International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea

[2015] NSWCA 363

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:	International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2015] NSWCA 363
Hearing dates:	10 August 2015
Date of orders:	26 November 2015
Decision date:	26 November 2015
Before:	Bathurst CJ at [1]; Macfarlan JA at [8]; Ward JA at [9]
Decision:	1. Allow the appeal. 2. Set aside orders 3, 4, 5 and 6(ii) of the orders made by Hammerschlag J on 6 February 2015 and in lieu thereof order as follows: (a)   The defendant pay to the plaintiff the sum of AUD 40,303,856.33 plus interest from 3 April 2014 at the Default Rate specified in Condition 6.4 of the Bond Deed on that amount; (b)   The defendant pay the plaintiff’s costs of the proceedings. 3. The cross-appeal and notice of contention be dismissed. 4. The respondent pay the appellant’s costs of the proceedings in this Court.
Catchwords:	CONTRACT – construction – Bond Deed Poll –whether primary judge erred in construction of the term “market value” where used in the context of a mandatory exchange procedure in the deed – whether primary judge erred in concluding that respondent’s valuer did not deliver a binding valuation – whether primary judge erred in determining that the respondent was entitled to request a subsequent alternative valuation under the deed – consequence, as a matter of construction of the deed, where each party appointed an independent valuer but only one of the two determinations was binding on the parties – whether appropriate for Court to undertake valuation process itself or to appoint a referee   WORDS AND PHRASES – “market value”
Cases Cited:	Airservices Australia v Canadian Airlines International Ltd [1999] HCA 62; (1999) 202 CLR 133 Barescape Pty Limited as trustee for The V’s Family Trust v Bacchus Holdings Pty Limited as trustee for The Bacchus Holdings Trust (No 9) [2012] NSWSC 984 Candoora No. 19 Pty Ltd v Freixenet Australasia Pty Ltd (No 2) [2008] VSC 478 Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd [1947] HCA 10; (1947) 74 CLR 358 Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA 99 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Elkington v Shell Australia Ltd (1993) 32 NSWLR 11 Gollin & Co Ltd v Karenlee Nominees Pty Ltd [1983] HCA 38; (1983) 153 CLR 455 Gould v Vaggelas [1984] HCA 68; (1984) 157 CLR 215 GR Mailman & Associates Pty Ltd v Wormald (Aust) Pty Ltd (1991) 24 NSWLR 80 Holt v Cox (1997) 23 ACSR 590 HTW Valuers Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2014] NSWSC 1289 Kizbeau Pty Ltd v W G & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281 Kudeweh v T&J Kelleher Builders Pty Ltd [1990] VR 701 Legal and General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 701 Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2013] QCA 271 Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 Miwa Pty Ltd v Siantan Properties Pte Ltd [2011] NSWCA 297; (2011) 15 BPR 29,545 MMAL Rentals Pty Ltd v Brunning [2004] NSWCA 451; (2004) 63 NSWLR 167 National Provincial Bank Ltd v Bradberry [1943] 1 Ch 35 Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 Sudbrook Trading Ltd v Eggleton [1983] 1 AC 444 Tawfik v Bill [2010] NSWSC 1034 Willis v The Commonwealth [1946] HCA 22; (1946) 73 CLR 105
Category:	Principal judgment
Parties:	International Petroleum Investment Company (Appellant/Cross Respondent) Independent Public Business Corporation of Papua New Guinea (Respondent/Cross Appellant)
Representation:	Counsel: JRJ Lockhart SC with JC Hewitt (Appellant/Cross Respondent) CA Moore SC with Dr EM Peden and A Hochroth (Respondent/Cross Appellant)   Solicitors: Clifford Chance (Appellant/Cross Respondent) Herbert Smith Freehills (Respondent/Cross Appellant)
File Number(s):	2015/00044894
Publication restriction:	Nil
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Civil Citation: [2014] NSWSC 1289 Date of Decision: 06 February 2015 Before: Hammerschlag J File Number(s): 2014/74705

HEADNOTE

[This Headnote is not to be read as part of the judgment]

On 5 March 2009, Independent Petroleum Investment Company (IPIC) subscribed for, and was issued, 3,362 Exchangeable Bonds (the Bonds) pursuant to the terms and conditions contained in a Bond Deed Poll executed by Independent Public Business Corporation of Papua New Guinea (IPBC) (the Bond Deed) as part of a $1.6 billion financing arrangement between IPIC and IPBC. The funds raised through the issue of the Bonds were intended to finance IPBC’s participation in a liquefied natural gas project in Papua New Guinea.

