect to Australia, and the Business Plan as it then stood in relation to the USA.  The Business Plan for Australia was predicated upon a much larger investment than the AUD$2 million which was the subject of the discussions between Dr Jessup and Mr Browne.

20. On 4 April 1995 Hayle wrote to Dr Jessup and raised the issue of repayment of loans (AB 1/298).  There were two loans which he did not wish to capitalise: first, funds invested between 1 January 1995 and the closing date (on 4 April this fund then stood at $US450,651, with the last $US150,000 going in on 31 March 1995); second, unpaid salary expected to be around $1,250,000 by 30 June 1995.  This letter also stated that when seeking the original $4.8 million for the Australian operation, Mr Browne was willing to lose 30 per cent of the equity, but he intended to keep the foreign scene separate.  He now accepts that ATG’s investment must apply to both the Australian and international operations.  He suggests that ATG should lift its initial investment to $2.75 million which, using the $4.8M = 30% equity formula, would mean that ATG’s equity would be 17 per cent.  This letter contemplated a closing date for the proposed transaction of 30 June 1995, but contains a statement that Mr Browne “would need estimate a likely closing date” which is a curious statement if the first and second representations were made.

21. On 28 April 1995 Dr Jessup wrote to Mr Browne listing factors on which the parties would need to agree prior to ATG entering into due diligence.  The letter included the following:

    “ATG would potentially invest up to a A$2 million in equity in the company.  Normally we would tranche such an investment over a period of time with subsequent tranches being committed subject to milestones being achieved.
    (emphasis added)

    We understand the company requires more than this and I would propose that the initial $2 million be used to prove the product in the market and then seek further funding at an increased value.  This would minimise dilution for the shareholders and ATG would be keen to assist in this process.

    We prefer to have a modest salary for executive shareholders so their financial gains come as a shareholder rather than as an executive.  I propose a package of $150,000 for yourself as Managing Director.

    On the issue of loans, we have difficulties with repayment of shareholder loans as a principle.  This cash has produced a value which is reflected in the valuation of the company.  Unless there are urgent cash flow considerations, we are prepared to negotiate a structure which will increase your equity as long as the company has met certain milestones.  (emphasis added)

    The letter also noted that ATG had based its structure on a 35 per cent equity.  ATG and Hayle will prepare a Business Plan incorporating five year summary financial forecasts prior to any investment by ATG.  Hayle agrees to provide ATG an exclusive period of three months from the date of acceptance of the Expression of Interest.  If ATG decides not to proceed with an investment ATG will bear its own expenses.  If Hayle rejects a firm offer by ATG to invest made by ATG within the spirit of this letter, then Hayle will bear ATG’s expenses.  ATG’s investment will be conditional on completion of satisfactory due diligence including agreement of a final Business Plan and approval from its Board of Directors. 

22. The letter further noted that the Shareholders’ Agreement would include a provision (the “Adverse Trading Event condition”) whereby ATG could assume control of the company if the monthly management accounts project a negative cash flow in the following three months which cannot be met from existing sources of committed finance, and the Board cannot agree on a financing and Business Plan to redress the situation which is acceptable to ATG.

23. On 5 May 1995 (AB 1/305) Mr Browne responded to that Expression of Interest stating his thoughts on the key points.  In that letter Mr Browne expressed a hope that ATG did not mean that it intended to tranche the first $2 million.  Mr Browne said that he believed that the co-authored Business Plan, combined with the controls which ATG would have through the Shareholders’ Agreement (ie the Adverse Trading Event option), would more than mitigate any need to tranche the initial investment.  There was no protest that tranching was inconsistent with the first and third representations.  Mr Browne stated that he wanted ATG to consider allowing two loan accounts to survive: $1,250,000 representing unpaid salaries as at 30 June 1995 and $630,000 approximating the funds loaned so far in 1995.  Apparently $630,000 is the AUD equivalent of the $US450,651 referred to in the letter of 4 April 1995.

24. The points made in the Expression of Interest letter in relation to the Shareholders’ Agreement (which contained the Adverse Trading Event condition) seemed OK, but Mr Browne saw no point in getting into the detail “until the basic deal points are agreed.”

25. The letter of 5 May 1995 also included the following:

    “5.EXCLUSIVITY:          We would need to agree a ‘drop-dead’ closing date of 1/7/95.  There are a number of reasons for this: a new financial year is a great time to change equity: Spring is the ONLY time to launch a health and fitness product; it is not healthy for the business to be in limbo for extended periods; we cannot afford to be in a non-negotiating mood for too long ... it would take time to revive the alternative sources of capital.”  (emphasis added)

    The letter described ATG as being the most attractive of the current options.  It sought a response.  “Both of us need to know if we have a deal so that we can get moving ... one way or the other!”.

26. Mr Browne does not seek, by the letter of 5 May, to call in aid the first and second representations, on the faith of which Mr Browne says that he did not pursue venture capital opportunities in USA, as reasons why there was a need to agree upon a “drop dead” closing date of 1 July 1995.  If those representations were made, one would have expected Mr Browne to have invoked them in support of the supposed need to agree upon a “drop dead” closing date.

27. By the time of this letter, the basic deal points had not been agreed, and neither party could know whether a deal would eventuate.  Mr Browne knew that there was a risk that ATG would reconsider the matter (whether in the light of further information or not) and decide to do the deal or do it on different terms to those discussed on 5 May (T 394).  He also knew that there was a risk that ATG would walk away from a “deal” if it was not legally binding (T 189).

    The fourth representation: 5 May 1995, 2FASC par 13

1. Paragraph 13 of 2FASC alleges that soon after 5 May 1995 Dr Jessup made the following oral representations to Hayle:

   (a)the only way to get the deal done quickly was to split the $2 million into two $1 million tranches;

   (b)there would be a very simple milestone for the second tranche;

   (c)ATG would only not pay the second tranche of $1 million if there was something it had been misled about by the applicant.

   Dr Jessup accepts (T 780) that he told Mr Browne that milestones were essential to ATG’s investment processes.  Otherwise he denies the representations alleged.  Mr Browne says that he did not regard the suggestion that the funds be split into two tranches as a meaningful departure from Dr Jessup’s earlier assurances that the full funding would be committed up front (Affidavit 29/5/99 par 60).  Mr Browne did not walk away from ATG, yet the evidence referred to in [37] above suggests that he would have walked away if not assured of a commitment for $2 million on day one.

2. May was a very preliminary stage of the negotiations.  The Board of ATG did not then have before it all the facts and circumstances in relation to the proposal which were germane to an assessment of ATG’s best interests (T 394-395).

   Fifth representation: 12 May 1995, 2FASC par 16

3. Par 16 of 2FASC alleges that on 12 May 1995, by letter of that date, ATG represented to Hayle that:

   (a)tranche milestones would be set which were readily achievable, and

   (b)the first tranche milestone for $1 million would be upon completion of documentation and the agreed Business Plan.

4. The letter of 12 May 1995 contained Dr Jessup’s comments on Mr Browne’s letter of 5 May.  It was consequential upon the phone conversation shortly after 5 May 1995 which concluded with Mr Browne suggesting that Dr Jessup should put something in writing (Browne Affidavit 29/5/99 par 59).  The letter included the following:

   “INVESTMENT TRANCHES

   As discussed, we need to tranche according to milestones, but these milestones should be set so they are readily achievable.

   I suggest the following:

   Tranche          Amount  Milestone

   1               $1 million                   Completion of the documentation
     Final agreed Business Plan

   2               $1 million                   Hire marketing director
     Sign US distributor with orders for
     5,000 units
     Sales is within 30% of the final
     agreed Business Plan
     Profit is within 30% of the final
     agreed Business Plan

   The timing will depend on the cash flow in the final agreed Business Plan”

5. The letter also indicated that retention of the $630,000 loan account was probably acceptable from ATG’s point of view.  Dr Jessup suggested that the initial tranche of $1 million would be for 20 per cent equity and the second tranche of $1 million would be for between 15 and 5 per cent equity depending on the financial performance of the company.

6. Under the heading “Exclusivity” the following appears:

   “I would plan to go to the July Board meeting so could aim to commit by mid July.  Documentation could take 2-4 weeks.”