On 5 March 2014 (the Maturity Date), the Bonds were subject to Mandatory Exchange of a number of ordinary shares in the capital of Oil Search Limited (Oil Search). If the aggregate of the Principal Amount of the Bonds (as defined) plus accrued interest on the Maturity Date exceeded the ‘Current Market Value’ on the Valuation Date of the aggregate of the ordinary shares in Oil Search, a Cash Settlement Amount was payable by IPBC to IPIC.

The Current Market Value of the Oil Search shares and the Cash Settlement Amount (if any) were, in accordance with condition 7.5 of the Bond Deed, to be determined by the Calculation Agent. The Current Market Value, for the purposes that determination, was the VWAP Value (in effect the daily volume-weighted average sale price as defined in the Bond Deed calculated over a 20 day trading period). In February 2014, the Calculation Agent determined, relevantly, that the VWAP was AUD 8.19 and the Cash Settlement Amount was AUD 103,280,420.55.

On 24 February 2014, IPBC invoked the Alternative Valuation procedure provided for under condition 7.5.9 of the Bond Deed on the basis that “following the occurrence of an event or series of events” it reasonably considered that the VWAP did not reflect the market value of the Oil Search shares for determining their Current Market Value. IPBC appointed RBC Capital Markets (RBC) as an Independent Valuer and IPIC appointed KPMG Corporate Finance (KMPG).

RBC concluded that the VWAP Value did not reflect the market value of an Oil Search ordinary share and adopted AUD 8.60 as the Alternative Value. KPMG concluded that the market value of an Oil Search share at the Valuation Date was AUD 8.19. The Calculation Agent proceeded to calculate the Cash Settlement Amount as AUD 62,976,564.26, based on the average of the VWAP Value (AUD 8.19) and the Alternative Value determined by RBC (AUD 8.60), that being AUD 8.395.

IPIC commenced proceedings in the Commercial List of the Equity Division of the Supreme Court seeking, relevantly, a declaration that the determination by RBC was affected by manifest or proven error and was not binding on the parties. IPBC cross-claimed, contending that the KPMG determination was not binding.

The primary judge found that the KPMG determination was binding but that the RBC determination was not. The primary judge held that “market value” for the purposes of the relevant condition of the Bond Deed had the meaning articulated in Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418, namely that which a willing and knowledgeable but not anxious buyer and seller would pay and sell for the share in question.

The primary judge found that the methodology adopted in the RBC determination was not directed at, and did not yield a determination of “market value” of the Oil Search shares. However, the primary judge did not accept IPIC’s contention that in those circumstances the “Current Market Value” of the share was the VWAP Value. The primary judge found that IPBC was entitled to request RBC to make a further determination in accordance with the Bond Deed.

On appeal, IPIC challenged the finding by the primary judge that, on the proper construction of the Bond Deed, IPBC was entitled to request a further determination from RBC. IPBC cross-appealed, challenging the primary judge’s construction of “market value” and the finding that RBC’s determination was not binding because it did not assess or direct itself to the “market value” of an Oil Search share. It filed a notice of contention seeking, in the event that IPIC’s appeal was successful, that the judgment below be affirmed on other grounds, namely that it was appropriate for the primary judge to have determined the value himself or to have referred it to a referee for determination.

Held allowing the appeal and dismissing the cross-appeal and notice of contention:

(1)   the expression “market value” refers to what a willing and knowledgeable, but not anxious, purchaser would pay a willing and knowledgeable, but not anxious, vendor for the asset in question: [2] (per Bathurst CJ, Macfarlan JA agreeing)

Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418; Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 applied.

(2)   the primary judge did not err in his construction of “market value” in condition 7.5.9; “market value” has an accepted and well-recognised meaning at common law; there was nothing in the Bond Deed which suggested that the parties intended “market value” to have any meaning different from that identified in the authorities: [94] (per Ward JA, Bathurst CJ and Macfarlan JA agreeing).

Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418; Marks v GIO Australia Holdings Ltd [1998] HCA 70; (1998) 196 CLR 494 applied.

HTW Valuers Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640; MMAL Rentals Pty Ltd v Brunning [2004] HCA 451; (2004) 63 NSWLR 167 referred to.

(3)   the primary judge did not err in concluding that the RBC valuation did not yield a determination of “market value” in accordance with Spencer v The Commonwealth; there was no suggestion that the factors that RBC considered had, or were capable of, softening the price at which the Oil Search shares were trading at the relevant time were unknown to the market; the fact that at the relevant date willing and knowledgeable but not anxious buyers who were purchasing the shares on market may have purchased them at a bargain price did not mean that as at that date the market value of the shares was higher than the traded price: [116] (per Ward JA, Bathurst CJ and Macfarlan JA agreeing). The analysis conducted by RBC did not determine what a hypothetical buyer, for the purposes of the Spencer test would pay for shares; the fact that certain factors weighing on the share price may influence a willing but not anxious buyer to pay, and a willing but not anxious seller to accept, less than the value of the shares, arrived at in accordance with that calculation, does not mean that what such a purchaser is prepared to pay and such a seller is prepared to accept is not market value: [4] (per Bathurst CJ, Macfarlan JA agreeing).

Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418 applied.

(4)   the trading price will not always correspond to market value; there may be distortions in the market for shares, for example, as a result of market manipulation, or there may be a lack of information in the market relevant to a decision of a willing but not anxious and knowledgeable buyer; it was not suggested in the present case that there were any such distortions or that the market was other than fully informed: [5] (per Bathurst CJ, Macfarlan JA agreeing).

(5)   on the proper construction of conditions 7.5.8 and 7.5.9, in the circumstances where each party appointed an Independent Valuer but only one of them produced a binding determination and that determination was to the effect that the market value ‘approximated’ VWAP, the Current Market Value was the VWAP Value: [149]; the commercial consequences of an indeterminate delay in the calculation and payment of the Cash Settlement Amount support the construction: [163] (per Ward JA, Bathurst CJ and Macfarlan JA agreeing).

Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 applied.

Miwa Pty Ltd v Siantan Pte Ltd [2011] NSWCA 297; (2011) 15 BPR 29,545; Current Images Pty Ltd v Dupack Pty Ltd [2012] NSWCA 99 referred to.

(6)   while the concluding paragraph of condition 7.5.9(vi) left open the possibility that a valuation prepared in accordance with the terms and conditions of the bonds, but tainted with manifest or proven error, could be corrected, a party was not entitled to have a further valuation undertaken when a valuation commissioned by it pursuant to the terms and conditions of the Exchangeable Bonds, was not in accordance with those terms and conditions: [7] (per Bathurst CJ, Macfarlan JA agreeing).

(7)   it was not appropriate for the Court to undertake the valuation process in place of RBC; it was not apparent that the error made by RBC was of an obvious mechanical kind so as to be capable of simple rectification: [168] (per Ward JA, Bathurst CJ and Macfarlan JA agreeing).

(8)   it was not appropriate to appoint a referee as this would have involved a substantial departure from the valuation exercise agreed to by the parties: [169] (per Ward JA, Bathurst CJ and Macfarlan JA agreeing).

Judgment

1. BATHURST CJ: I agree with the orders proposed by Ward JA and with her Honour’s reasons. I would add the following remarks.

2. As Ward JA has pointed out, the task assigned to the valuer or valuers, appointed in accordance with cl 7.5.9 of the terms and conditions of the Exchangeable Bonds, is to determine market value. It is accepted that the expression “market value” refers to what a willing and knowledgeable, but not anxious, purchaser would pay a willing and knowledgeable, but not anxious, vendor for the asset in question: Spencer v The Commonwealth [1907] HCA 82; (1906) 5 CLR 418; Marks v GIO Australia Holdings Ltd [1998] HCA 69; 196 CLR 494. Further, it is important to remember that what is to be valued is shares in the company in question (Oil Search Ltd), not the company itself.