   Thus ATG did not agree to the “drop-dead” closing date of 1 July 1995 referred to in the letter of 5 May 1995.  Dr Jessup regarded this requirement as simply a negotiating stance (T 811).  That is consistent with Mr Browne’s own approach.  At T 225, he gave the following evidence:

   “So when you used the expression ‘bluff’ and ‘chickened out’ do you mean that having bluffed that you would walk away from negotiations if he did not agree to a drop dead closing date of 1 July ’95, he having refused to give that agreement, you chickened out and moved away from a position which you had described as a drop dead one? --- That’s correct, yes.

   You would agree, would you not, as an experienced businessman and negotiator, that that sent a message to Dr Jessup at ATG about your determination to stick to things which you had maintained were absolutely critical? --- It is always dangerous to say something and then not carry it out, yes.

   That’s exactly what you did by your language, hyperbolic or otherwise of drop dead on 5 May, isn’t it? --- Yes.”

7. ATG claims that insofar as the letter of 12 May 1995 contains representations as to future matters, there were reasonable grounds for making them, in that nothing was known to Dr Jessup at that stage of the negotiations which would indicate that the milestones would not be readily achievable.

8. Dr Westlake says that it was not ATG’s normal practice to set milestones that are easily achievable, but based on the Business Plan, the milestones referred to in this letter were achievable (T 573).

9. Over a period including April and going into May 1995 it became apparent to Mr Browne that funding by 30 June 1995 was not going to happen (T 219).  In the letter of 12 May 1995 the timing was expressed in somewhat tentative language (T 220), and Mr Browne appreciated that there was a risk of slippage (T 220).  By 12 May 1995 Mr Browne knew that funding was not going to occur by 30 June 1995 (T 222).

10. As at 12 May 1995 the US venture capital market was still an available option (T 226).  However, Australia was the more attractive of the two options for both business and personal reasons (T 227), including the cachet of Australian Government support.

11. Even though Mr Browne knew as at 12 May 1995 that funding by 30 June 1995 would not occur, he continued his negotiations with ATG directed towards reaching an agreement in preference to making an approach to the American venture capital market.

12. On 16 May 1995 Mr Browne wrote to ATG (AB 1/309).  The letter asserted that the idea of splitting the $2 million into two tranches came as a bit of a shock.  The letter stated:

    “When you explained that holding back half of the $2 million would expedite the due diligence, I could see the logic of your suggestion.  Even though the second million would be needed quite soon, you would have the equivalent of another due diligence period to ensure our representations to you had been accurate.  Obviously that would speed up the initial due diligence.  Because I know we are ‘squeaky clean’ I have no problems with doing everything possible to give you comfort regarding the representations we have made, and will be making, to you.  Now that I have received your FAX I am worried that you not only see the tranching as an ongoing due-diligence but also as an opportunity to re-assess risk and I’m not sure if that is appropriate.  Frankly, if we had an order for 5,000 units from the US, we wouldn’t need to use equity to raise funds.  Instead, we would be talking to a bank about working capital finance.

    Hiring a Marketing Manager is not a problem.  We are in total agreement on the need and it falls into the category of a representation we would have made to you and one which is completely within our control to honour.  Likewise, being within 30% of the Business Plan is really not a problem either.  The milestone-test will be applied so soon after we co-author the plan I can’t imagine being too far out.  I’m not sure such a milestone means too much.  If we were talking about a few years down the track I could understand, but the second million will be needed within several months of the first.

    In summary, I can live with a few ‘milestones’ needing to be met between the first and second tranches but I’d prefer the concept to be that you are using the two tranches for additional comfort regarding our representations and warranties so that the deal can be expedited.”

13. Other points made in the letter included that:

    -the $630,000 loan could be repaid as suggested without any problems;

    -loans made to Hayle in the period between signing the Letter of Intent and receiving the ATG funds should be considered as bridging loans and repaid at closing.  An upper limit could be agreed upon.  This was a new requirement;

    -ATG’s $2 million should buy 20 per cent of the business, but the equity jumps to 35 per cent if performance milestones are hit within three years.

14. Under the heading “Timing” the following appears:

    “Would the following timetable be workable?

    (a)      Agree the main points (points in this letter) by May 18th.
    (b)      Agree the other points in your FAX 28/4/95 by May 25th.
    (c)       Sign Letter of Intent by May 31st.
    (d)      Complete due-diligence by June 23rd.
    (e)       Complete revised Business Plan by June 23rd.
    (f)       Obtain Board approval on July 7th.
    (g)      Complete Letter of Offer by July 11th.
    (h)      Complete documentation & fund 1st tranche by July 31st.

    Sixth representation: 16 May 1995, 2FASC par 19

15. Paragraph 19 of 2FASC alleges that soon after 16 May 1995 Dr Jessup orally represented to Hayle that:

    (a)it would not set milestones for tranching unless it was certain the applicants would meet them, because milestones were only necessary to satisfy ATG’s internal processes and were not meant to be a genuine trigger for funding;

    (b)it was certain that their agreement with the applicants would be concluded by 31 July 1995.

    Dr Jessup denies these representations.  He claims to have told Mr Browne that he needed the milestone concept to be included in the proposal to obtain Management Committee approval (Jessup Affidavit 26/7/99 par 17).

16. Mr Browne says (Affidavit 29/5/99 par 65) that Dr Jessup assured him that the $2 million was really being committed up-front, that the two tranches were only necessary in order to expedite the approval process, and that he was certain of funding by 31 July 1995.  Based on those assurances Mr Browne says that he was no longer considering the USA option, and he kept the Sydney operation going in preparation for executing the Australian side of the Business Plan once the ATG funding was available.

17. On 25 May 1995 Dr Jessup wrote to Mr Browne setting out what he described as ATG’s “final position” on the outstanding issues (AB 1/312).  The letter stated:

    “1.We are interested only in 35% equity for $2 million investment.  On reflection, the idea of having a varying value for the second tranche is theoretically possible in some cases, but the speed of tranching (that is very fast) will not provide any real assessment of progress in the case of Hayle.

    2.The loan of $630,000 being repaid over 36 months is acceptable subject to tax advice of both parties.

    3.All of the loans should be capitalised.

    4.We are prepared to agree to an immediate repayment of loans up to an agreed limit after the time of signing a Letter of Intent.”

    Dr Jessup said that he hoped Mr Browne might still be interested, but understood that he may be less than happy with this approach.

18. On 1 June 1995 Mr Browne wrote to Dr Jessup (AB 1/323).  The letter confirms Mr Browne’s understanding that tranching is only being used as an extension of the due diligence, and not as a means of reassessing risk.  Statements were made in relation to the loan accounts, and business valuation, on which the parties were still “stuck”.  Concern was expressed about timing as the Spring launch is “critical”.  The launch strategy will differ depending on whether or not ATG is Hayle’s partner.  Hayle needs to know one way or the other so it can decide upon strategy and put it in motion.  A timetable is proposed (“is the following agreeable to you”) commencing with the reaching of agreement on all points of the Letter of Intent by 6 June, and concluding with funding of the first tranche by July 31.  Dr Westlake (T 575) rejected a suggestion that what Mr Browne was saying in this letter was that ATG needed to make up its mind about whether to invest or not, and that ATG should not allow subsequent events to influence whether the money would continue to flow.  Dr Jessup said:

    “I believed he was trying to negotiate to the milestones where they are effectively meaningless and that was not acceptable to us, but I regarded that as a negotiation.”  (T 814)

    Seventh representation: 5 June 1995, 2FASC par 22

19. Paragraph 22 of 2FASC alleges that on or about 5 June 1995 Dr Jessup orally represented to Hayle that:

    (a)there would be two $1 million tranches but the milestones for the second $1 million tranche would be very easy to achieve and was not really a milestone but a way of extending the due diligence process so ATG could expedite the funding of the first $1 million;

    (b)the deal would be concluded and funded by 31 July 1995;

    (c)the approval of the ATG Board of Directors would be a rubber stamp of the Management Committee’s decision.

20. There was a meeting between Mr Browne and Dr Jessup on 5 June 1995 at which Dr Jessup indicated that ATG wanted 35 per cent for its $2 million investment, but that he was prepared to recommend a formula whereby ATG’s equity decreased if Hayle performed better than the Business Plan, and increased if Hayle did not perform up to the plan (Browne Affidavit 29/5/99 par 68).  In his affidavit, Dr Jessup denies making each of the representations alleged (Jessup Affidavit 26/7/99 par 18).  Dr Jessup said that whilst he had the “most memory” of the first and second meetings with Mr Browne, after that he did not remember a lot of specifics, just general conversations (T 783).  He did not have a specific recollection of the meeting of 5 June 1995 (T 814), but maintained that he did not see how he could have said matters which were attributed to him (T 815).   The following was put to Dr Jessup (T 815):

    “I suggest you said to him, that so far as the second tranche was concerned, it was ‘really just a way of extending the due diligence process, so we could expedite the funding of the first million’.  That’s right, isn’t it? --- I would never say that, and I have never said such a thing.”