3. In reaching its conclusion, RBC Capital Markets (RBC), undertook what it described as a financial summary. This involved a calculation of the value of the shares, based on a calculation of the value of the company, derived from a discounted cash flow analysis. This calculation produced a net asset value of $9.28 per share. RBC then calculated a market price to net asset value ratio in respect of Oil Search and three other companies, IPEX, Santos Limited and Woodside Petroleum Ltd, for the period December 2012 to February 2014. As a result of that analysis, RBC concluded that over that period, the market price to net asset value ratio of Oil Search largely tracked that of Woodside Petroleum Ltd. It explained that the difference in the ratio between those companies in February 2014, “94% for Woodside compared to 87% for Oil Search”, was attributable to certain factors weighing on the market price for Oil Search. It pointed out that after removal of these factors, the price to net asset ratio of each of the two companies converged. From this and certain other material to which it is unnecessary to refer, it concluded that a trading margin for Oil Search of $8.52 per share to $8.68 per share was appropriate and adopted a midrange of $8.60 per share.

4. The difficulty with this analysis is that while it might be valuable in determining whether the true value of the shares is more than what a willing but not anxious buyer in an informed market is prepared to pay for them, it does not determine what a hypothetical buyer, for the purposes of the Spencer test, would pay for the shares. The fact that certain factors weighing on the share price may influence a willing but not anxious buyer to pay, and a willing but not anxious seller to accept, less than the value of the shares, arrived at in accordance with that calculation, does not mean that what such a purchaser is prepared to pay and such a seller is prepared to accept is not market value.

5. That does not mean that the trading price will always correspond to market value. There may be distortions in the market for shares, for example, as a result of market manipulation, or there may be a lack of information in the market relevant to a decision of a willing but not anxious and knowledgeable buyer. It was not suggested in the present case that there were any such distortions or that the market was other than fully informed.

6. For these reasons, in addition to those of Ward JA, the primary judge was correct in concluding that RBC did not perform its valuation in accordance with the terms and conditions of the bonds.

7. The only other matter that I wish to refer to is this. The concluding paragraph of cl 7.5.9(vi), to the effect that a determination by an independent valuer, “in the absence of manifest or proven error”, will “bind all parties concerned”, leaves open the possibility that a valuation prepared in accordance with the terms and conditions of the bonds, but tainted with such an error, could be corrected. However, while recognising the force of the reasons of the primary judge, for the reasons given by Ward JA, I do not think that a party is entitled to have a further valuation undertaken when a valuation commissioned by it pursuant to the terms and conditions of the Exchangeable Bonds, is not in accordance with those terms and conditions.

8. MACFARLAN JA: I agree with the judgment of Ward JA and also with the additional observations of Bathurst CJ.

9. WARD JA: These proceedings involve an appeal and cross-appeal from a decision in the Commercial List of the Equity Division (International Petroleum Investment Company v Independent Public Business Corporation of Papua New Guinea [2014] NSWSC 1289) in relation to a dispute as to the proper construction of a bond deed which governed the terms applicable to a series of bonds issued as part of a $1.6 billion financing transaction entered into between the parties in 2009.

10. The issuer of the bonds was the respondent/cross-appellant, Independent Public Business Corporation of Papua New Guinea (IPBC). IPBC is a corporate instrumentality of the Independent State of Papua New Guinea. The funds raised through the issue of the bonds were to be used to finance IPBC’s participation in a liquefied natural gas project in Papua New Guinea.

11. The bonds were issued to the appellant/cross-respondent, International Petroleum Investment Company (IPIC). The bonds were to bear interest on their aggregate Principal Amount (as defined) at a rate of 5% per annum in accordance with the provisions of the bond deed to which I will refer in due course.

12. The maturity date of the bonds was 5 March 2014. On maturity, the bonds were subject to mandatory exchange in up to 196,604,177 ordinary shares in the capital of Oil Search Limited (Oil Search), a company incorporated in Papua New Guinea, the shares of which are listed on the Australian Securities Exchange.

13. Relevantly, a cash settlement amount was payable by IPBC to IPIC if the aggregate Principal Amount of the bonds being redeemed plus accrued interest on the maturity date exceeded the “Current Market Value” on the relevant Valuation Date of the aggregate of all of the ordinary shares in Oil Search which were to be exchanged for the bonds. The bond deed contained provisions for the calculation of the Current Market Value. In practical terms, the lower the market value of the Oil Search shares at the relevant date, the higher the cash settlement amount; and vice versa.

14. The dispute that ultimately arose between the parties was as to the quantification of the cash settlement amount payable to IPIC.

Background

15. Pursuant to the financing arrangement entered into by the parties, on 5 March 2009 IPIC subscribed for, and was issued, 3,362 Exchangeable Bonds (the Bonds) pursuant to the terms and conditions contained in a Bond Deed Poll executed by IPBC and dated 23 November 2008 (the Bond Deed). Relevant provisions of the Bond Deed were reproduced in the schedules to the primary judge’s reasons, which are annexed to these reasons. Terms defined in the Bond Deed will be capitalised in these reasons. The governing law of the Bond Deed was stated to be that of England and Wales (though it was not suggested that anything turned on this for the purposes of the present dispute).

15. The face value of each Bond was AUD 500,000 (defined in condition 2 of the Bond Deed as the “Principal Amount”). The total amount of the financing raised by the subscription and issue of the Bonds was AUD 1,681,000,000.

Procedure for mandatory exchange

17. The procedure for mandatory exchange on maturity (or redemption) of the Bonds was set out in condition 7.5 of the Bond Deed. In the present case, the relevant occasion was the maturity of the Bonds, not their redemption in accordance with the call redemption provisions.

18. The Mandatory Exchange Procedure involved, relevantly, the following steps.

19. First, IPIC was required to deliver to the Exchange Agent and the Calculation Agent a Mandatory Exchange Notice, to be received not later than 10 Business Days before the Maturity Date (see condition 7.5.2). The date by which the Mandatory Exchange Notice was required to be received was defined as the Valuation Date. The Mandatory Exchange Notice was required to include, among other things, directions for the payment of any Cash Settlement Amount.

20. Condition 7.5.3 permitted IPIC, at its discretion, to defer the issue of the Mandatory Exchange Notice for up to the 90th business day after the Maturity Date but there were consequences in relation to the interest payable under the Bond Deed if it chose to do so.

21. The next step in the process was the making of a determination by the Calculation Agent (defined in condition 22 to be BNY Trust Company of Australia Ltd) of certain matters as set out in condition 7.5.5: relevantly, the number of Ordinary Shares to be delivered on the Unconditional Delivery Date in exchange for the Bonds; the Current Market Value on the relevant Valuation Date of the aggregate of all the Ordinary Shares to be delivered; and the Cash Settlement Amount.

22. The Cash Settlement Amount, as noted earlier, was the amount, if any, by which the aggregate Principal Amount of the Bonds being redeemed, plus accrued interest on the Maturity Date exceeded the Current Market Value on the Valuation Date of the aggregate of all of the Ordinary Shares to be delivered to IPIC on Mandatory Exchange (condition 7.5.5(iii)).

23. The definition of Current Market Value, for the purposes of the determination required to be made by the Calculation Agent (though not for all purposes as will be seen shortly), was set out in condition 7.5.8(i)(a), as follows:

the VWAP of the security for the period of 20 consecutive Trading Days ending on the relevant Valuation Date (the “VWAP Value”)

24. VWAP, in effect the daily volume-weighted average sale price, was defined in condition 1.1 of the Bond Deed. The definition is set out in full in the schedule to these reasons.

25. What the Calculation Agent was required in the present case to determine, therefore, was the VWAP of an Oil Search Ordinary Share for the period of 20 consecutive Trading Days ending on 17 February 2014 (that being the Valuation Date).

26. The next step in the process turned on whether IPBC accepted that the VWAP Value as so determined reflected the market value of the security for the purpose of determining its Current Market Value on the Valuation Date. If it did, then the determination of the Cash Settlement Amount by the Calculation Agent, absent manifest or proven error, would be binding on all parties (condition 7.5.8).

27. However, if, as was here the case, IPBC reasonably considered, “following the occurrence of an event or a series of events”, that VWAP did not reflect the market value of the relevant security for the purpose of determining its Current Market Value on the Valuation Date, then condition 7.5.9 required IPBC to issue an Alternative Valuation Notice, whereupon the Current Market Value of the relevant security on that Valuation Date was to be (in the language of the condition, “shall be”) determined in accordance with the procedure specified in the balance of condition 7.5.9.