21. Mr Browne says that it was at this point that he made the decision to pursue the ATG funding option to the exclusion of funding in the USA, and it was Dr Jessup’s assurances, particularly as to the commitment of the full $2 million up front and the 30 June, and subsequently 31 July timing, coupled with his requirement of exclusivity, which finally convinced Mr Browne not to pursue the USA option.

22. By mid June 1995 Mr Browne knew that funding was not likely to occur by 31 July 1995 (T 254).  His evidence in cross-examination was that if he had known on 1 June 1995 that ATG could not be sure of completing on 31 July 1995, he would have gone to the United States of America (T 255).  Nothing had happened in the intervening fortnight to make America less attractive, but he did not go to USA in mid June in search of venture capital.

23. Mr Browne rejected a suggestion that his failure to go to America in mid June indicates that on 1 June, he did not rely on 31 July being achieved as something which put him off going to America (T 255).  But apart from making statements such as “I was just married to try and make this happen” and “I’ll hang in there because they are saying very positive things”, he could not explain why he did not then go back to America (T 256).

    Eighth representation: 16 June 1995, 2FASC par 25

24. Paragraph 25 of 2FASC alleges that on or about 16 June Dr Jessup made the following oral representations to Hayle:

    (a)ATG’s Management Committee had approved the deal and that was good news;

    (b)Dr Jessup had been replaced by Dr Barry Westlake to work on the project on behalf of ATG but this would only delay completion of contracted funding for a week or two.

    Dr Jessup asserts (Jessup Affidavit 26/7/99 par 23) that what he said to Mr Browne was that the Management Committee is agreeable to undertaking due diligence.  “However, I am too busy to assist with that process.  It is proposed that Barry Westlake be the new Business Development Director involved with your project.  He is an experienced and good manager.  He used to have his own business.  He already has a good understanding of the deal and the business anyway.”  Mr Browne said that he was worried about there being any delays, to which Dr Jessup responded: “there may only be a minor delay but [ATG] still had to go through due diligence.  [Dr Westlake] will have more time than me to deal with the matter”.

25. Dr Jessup says that at this stage “we didn’t have a deal structured yet”, and all that the Management Committee could decide, and had decided was that the matter should be proceeded with (T 816).  Dr Westlake said (T 589) that the Management Committee: “had approved for us to continue down our process.  Dr Jessup accepts (T 816) that he may have told Mr Browne something along those lines.  At this stage, a Business Plan applicable to ATG’s proposed investment had not been prepared, and Mr Browne never believed that ATG would commit itself before it was content with the Business Plan (T 249).

26. At this point, Mr Browne contends (Affidavit 29/5/99 par 71) that he understood that the Management Committee had approved the deal, and bearing in mind that the Board was only a rubber stamp, he now believed that the ATG deal would definitely happen.

    Ninth representation: 21 June 1995, 2FASC par 28

27. After 16 June 1995 Dr Westlake took over the matter on behalf of ATG.  It is common ground that about this time Dr Westlake said to Mr Browne that he was not happy with the Business Plan which had been presented to Dr Jessup, and that it needed to be reworked.  The plan presented to Dr Jessup was based on a direct marketing plan to consumers whereas Dr Westlake wanted a Business Plan based on marketing to corporate customers in the USA for the benefit of their employees.  Dr Westlake wanted the Australian operations to be confined, with the major part of the business to be conducted in the USA.  Substantial amendments needed to be made to the Business Plan.  In his affidavit of 13 August 1999 (par 4) Dr Westlake claims to have said to Mr Browne:

    “Any deal must be approved by the Working Committee and then presented to the Board of ATG for approval.  The Working Committee won’t present a deal we expect the Board to knock back.  Anything we are doing or discussing will ultimately be subject to due diligence and Board approval.  I’ll need also to first obtain approval of the Working Committee.”

    There is no specific denial by Mr Browne of this conversation. The “Working Committee” is the Management Committee.

28. Dr Westlake accepts that he was enthusiastic about the project, that he got on well with Mr Browne, that up until the Board meeting of 6 October 1995 his expectation was that there would be no difficulty in securing Board approval, and that he was “positive” to Mr Browne about his Investment Proposal (T 584).  He also accepts that he knew Mr Browne was anxious to get the deal funded as soon as possible (T 590).

29. Mr Browne accepted that it “comes with the territory” that ATG would be reconsidering the risks of the proposal as it went along (T 263).  There was a risk that the involvement of persons apart from Dr Jessup might alter ATG’s views (T 263).  On 26 June 1995 it was clear to Mr Browne that Dr Westlake had a different approach from that of Dr Jessup, and that at least initially, he was less optimistic than Dr Jessup, and was in need of re-education (T 264).

30. Mr Browne did not then give consideration to the American option because he says he was married to making the ATG deal happen (T 265).  It was his perspective that Hayle’s commercial interests would be better served by trying to bring the deal to fruition in Australia, rather than starting again in America (T 266).

31. Paragraph 28 of 2FASC alleges that on or about 21 June 1995 Dr Westlake orally represented to Hayle that ATG would be able to do the funding by the end of August 1995.  In his affidavit, Dr Westlake denies making any representation to that effect.

32. According to Mr Browne’s affidavit (par 74) he said to Dr Westlake:

    “How do you see the timing now?”

    Dr Westlake’s response was:

    “There’s a lot we can get done over the next few days to get things moving.  We can meet again next Tuesday for a brain-storming session on revising the Business Plan.  You can then work on making the agreed changes and have the new Plan ready for my review when I return to Sydney in mid-July.  Assuming the new Plan makes sense, I’ll be able to get you a formal Expression of Interest by July 21st and due diligence can start immediately.  We’ll be able to get this funded by the end of August.”

    Dr Westlake contends that he said to Mr Browne:

    “If the Business Plan can be finalised by 21st July and a formal Expression of Interest signed off then it is likely due diligence will take approximately six weeks.  We will thereafter need to obtain approval of the Working Committee and the Board.  You will need to satisfy the due diligence process and also Board approval.”
    (Westlake Affidavit 13/8/99 par 17)

    Dr Westlake accepts (T 591) that there was a communicated expectation that a Business Plan could be prepared and worked upon so as to allow funding to occur by the end of August.  Mr Browne accepts (T 270) that he did not rely upon the end of August estimate to deter him from going to the USA.

1. On 26 June 1995 Mr Browne wrote to Mr Dalfen (AB 1/327).  The letter included the following:

   “Negotiations with the Australian venture capital source are dragging on and on but I’ll have a clear picture before the end of July.  Hopefully the Australian side will then be well funded and I will be able to concentrate on developing the US.”

   There is a marked contrast between the tone of this letter, and the eighth and ninth representations.  It was Mr Browne’s position that as at 26 June 1995 he had a deal with ATG (T 274), but there was no done deal (T 276).

2. On 26 June 1995 Dr Westlake wrote to Mr Browne confirming the strategy meeting to be held on 27 June (AB 1/328).  The letter included the following:

   “The aim of the meeting will be to produce agreement between ATG and Hayle as to the tenets of the Business Plan.  This will allow you to refine your Business Plan so that ATG and Hayle can develop an agreement to move forward into due diligence on my return in mid-July.”

3. A meeting between Mr Browne and Dr Westlake took place on 27 June 1995.  Dr Westlake was going on vacation for the next two weeks.  Mr Browne agreed to redo the Business Plan along the lines discussed, and have it on Dr Westlake’s desk before he returned on July 17.

4. On 28 June 1995 Dr Westlake wrote to Mr Browne (AB 1/329).  The subject matter of the letter was the points which should be addressed by the outline Business Plan agreed to be prepared at the meeting on 27 June.  The letter stated:

   “I would like to confirm that ATG remains very interested in pursuing an ongoing relationship with Hayle and to this end I need to see an outline Business Plan as soon as possible after my return from vacation on 17th July.”

5. On 14 July 1995 Mr Browne submitted a revised Business Plan to Dr Westlake (Browne Affidavit 29/5/99 par 80).  That plan was premised on the assumption that the Australian operation would be confined to a break-even-test-bed with the focus being on the US market, particularly the corporate sponsor segment.  This represented a major change in the strategy of the Business Plan (T 261).

6. On 17 July 1995 Hayle submitted an itinerary to Dr Westlake for a visit to America between 18 and 25 August.  The letter stated that the possibility had been left open for a postponement to October if it was thought that the end of August was too rushed (AB 1/368).

   Tenth representation: 25 July 1995, 2FASC par 31

7. Paragraph 31 of 2FASC alleges that on or about 25 July 1995 Dr Westlake orally represented to Hayle that:

   (a)the approval of ATG’s Board of Directors would be automatic once the deal had the recommendation of ATG’s Management Committee;

   (b)ATG would close and fund the deal by the end of September 1995 at the latest.

   In his affidavit, the making of these representations is denied by Dr Westlake (Westlake Affidavit 13/8/99 par 23).  In cross-examination, Dr Westlake accepts that he told Mr Browne in July that he would be ready to submit to the Board in mid-September, although at that stage, he did not have a Business Plan (T 604).  He told Mr Browne that it was his expectation that he would be closing the deal around end September 1995 (T 613).  Dr Westlake maintained his position that he “would never say” that Board approval would be automatic to a proposal recommended by the Management Committee (T 604). By this time Mr Browne says (Affidavit 29/5/99 par 82) that he felt fully committed to ATG, and in his mind, funding in the USA was no longer a viable option.  Mr Browne says he continued to operate the business in reliance on the representation that ATG would close and fund the deal by end September (T 301-302).  He simply believed it was going to happen.

8. On 26 July 1995 Mr Browne wrote to Dr Westlake as a result of the meeting on the previous day (AB 1/371).  The letter commented on issues discussed at the meeting.  It concluded:

   “We now have a clear picture of the timing involved with the ATG decision.  This Friday you will decide whether or not to proceed.  If the answer is ‘yes’, you will present us with a formal Terms Sheet around the 2^nd of  August.  The terms will be based on those already agreed with George.  [Jessup]  We will sign the Terms Sheet and you will start due diligence by August 15th.  This should take about four weeks meaning that you can seek Board approval by mid September.  After that, documentation will only take a few days.  This means the deal can be closed by end September.”

9. On 2 August 1995 Mr Browne wrote to Timex Corporation (AB 1/379).  Timex Corporation was a proposed supplier of HeartWatches to the project.  The letter included statements that:

   -the venture capital deal is going ahead and should close by end August;

   -ATG have decided to invest in Hayle.

   A copy of that letter was sent to Dr Westlake.  The statement: “ATG have decided to invest in Hayle” was based upon a conversation with Dr Westlake prior to the Management Committee meeting at which he confidently asserted that approval would be forthcoming (T 314-315).  All that could accurately be said at 2 August was that Mr Browne thought ATG were very interested in the possibility of funding (T 317).  On 11 August Mr Browne told Dr Cooper that “if all goes well, the deal will close before September 14^th” (AB 1/391).

   Eleventh representation: 3 August 1995, 2FASC par 34

10. On 3 August 1995 Dr Westlake sent an “Expression of Interest” letter to Hayle.  Paragraph 34 of 2FASC alleges that by that letter ATG represented to Hayle that:

    (a)ATG was interested in entering into detailed due diligence with the purpose of investing $2 million in Hayle Holdings in two tranches of $1 million, the first upon execution of the Shareholders’ Agreement and the second at the end of twelve months on achievement of appropriate milestones to be set out in the agreed Business Plan;

    (b)Hayle Holdings agreed to provide ATG with an exclusive period of one month in order to conduct due diligence and make a firm offer to invest during which time Hayle Holdings would not negotiate with any other party to raise capital and would commit all reasonable resources required by ATG to assist ATG to carry out its due diligence;

    (c)should ATG invest, the first tranche of the capital invested would be used to fund Hayle Holdings’ reasonable operating expenses from the date of acceptance of the letter, but not more than $80,000 per month or $160,000 in total.

11. The representations contained in the letter of 3 August are alleged to be false, misleading and deceptive in that:

    (a)ATG was not interested in investing $2 million in Hayle Holdings in two tranches of $1 million as stated or at all, or there was a risk that that would not occur, and it did not occur;

    (b)Hayle Holdings’ reasonable operating expenses of not more than $80,000 per month up to $160,000 would not be reimbursed out of the first tranche, or there was a risk that they would not be, and they were not;

    (c)insofar as they related to future matters, there were no reasonable grounds for making them. 

    ATG contends that there were reasonable grounds, in that the letter represented ATG’s position at that stage of negotiations, and it knew nothing to suggest that it would not be able to maintain that position.

12. The letter confirmed ATG’s interest in entering into detailed due diligence of the business of Hayle as presented in the ATG Business Plan dated July 1995.  The investment contemplated was of $2 million to be made in two tranches of $1 million, the first tranche to be made available on the execution of the Shareholders’ Agreement, and the second tranche at the end of the first twelve months on the achievement of appropriate milestones that would be set out in the Agreed Business Plan.  After the investment ATG would own 35 per cent of the capital of Hayle.  Hayle agreed to provide ATG an exclusive period of one month from the date of agreement to the conditions of the letter in order to allow ATG to conduct due diligence and to make a firm offer to invest in Hayle, and agreed not to enter into negotiations with any other party to raise capital during this period.  In the event that ATG decides not to proceed with an investment, ATG was to bear its own expenses.  If Hayle rejects a firm offer to invest made by ATG within the guidelines of the letter, Hayle will bear all ATG’s out-of-pocket expenses.

13. The key issues to be addressed during the due diligence, and appropriately incorporated into the Business Plan, were set out in the letter.  The letter then included the following:

    “12.     Commitment

    ATG’s investment will be conditional on the completion of satisfactory due diligence, including the agreement to a Business Plan, and approval from ATG’s Board of Directors.  ATG may decide to cease due diligence at any time if, in ATG’s sole opinion, a satisfactory Business Plan is unlikely to be agreed.

    13.Disclaimer

    Prior to making an investment ATG is working on its own behalf, first to determine whether or not to invest in Hayle and then to make its best endeavours to ensure that the investment has an appropriate return to ATG.

    ATG does not accept responsibility for any advice and representations made by it including, but without limitation, any representations with regard to valuation, business advice, strategic marketing or success of the venture.”

14. The letter also included the Adverse Trading condition, to which Mr Browne took no objection.  He accepted the risk that the operation might come to a grinding halt in the future if a need for money arose which he was not prepared to put in (T 333).

15. By letter dated 4 August 1995 Mr Browne advised that Hayle was willing to proceed on the basis outlined in the Expression of Interest letter (AB 1/390).  He did so even though, for the first time, it was proposed that the second tranche of $1 million would not occur until twelve months after the first, and it would depend upon achievement of “appropriate” milestones, as distinct from “easily achievable” quasi milestones.  Mr Browne knew that there was no commitment by ATG at this point, and that there was a risk that ATG would decide ultimately not to invest.  He continued to negotiate with ATG because he had real confidence and belief in the HayleSystem (T 321).  What was stopping him from going to USA at that time was that he was optimistic and confident that he would get a deal with ATG (T 343).

    Twelfth representation: 3 August 1995, 2FASC par 35

16. The Expression of Interest letter stated that should ATG invest in accordance with the spirit of the letter, the capital invested would be used to fund Hayle’s reasonable operating expenses from the date of acceptance of the letter, but in any case would not be greater than $80,000 per month or $160,000 in total.

17. Paragraph 35 of 2FASC alleges that on 3 August 1995 Dr Westlake orally represented to Hayle that the letter meant that Hayle’s reasonable operating expenses up to $160,000 would be reimbursed out of the first tranche.  Dr Westlake accepts that he said something to that effect, but claims that it was prefaced with the words:

    “Subject to Board approval, and due diligence.”
    (Westlake Affidavit 13/8/99 par 25)

    At T 617 Dr Westlake accepts that an undertaking was given to Mr Browne that ATG would fund his company for two months from 2 August.

18. Between 4 August and 3 November 1995 Mr Browne arranged for $146,000 to be lent by Panco Enterprises Pty Ltd (as trustee of the Neville Browne Family Trust) to Hayle upon the basis that the funds so lent would be reimbursed out of the first tranche (Browne Affidavit 29/5/99 par 87).