28. No time was specified within which an Alternative Valuation Notice was required to be issued, though in practical terms it appears that the parties contemplated that it would be issued, if at all, no later than 8 Business Days after the Unconditional Delivery Date. I say that because condition 7.5.7 provided that IPBC was to have no obligation to pay any Cash Settlement Amount unless and until the later of the aforementioned date and, if IPBC had delivered an Alternative Valuation Notice in accordance with condition 7.5.9, a determination had been delivered pursuant to condition 7.5.9(v)(b) or (vi)(b) as then applicable. If in fact no Alternative Valuation Notice were to have been delivered by the first of those two dates then the effect of the condition would seem to be that the obligation to pay the Cash Settlement Amount would arise at that point.

29. Condition 7.5.9(i) provided that the Alternative Valuation Notice was to be irrevocable and unconditional. It also provided for the matters that it was to address.

30. Condition 7.5.9(ii) then went on to provide for the appointment by each of IPBC and IPIC, within 5 Business Days after receipt of the Alternative Valuation Notice (the Initial Notice Period), of an Independent Valuer to “conduct the valuation of the relevant security”. Such a valuer was to be “an independent international investment bank of good repute, the investment banking arm of an international bank of good repute or one of the big 4 accounting firms”.

31. If either IPBC or IPIC failed to appoint an Independent Valuer within the Initial Notice Period then it was to be deemed to have waived its right to do so and to have accepted the Independent Valuer appointed by the other as the sole Independent Valuer (condition 7.5.9(iv)).

32. Condition 7.5.9(v) specified what was to occur if only one Independent Valuer was appointed; condition 7.5.9(vi) specified what was to occur if 2 Independent Valuers were appointed. Condition 7.5.9(vi), which was the provision applicable in the present case, provided that:

(vi)   if 2 Independent Valuers are appointed pursuant to condition 7.5.9(ii):

(a)   those Independent Valuers shall conduct the valuation of the relevant security by reference to the relevant Valuation Date using a methodology reasonably considered by each of those Independent Valuers as appropriate for that security;

(b)   no later than the last day of the Alternative Valuation Period, each Independent Valuer shall issue a confirmation in writing to the Issuer and the relevant Holder either (x) confirming that the VWAP Value reflects the market value of the relevant security or (y) confirming that the VWAP Value does not reflect the market value of the relevant security and specifying the Alternative Value;

(c)   if both Independent Valuers confirm that the VWAP Value reflects the market value of the relevant security, then the VWAP Value as determined by the Calculation Agent shall be the Current Market Value of the relevant security for the purpose of condition 7.5.8(i)(a);

(d)   if only one of the Independent Valuers confirms that the VWAP Value does not reflect the market value of the relevant security and specifies an Alternative Value, then the average of the VWAP Value as determined by the Calculation Agent and the Alternative Value shall be the Current Market Value of the relevant security for the purpose of condition 7.5.8(i)(b);

(e)   if both Independent Valuers confirm that the VWAP Value does not reflect the market value of the relevant security and specify an Alternative Value, then the average of the Alternative Values determined by the Independent Valuers shall be the Current Market Value of the relevant security for the purpose of condition 7.5.8(i)(b).

33. Condition 7.5.9 then concluded with the following:

Any determination by an Independent Valuer will (in the absence of manifest or proven error) bind all parties concerned.

34. The present dispute turns in substance on what was to happen, for the purposes of determining the Cash Settlement Amount, if two Independent Valuers were validly appointed, thus enlivening condition 7.5.9(vi), but (as the primary judge ultimately found) one of those valuers did not direct its determination to the relevant question, i.e., “the market value of the relevant security”, such that its valuation was affected by manifest or proven error and not binding on the parties.

What occurred in the present case

35. On 13 February 2014, within the time stipulated by condition 7.5.2, IPIC issued a Mandatory Exchange Notice.

36. The Calculation Agent proceeded to make the determination required by condition 7.5.5 and advised the parties by letter dated 28 February 2014 that:

1. the number of Ordinary Shares to be delivered on the Unconditional Delivery Date in exchange for the Bonds was 196,604,177;

2. the Current Market Value on the relevant Valuation Date of the aggregate of all the Ordinary Shares to be delivered was AUD 1,610,188,209.59; and

3. the Cash Settlement Amount was AUD 103,280,420.55.