19. On 6 August 1995 the due diligence process commenced.

20. On 11 August 1995 Mr Browne wrote to Dr Cooper (AB 1/391).  The letter contained the following statements:

    -if all goes well the deal will close before September 14;

    -assuming the deal proceeds Mr Browne would visit the US on 22 October with Dr Westlake;

    -Mr Browne would not go into the detail of the strategy for establishing in the US “until I know for sure that the deal is on”.

    Mr Browne said in cross-examination (T 191) that on 11 August: “I was sure the deal was on, I knew it hadn’t been consummated.  I was very confident the deal was on.”  But the risk always existed in Mr Browne’s mind that ATG would not fund on terms acceptable to Mr Browne.

    Thirteenth representation: 24 August 1995, 2FASC par 42

21. On 24 August 1995 Dr Westlake telephoned Mr Thompson of 3M in the presence of Mr Browne.  Mr Browne’s affidavit (29/5/99 par 89) describes the conversation as follows:

    “(a)Westlake said:            ‘We’re close to funding Hayle so that they will be in a position to run the HayleSystem trial involving 1,000 of your employees and as part of the due-diligence process we’d like to get your confirmation that you will sponsor such a trial.’

    (b)Thompson said:          ‘We haven’t worked out the exact details but we are agreed in principle to the idea of a funded trial involving around 1,000 people.’

    (c)Westlake said:            ‘We should be closing the deal around the end of September so Neville and I will come and work out the details with you some time in October.’

    (d)Thompson said:          ‘I’ll look forward to seeing you then.’”

    Dr Westlake’s affidavit does not contradict this conversation.  In cross-examination (T 613-614) he accepted the substance of it.

22. Paragraph 42 of 2FASC alleges that during the course of that conversation Dr Westlake represented to Hayle that:

    “(a)     The deal should be closed and funded by the end of September;

    (b)In October Dr Westlake and Mr Browne would attend on the 3M Corporation in the USA to work out the details of the 3M Corporation’s agreement in principle to a HayleSystem deal involving 1,000 of 3M’s employees.”

23. Paragraph 43 of 2FASC pleads that these representations were false, misleading and deceptive in that:

    “(a)the deal would not be closed and funded by the end of September, or there was a risk that it would not be, and in fact it was not closed and the first tranche was not funded until 13 November 1995 or thereabouts as hereinafter pleaded;

    (b)Westlake and Browne would not attend on 3M Corporation in October to work out the said details, or there was a risk that they would not, and in fact they did not do so until December as hereinafter pleaded;

    (c)Insofar as they related to future matters, there were no reasonable grounds for making them.”

    Due Diligence

24. There is conflicting evidence as to when the due diligence process was completed.  The better view is that the due diligence process was finished by the end of August.  Dr Westlake’s monthly report for August 1995 (AB 1/395-399) contains the following notation in relation to Hayle:

    “Obtained full agreement on Term Sheet and began due diligence on 4th August.  Due diligence gone extremely well, including iteration to a very good Business Plan.  Should be presented to Staff Review 8th September and to Board review before October Board mtg.”

25. Mr Browne’s affidavit records a conversation which he said he had with Dr Westlake around the end of August 1995 as follows:

    “(a)Westlake said:            ‘I told you that due-diligence would only take three or four weeks’;

    (b)       Browne:  ‘And I told you we were “squeaky clean’;

    (c)Westlake:                   ‘Yes I must agree that everything was just as you said it would be ... no unpleasant surprises.  I’m very pleased with the way it went.  We’re all set to present to the Board.  I have to prepare the Board submission and that will take a few days but we’re on track for funding by end September as promised.  It will go before the next Board meeting on September 8th.’”

    Dr Westlake denies par (c) above, and says that whilst the corporate governance element of the due diligence process was satisfactory, the due diligence process itself identified a number of problems in ATG investing in Hayle (Westlake Affidavit 13/8/99 par 27).  Those problems included a history of high spending on matters which did not enhance the return to the company, the Australian operation was spending cash at an alarming rate, the financial controller, Kyle Amadio was shown to be incompetent, the development of a completely new accounting system needed to be implemented, the HeartWatch was too cumbersome and a smaller unit was required, the HeartWatch needed to be significantly cheaper to manufacture and the Business Plan, finalised just before completion of the due diligence, showed that cash flow would be very tight and the development of the project would be extremely sensitive to any delays.

26. On 1 September 1995 Dr Westlake requested Abbott Tout to prepare a draft Shareholders’ Agreement based on the 3 August expression of interest (AB 2/400).

27. On 6 September 1995 a preliminary draft due diligence report was prepared, apparently by Dr Westlake (AB 2/406).  A copy of it appears to have been sent to Mr Browne on 11 September 1995.  It includes the notation:

    “May need special Board Review around early September.”

28. On 7 September 1995 Mr Browne forwarded an incomplete draft of the Business Plan to Dr Westlake.  Also on 7 September 1995 Mr Browne wrote to Dr Cooper indicating that Barry Westlake had a meeting in Europe on 22 September and that it was hoped to sign the deal before he leaves Australia.  Mr Browne had no genuine belief at that time that it was likely a deal would be done by end September, hence what he said to Dr Cooper was misleading, but not intentionally so (T 374).

    Fourteenth representation: 8 September 1995, 2FASC par 45

29. In his affidavit (29/5/99 par 92) Mr Browne deposes to a conversation which he said he had with Dr Westlake some time early in September 1995.  In the course of that conversation Dr Westlake said:

    -he was off work with the flu;

    -they would miss the Board meeting to be held on September 8;

    -he can call a special Board meeting as soon as he is back on deck;

    -he was going to get the lawyers working on the documentation immediately rather than wait for Board approval.  Normally he waits for the Board to sign off on the deal in case they make any last minute changes to it.

30. In the affidavits it is common ground that Dr Westlake said that he was going to get the solicitors working on the documentation immediately, rather than wait for the Board’s approval.  Then in their respective affidavits, Mr Browne asserts (par 92), and Dr Westlake denies (pars 28-29), that the following ensued:

    (b) Browne:“I’m glad you’re proceeding with the documentation, but you and George have always told me that the Board will automatically rubber stamp the deal once it’s approved by the Committee.  What do you mean by ‘last-minute changes’ the Board might make?”

    (c) Westlake:    “Sometimes the Directors like to justify their existence by tweaking the deal but don’t worry I have it all under control.  I might want you to meet the Board personally as part of my presentation.  That’s going to make a telephonic Board meeting impossible but I feel it would be a good idea for them to meet you.”

    (d) Browne:“This is sounding less and less like a rubber stamp.  Does this mean we’ll have to wait until the October Board meeting?  What happened to the September 30 deadline?”

    (e) Westlake:    There’s not much I can do about getting ill, but you have my word that I’ll do everything I can to get it through as soon as humanly possible.”

31. Paragraph 45 of 2FASC alleges that during this conversation Dr Westlake represented to Hayle that normally ATG waited for the Board to sign off on the deal in case they made any last minute changes, that sometimes the Directors liked to justify their existence by tweaking the deal, that the applicants need not worry and that Dr Westlake had it under control.  Dr Westlake accepts that he may have said “it’s all proceeding OK” or “it’s going where we want it to go” (Westlake Affidavit 13/8/99 par 28).  Dr Westlake says that he always made it plain to Mr Browne that the Board “would exercise its right to make some adjustments” (T 658), but stated that he would have provided words of comfort to Mr Browne that there did not seem to be any reason why ATG would not go ahead with the investment (T 658).  Dr Westlake says (T 659) that having worked with and reported to boards for much of his business life he would never regard boards as rubber stamps and never treat them that way (T 659).  The practice of the Board had been to make minor changes around the edges, and it is likely he told Mr Browne that (T 663).

    Fifteenth representation: 13 September 1995, 2FASC par 48

1. The alternative way in which the case is put, is that were it not for the misleading and deceptive conduct on the part of ATG (which I have found), Hayle would not have entered into the agreement of 13 November 1995 with ATG, the Sydney operation would have been closed down on about 15 November 1995, and venture capital sought in the USA.  Hayle contends that venture capital would have been obtained in the USA in about March 1996 in return for a 25 per cent equity in a business (“Hayle-USA”) which would have been established, and successfully operated, in conformity with that part of the Hayle/ATG Business Plan for October 1995 which relates to the USA.

2. The case is that the results which would have been achieved by Hayle-USA from the commencement of its operation to 30 June 2000 would have been those predicted in that part of the Business Plan which relates to the USA (subject to minor adjustments), and that the forecast results for the financial year 2000 are a reasonable prediction in real terms of the results likely to be achieved thereafter.

3. On that basis, Hayle’s expert accountant, Mr Vella, has calculated that:

   -Hayle’s share of the pre-tax profits which would have been hypothetically derived by Hayle-USA from the commencement of its operations until 30 June 2000 is $9.4 million.

   -The hypothetical value of Hayle’s 75 per cent interest in Hayle-USA at 30 June 2000 would be $33.25 million.  That value is in addition to the accrued profit entitlement, and is based upon multiplying the forecast earnings in the year 2000 by price earnings multiple of 9.

   (Fourth report of Vella, par 3)

4. Hayle claims $42.65 million, or alternatively, damages for loss of chance to make profits, and to have a valuable business.  In addition, various items of expenditure are claimed upon the basis that as a result of ATG’s misleading and deceptive conduct, the expenditure on those items was wasted.

5. Mr Vella did not undertake any assessment as to the reasonableness of the projections contained in the Business Plan, or as to whether his calculations were a reflection of the loss which Hayle suffered in consequence of the misleading and deceptive conduct of which it complains.  On the basis of the assumptions he was required to make, he concluded that a multiple of 9 was appropriate to a business which is assumed to have traded up to the financial year 2000 with the results as shown in the projections.  ATG adopted a multiple of 10 in its internal consideration of the project (AB 2/494).  Ms Exner, an accountant called by ATG, thought that a multiple of 3 was appropriate, because although instructed to assume that Hayle-USA performed in accordance with the Business Plan until financial year 2000, in her opinion, the risk associated with Hayle was significantly higher than that of an established company, and a multiple of 3 is more appropriate to a business of that character (see Joint Report of Vella and Exner, dated 6/6/00 par 13-16).

6. As indicated in par 234 above, Mr Browne’s evidence was that he formed the view in February 1996, that it would be impossible to attract venture capital to any business which had Hayle's experience with ATG in the recent past.  In Mr Browne’s view, the fact that Hayle had attracted a venture capitalist who had then, after a short period, abandoned the deal would be impossible to explain away, even though the explanation might completely exonerate Hayle and the HayleSystem.

7. Between 8 April 1996 and 16 July 1999, Hayle made seven trips to the USA, (and at least once to Europe), in attempts to secure a licensing agreement for the HayleSystem.  Hayle retained three advisers to assist in those attempts.  The following trips were made:

   1.8 April 1996-20 May 1996;

   2.15 October 1996-15 November 1996;

   3.17 May 1997-30 May 1997;

   4.20 June 1997-1 August 1997;

   5.28 February 1998-19 April 1998;

   6.28 January 1999-6 March 1999;

   7.7 June 1999-16 July 1999.

   Hayle incurred costs of $132,649.31 by way of trip expenses (AB 4/1636) and $61,922.62 in consultants’ fees (AB 4/1473), a total of $194,571.93, in its unsuccessful attempts to secure a licensing arrangement.

8. On 22 May 1996, after the first trip, Hayle wrote to 3M (AB 4/1256).  The letter stated that Mr Browne had been “meeting with potential investors/licensees with the view to launching the HayleSystem” in the USA.  The first trip report (AB 4/1257) refers to a meeting with a very wealthy potential investor, who was impressed with the presentation, and would be an investor if Hayle decided to go that way.  There is also a reference to a lady from Hankin Investment Banking, discussing a possible appointment as a non-exclusive finder of “potential investor/licensee” (AB 4/1259).  My attention was not drawn to any other entries in the trip report which unambiguously referred to meetings with potential investors.  Nor was my attention directed to any entry in the trip report to the effect that ATG’s withdrawal had any adverse effect upon potential investees or licensees.  There was no cross-examination on the trip reports.

9. No cross-examination was directed to Mr Browne to the effect that his evidence that the stigma of the failed ATG deal would make a venture capital deal impossible, was an opinion which he did not genuinely hold.

10. Two United States experts were called in the field of venture capital.  Hayle called Mr Rider, who had a background of 30 years experience in venture capital investing.  ATG called Mr Feigen, whose background in venture capital was as a regulator, as a consultant, and as a teacher but who had some involvement in the provision of venture capital himself.

11. In Mr Rider’s first report the following question was posed:

    “3.      What was the likelihood that Browne could have secured venture capital funding for Hayle USA after January 1996 in light of the history of the association between ATG and Hayle in Australia in 1995 and early 1996, and in particular in light of ATG’s withdrawal from the deal on 29th January 1996?”

    Mr Rider’s answer to that question was:

    “Highly unlikely”.

    The reason which he gave for that answer is that US venture capitalists would be likely to follow the lead of the Australian firm and to assume that ATG must have discovered some serious problem with the deal, and used the 3M problem as an excuse to exit.  Further, deals in the venture capital market are either dead or alive.  “By early 1996 the Hayle deal was dead”.

12. Mr Feigen was of the view (First Report of Feigen, dated 10/2/00 par 10) that Mr Browne would have substantially the same likelihood of obtaining venture capital funding for the investment after January 1996 as he would have had during the second half of 1995:

    “If a US venture fund received negative ‘vibes’ during the due diligence process because another fund turned a deal down or backed out of the deal, it might raise serious questions, but would not automatically kill the deal as long as the US market clearly demonstrates a distinct opportunity to grow exponentially, the product is proven unique, and the plan and the entrepreneurs make sense.  If there are insurmountable reasons why the deal may no longer be attractive or the risk becomes too great then it would be difficult to raise interest.  However, it is not unusual in the US for six venture firms to turn a deal down while six months to a year later six other venture firms actually do the same deal with some modifications.”

13. The disagreement between the experts upon this issue was not removed by their joint report.  As I understand that report:

    -Mr Rider answered question 3 “Highly unlikely” because of his view as to the negative impact upon US venture capitalists of ATG’s refusal to proceed with its proposed investment.

    -Mr Feigen answered that question “Unlikely”, because it was his view that Hayle-USA would not have been funded in 1995, and Hayle would have had substantially the same likelihood of obtaining funding for the investment after January 1996 as it would have had in 1995.

14. In Mr Rider’s third report he was asked this question:

    “3.      Would potential investors have viewed Browne’s withdrawal from ATG negotiations in October 1995 negatively?”

    His answer to that question was:

    “No.”

    The question is put in the context of an assumption that Mr Browne withdrew from negotiations with ATG in consequence of its requirement made on 27 October 1995 that if for some reason the roll-out was slower than expected, and bridging funds became necessary between tranches, Mr Browne would provide half of those funds and ATG would provide the other half.

15. Mr Feigen’s response to the same question was:

    “Unlikely.”

    because prospective investors and entrepreneurs often go their separate ways during the negotiations process (Second Report of Feigen 24/5/00).

16. As I understand the expert evidence, it is to the effect that Hayle’s prospects of obtaining venture capital in the USA would not have been materially lessened on the hypothesis that Hayle called off the proposed deal with ATG because ATG imposed a requirement that Hayle should contribute to bridging finance, a requirement to which Hayle would not agree.

17. The experts could not agree on whether or not Hayle would have been able to secure funding if it sought it in November 1995.  The following question was put to the experts:

    “Whether Browne, in early 1996, in your opinion, would have secured $US1.15 million in venture capital funding in the USA to finance the commercial exploitation of the HayleSystem in the United States based on a Business Plan ... which would have actually been the same as the October 1995 Hayle/ATG Business Plan ... except that the Australian operations, having been closed down in November 1995, would not be a part of the new Hayle USA Business Plan and the focus would have been exclusively on the United States.”

    Mr Rider’s answer to that question was:

    “Yes”

    and Mr Feigen’s answer was:

    “Unlikely.”

    Their respective answers to a similar question as at mid-1995 was, in the case of Mr Rider, “Yes”, and in the case of Mr Feigen, “No”.  Thus their views were less polarised in relation to the position at the end of 1995 than they were in relation to the position as at mid-1995 because in the second half of 1995 the venture capital market in the United States was stronger than it had been at mid-year.

18. One of the factors which Mr Feigen took into account in expressing his view is that Mr Browne’s visits to the United States at the end of 1994 and in early 1995 had not exposed any serious interest by a potential venture capitalist in investing in the project.  Hayle submits that this assumption does not accord with Mr Browne’s evidence that his trips to the United States prior to April 1995 were merely to investigate opportunities, rather than to ask venture capitalists for money and follow through such requests to finality.

19. One of  the reasons that Mr Browne went to the United States in March 1995 was to pursue sources of finance, and to determine what the level of interest was in the provision of finance (T 198).  Mr Feigen had some difficulty in coming to grips with an assumption that serious interest was expressed on these trips which Mr Browne simply elected not to follow through because “anytime anybody expresses interest you want to follow up on it” (T 849).  Nonetheless he accepted that if it were the fact that in the early part of 1995 American venture capitalists had expressed serious interest in investing in Hayle, then he could not give a negative answer to the question which was put to him (T 850-851).

20. I was invited to prefer the evidence of Mr Rider over that of Mr Feigen because of their differing backgrounds and because of Mr Feigen’s erroneous assumption in relation to the pre-April 1995 expressions of interest by venture capitalists investing in the HayleSystem.

21. On the evidence, I do not think that Mr Feigen made an erroneous assumption as to the level of interest on the part of US venture capitalists prior to April 1995.  One of the reasons for the March visits was to ascertain the level of interest in the provision of venture capital, which resulted in Mr Browne having “a couple of expressions of sort of very tentative prima facie interest” (T 218).  Nor do I think that their different backgrounds provides a sufficient, or indeed any reason for preferring the evidence of one over that of the other.  It is simply a case in which two experts have a different opinion on a matter where legitimate differences of opinion might well be expected.

22. Mr Rider’s evidence is given in the most general of terms.  He does not say that he would have been prepared to invest money in the project, nor does he identify any particular venture capitalist who, in his opinion, would have been prepared to do so.  Nor does he describe any market practice which would enable a conclusion to be drawn that the Hayle proposal fell within some accepted parameters which guided the provision of venture capital.  His assessment is an intuitive one, that Mr Browne and the HayleSystem were likely to be attractive to venture capitalists.  Given the heterogeneous nature of the market, that must mean attractive to some venture capitalists.

23. Mr Rider’s third report is based upon the assumption that by December 1995 Hayle had secured the verbal commitment of the 3M company to fund and conduct a twelve month trial of the HayleSystem involving between 200 and 500 employees at the 3M plant in Austin, Texas, as soon as the HayleSystem infrastructure was in place (Assumption 8).  His report does not refer to the significance of this assumption (as distinct from the corresponding assumption made in the first report), or to the likelihood of venture capital being provided in tranches.

24. Of course if Hayle were seeking venture capital in the USA in and after November 1996, it would be doing so in a context where the 1,000 person trial with 3M in St Paul would not be achieved.  The October 1995 Business Plan was based on the successful completion of this trial, inasmuch as at least initially Hayle intended to rely on the domino effect of the success at 3M to increase the level of corporate sponsorship.  The number of corporate sponsors was estimated to be 10 in the first year, 20 in the second, 40 in the third, 75 in the fourth and 100 in the fifth (AB 2/586).  Apart from the Business Plan itself, there is no material which indicates the likelihood of that level of sponsorship being achieved.

25. Whether Hayle suffered any loss or damage in consequence of the misleading and deceptive conduct which I have found involves a comparison between what actually happened, and what would have been the case if the misleading and deceptive conduct had not occurred.  What actually happened is that Hayle entered into the agreement with ATG on 13 November 1995 and received $300,000 pursuant to that agreement.  The agreement was terminated on 29 January 1996, and Hayle agreed to pay $300,000 to ATG.  What would have been the case if the misleading and deceptive conduct had not occurred is that Hayle would not have entered into the agreement with ATG, but would have sought venture capital in the USA from about November 1995.

26. There is an issue between the parties as to whether Hayle needs to prove on the balance of probabilities that it would have succeeded in obtaining venture capital from an alternative source, or whether the Court is required to estimate the chance of that occurring, and to reflect the chance in the amount of any damages it awards.

27. Hayle’s objective was to establish and successfully conduct the business of Hayle-USA in accordance with the Business Plan, so as to derive the benefits in terms of income and capital value reflected in Mr Vella’s calculations.  The damages claim is constructed on the basis that but for the misleading and deceptive conduct in question Hayle could and would have achieved that objective.

28. A number of contingencies lay in the path of that objective; venture capital had to be found, Hayle-USA needed to be established, the corporate sponsorships projected in the Business Plan needed to be obtained, and the other assumptions on which the Business Plan was based needed to be made good.  So many contingencies lay in the path of that objective, that whether or not it would be achieved is a matter of pure speculation.

29. Alternatively, Hayle puts its case on the basis of a loss of a valuable opportunity.  In order to succeed on that alternative case, Hayle would need to prove both that there was a valuable opportunity, and that in consequence of the misleading and deceptive conduct which I have found, that opportunity was lost to it.

30. Hayle’s ability to exploit commercially the HayleSystem in a manner not involving ATG was restored to it when the Shareholders’ Agreement was terminated on 29 January 1996.  At least in theory, Hayle could then have entered into arrangements with a venture capitalist and proceeded to implement the Business Plan.  That Hayle believed it had not lost the opportunity to exploit the HayleSystem commercially is illustrated by the fact that it attempted to so, albeit unsuccessfully, in the seven trips which Mr Browne made to the USA thereafter.

31. If, Hayle could and would have entered into a contract with a venture capitalist in the USA, instead of doing so with ATG, then, depending on the terms of that contract and any tranching conditions, Hayle would have had a prospect of acquiring the financial benefits it sought to achieve.  The value of that opportunity could be ascertained by reference to the degree of probabilities or possibilities: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355. That returns of the level shown by the Business Plan are expected by a venturer providing $2 million capital, demonstrates the magnitude of the risks which lie in the way of the achievement of those returns.

32. Causation and the existence of a loss needs to be established on the balance of probabilities, although that standard is inappropriate to the assessment of the amount of a loss where the assessment depends upon an evaluation of future possibilities: Sellars at 355 and 367. The finding that a loss has been suffered is to be made on the balance of probabilities whether or not the finding depends upon historical facts or evidence giving rise to competing hypotheses: Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 423 per Gaudron J. See also Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 511 where McHugh, Hayne and Callinan JJ referred to the plaintiff having to prove that he “could and would” have entered into an alternative contract but for his reliance on the misleading and deceptive conduct of the defendant.

33. Thus, in order to prove loss and causation Hayle needs to establish on the balance of probabilities that:

    -but for the misleading and deceptive conduct which I have found, it would not have entered into the contract with ATG;

    -it could and would have obtained venture capital to establish and operate Hayle-USA from an alternative source;

    -it lost the opportunity of deriving profits from Hayle USA by reason of the misleading and deceptive conduct which I have found.

34. In Sellars the prejudice or disadvantage which the respondents suffered in consequence of the misleading and deceptive conduct was the loss of the opportunity or chance of securing commercial benefits, which entry into and completion of the Pagini agreement would have brought.  Both the majority (p 356) and Brennan J (p 368) regarded it as significant that but for the misleading and deceptive conduct, the Pagini contract would have been entered into.  Although, on the probabilities it would not have been completed because conditions precedent to the performance would not have been satisfied, there was a significant chance (40 per cent) that it would have been.

35. I am not satisfied on the balance of probabilities either that Hayle would have obtained venture capital in the USA had it broken off negotiations with ATG at the end of October 1995, nor am I satisfied to the requisite standard that whatever chance of obtaining venture capital which Hayle then had, was destroyed by the circumstances surrounding ATG’s withdrawal from the project.

1. As to the first of those matters, one of the reasons for the March 1995 visit to the USA was to ascertain the level of interest in providing venture capital to the project.  Thereafter Hayle chose to proceed with its negotiations with ATG rather than pursuing whatever venture capital opportunities were available in America.  No venture capitalist who was contacted on that visit gave evidence that it had any interest in providing venture capital to the project.  No venture capitalist was called to say that it would have been prepared to provide venture capital, and if so, on what terms.  No practice was established such as would enable one to conclude that the present case was one in which venture capital would ordinarily be provided on acceptable terms.  Venture capitalists are a heterogeneous group of people and the evidence from each expert was little more than an educated speculation as to what others might or might not have done, falling short of proof on the balance of probabilities.

2. As to the second, again there is a disagreement between the experts.  Both Mr Feigen and Mr Rider were witnesses who were honestly expressing different views, but I was more persuaded by the following evidence given by Mr Feigen in cross-examination:

   “You do agree that the pull out of ATG within ten weeks of funding the matter the first time is a serious question which would need to be fully explained before a venture capitalist would invest? --- Yes, I think that’s a significant question.

   You agree that the fact that one venture capitalist had pulled out of a deal that it had agreed to fund is something that other venture capitalists would take seriously? --- They would ask questions.  They wouldn’t kill the deal.

   Well, when you say it wouldn’t kill the deal it would depend on just whether the venture capitalist was able to satisfy itself that there was no smell remaining about the deal, that’s right, isn’t it? --- What the issues are, yes, whether there is a smell or something else.

   And unless the smell could be dispelled the venture capitalist wouldn’t touch it, that’s right, isn’t it? --- It might express an interest but certainly when they due diligence they wouldn’t do the deal until that was explained.” (T 858)

   than by the reasons given by Mr Rider in support of his “highly unlikely” answer to question 3 posed in the first report.  Whilst I generally accept Mr Browne’s evidence that in 1996, his concentration was upon securing licensees, rather than venture capital, it is clear from the trip reports that there were at least some venture capitalists who were spoken to, but there is no evidentiary foundation for a conclusion that any of them were deterred from investing by reason of the ATG experience.

3. It follows that Hayle has not made out its case to recover the pre-tax profits and the hypothetical value of its profit entitlement.  Even if Hayle had established on the balance of probabilities that venture capital would have been raised by it, I would not have been satisfied on the balance of probabilities that the results projected in the Business Plan would have been achieved, or that the lesser ATG figures would have been achieved.

4. Either there would have to be an assessment of the chance of achieving those results, or the projections would need to be substantially discounted to allow for contingencies.  Hayle was willing to part with a 30 per cent interest in the venture for a contribution of $2 million by way of venture capital and ATG was willing to pay $2 million in order to obtain a 30 per cent interest in the chance of obtaining the revenue stream predicted by the projections of the Business Plan.  Its risks were hedged by the tranches and the tranching conditions, but on a very broad view, that suggests that, if venture capital is obtained, the value of a 70 per cent interest in the chance of obtaining the revenue stream predicted by those projections is of the order of $4.66 million.  Whilst no evidence was called that this was an appropriate method of calculating damages, it approximates a market assessment of the value of the opportunity and in my view it more closely reflects reality than the artificial calculations undertaken by Mr Vella and Ms Exner.

5. Given my conclusion on the expert evidence, it is hard to make an assessment of the chances of Hayle obtaining venture capital in the USA before and after the ATG transaction.  Nor, in view of my conclusion, is it necessary for me to do so.  If I had to make a percentage estimate I would estimate the prospects of obtaining venture capital in the USA before the ATG transaction as being of the order of 30 per cent, and after the ATG transaction as being of the order of 10 per cent.  But I would find it difficult to martial reasoned arguments in support of the particular percentages I have chosen rather than some other percentage which was less than 50 per cent, such as, eg, 40 per cent.

6. If I were wrong in my conclusion that Hayle needs to establish on the balance of probabilities that it would have been successful in raising venture capital in the USA, and it was sufficient to establish that it had, eg, a 30 per cent chance of doing so which was lost, then in the absence of any other evidence as to the value of the chance, I would have estimated the value of the lost chance of obtaining venture capital and achieving the projections of the Business Plan at 30 per cent of $4.6 million, ie $1.38 million.

   Damages – outgoings
   $300,000 liability under Share Sale Agreement.

7. Hayle contends that if it had not entered into the agreement with ATG then the Share Sale Agreement and the Guarantee and Indemnity, both dated 29 January 1996, would not have been executed.  It follows that none of the applicants would have incurred the $300,000 liability created by the latter two documents.  But neither would Hayle Holdings Pty Ltd have received the first tranche capital subscription of $300,000.

8. Thus, at least in the case of Hayle Holdings Pty Ltd, the liability which it assumed on 29 January 1996 was matched by an equivalent benefit it would not have otherwise received in November 1995.

9. Hayle’s submissions do not distinguish between the position of individual applicants. ATG’s submissions did not condescend to dealing with the damages claim at this level at all. It may be that applicants other than Hayle Holdings Ltd may have some claim, for example under s 87 of the Act in this respect. As counsel were responsibly endeavouring to fashion their submissions to accommodate reasonable time expectations, I do not propose, at this stage, to make any order in relation to this aspect of the claim, but will simply reserve liberty to the applicants to argue on the basis of the existing evidence whether any, and if so what, order is appropriate in this respect.

   $488,270 trading losses incurred as a direct result of postponing the closedown of Hayle Sydney from 15 November 1995 to 14 February 1996.

10. Mr Browne’s evidence was that if he had known what I have found to be the true position, he would have closed down the Sydney operation, and sought venture capital in the USA.  On my findings, he should have been told the true position at least by 27 October 1995.  ATG did not put any submissions to the effect that the closure of the Sydney office could not have been effected within the time frame contemplated by Mr Vince’s report.

11. In Mr Vince’s second report he was asked this question, to which he gave the following answer:

    “QUESTION FOR OPINION:           What trading losses were incurred by the Hayle Group of companies as a direct result of postponing the close-down of the Sydney operation from 15^th November, 1995 until 14^th February, 1996?

    OPINION:      Based on the information provided and the assumptions made, the answer to the above question is:

    $488,270 Australian Dollars.”

12. Mr Vince was not cross-examined.  No submissions were put by counsel for ATG as to why, if I came to this point, I should not simply adopt Mr Vince’s conclusion.  In those circumstances, I do not think that I should comb through Mr Vince’s report for myself with a view to finding whether there are deficiencies in it which have not been identified, let alone argued, by counsel for ATG.

13. One of the purposes of the “line in the sand” was to prevent erosion of Mr Browne’s capital by trading losses which were being incurred in the hope that something might turn up.  I accept Mr Browne’s evidence that he would have closed the Sydney operation if he called off the negotiations with ATG.  In the circumstances to which I have referred, the applicants are entitled to judgment in the sum of $488,270.

    $194,571.93 expenses incurred in attempting to secure a licensing arrangement with Hayle Technology from 14 February 1996 to date.

14. I accept that these expenses were incurred for the purpose indicated.  No argument was put by counsel for ATG to the contrary.  The argument for payment of this sum really proceeds on the basis that had the proposed deal with ATG been called off in November 1995 venture capital would have been obtained, hence there would have been no need to pursue licensing arrangements.

15. Whilst I am satisfied that Hayle would have pursued the raising of venture capital, I am not satisfied that it would have been successful in that respect.  No doubt some expenses would have been incurred in the unsuccessful pursuit of venture capital, but I do not know what they are likely to have been.

16. Nor do I know whether, if the pursuit of venture capital had been unsuccessful, as I have found, Hayle would nonetheless have pursued a licensing arrangement.

17. In those circumstances, Hayle has not discharged its onus of showing that this expenditure would not have been incurred if ATG had not engaged in the misleading and deceptive conduct which I have found.

    $A81,679 expended in developing the 3M relationship which was lost.

18. This expenditure was incurred in the period between November 1994 and March 1995 when Mr Browne travelled to the USA in order, amongst other things, to develop a relationship with 3M.  This expenditure was wasted because of the unexpected problems which arose at 3M on 29 November 1995, rather than by reason of the misleading and deceptive conduct on the part of ATG which I have found.

    Conclusion

    1.There should be judgment for the applicants in the sum of $488,270.

    2.I reserve for further consideration the question of whether any relief should be granted to parties other than Hayle Holdings Pty Ltd in relation to the incurring of a liability to ATG in the sum of $300,000 pursuant to the agreements of 29 January 1996.

    3.I will hear argument on the question of costs.

I certify that the preceding four hundred and seventy-seven (477) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Associate:

Dated:             5 September 2000

Counsel for the Applicant:	Mr J Campbell QC, Mr R Weber, Mr M Henry
Solicitor for the Applicant:	Aitken McLachlan & Thorpe
Counsel for the Respondent:	Mr B Walker SC, Mr P O’Loughlin
Solicitor for the Respondent:	Gordon & Johnstone
Date of Hearing:	26-30 June, 3-7 July, 10-11 July, 13-14 July, 17 July 2000
Date of Judgment:	5 September 2000