37. Details of the calculations made by the Calculation Agent in making its determination were enclosed with the 28 February 2014 letter, from which it can be noted that:

1. the Principal Amount of the Bonds being redeemed plus accrued interest on the Maturity Date was calculated at AUD 1,713,468,630.14;

2. the VWAP determination was calculated on the basis of a 20 day VWAP determination period from 20 January 2014 to 17 February 2014; and

3. VWAP was calculated as being AUD 8.19.

38. On 24 February 2014, following a resolution by the IPBC Board to do so, the Managing Director of IPBC issued an Alternative Valuation Notice, certifying that IPBC did not consider the VWAP Value to reflect the market value of the Oil Search shares and advising that its view was based on the occurrence of various events leading up to the Valuation Date and subsequently.

39. The giving of that notice triggered the procedure in condition 7.5.9 of the Bond Deed. Although IPIC contended (ultimately unsuccessfully) that the Alternative Valuation Notice was invalid and ineffective, it proceeded on 3 March 2014, without prejudice to that contention, to appoint KPMG Corporate Finance (KPMG) as an Independent Valuer for the purposes of condition 7.5.9(ii). On the same day IPBC appointed RBC Capital Markets (RBC) as an Independent Valuer for the purposes of that condition.

40. In successive tranches on 5 and 7 March 2014, the requisite aggregate number of Oil Search shares to be exchanged for the Bonds, as determined by the Calculation Agent, were transferred to IPIC.

41. The Independent Valuers then prepared their respective reports.

42. IPBC’s appointed Independent Valuer (RBC), in a report of 18 March 2014, concluded that the 20 Day VWAP Value of AUD 8.19 per share “does not reflect the market value of Oil Search ordinary shares” and adopted AUD 8.60 (being the midpoint of the trading range it had derived for those shares as at 17 February 2014) as the Alternative Value for Oil Search Ordinary Shares. In reaching this conclusion, RBC stated its belief that a stock underperformance gap that it had identified in relation to the Oil Search shares was alleviated after the making of certain media announcements on 27 February 2014 and that the divergence in the P/NAV (price to net asset value ratio) averages of Oil Search and Woodside (a comparable company) had narrowed since 27 February 2014, suggesting that investor concerns (as identified earlier in the report) had been addressed.

43. IPIC’s appointed Independent Valuer (KPMG), in a report of 19 March 2014, concluded on the other hand that the market value of a single share in Oil Search as at the Valuation Date was AUD 8.19, this being the VWAP corresponding to a 15 trading day period “prior up to [sic] the Valuation Date”. The 15 trading day period from 28 January 2014 to the Valuation Date was considered by KPMG to be appropriate having regard to the following matters: that the market was well informed in relation to the activities of Oil Search; the release (and dates of release) of certain information to the market; and the trend in the share price observed up to the Valuation Date. In essence, what KPMG did was to exclude from consideration the first 5 days of the 20 day VWAP period due to the fact that there had at that time been an announcement of financial results by the company and it formed the view that the 15 day period better represented the market consensus view on the Valuation Date.

44. Although KPMG reached its conclusion by reference to a 15 day VWAP period rather than a 20 day VWAP period, it noted in its report that the 15 day VWAP was broadly consistent with the VWAP over 20, 30 and 60 days. The table at p 31 of its report identified VWAP over the 20 day period as AUD 8.19. The KPMG report also noted that its conclusion as to market value “approximates” the VWAP Value.

45. The upshot of both reports was that it was not the case that both Independent Valuers had confirmed that the VWAP Value reflected the market value (which would have enlivened condition 7.5.9(vi)(c)) nor had they both confirmed that it did not reflect market value (the starting point for the operation of condition 7.5.9(vi)(e)).

46. Assuming for the moment, contrary to his Honour’s finding, that both valuations were effective for the purposes of condition 7.5.8(i)(b), and assuming the KPMG valuation to have confirmed the VWAP Value (this being a moot point depending on how one reads the statement that its conclusion as to market value “approximates” the VWAP value), what condition 7.5.9(iv)(d) in terms then required was for the Calculation Agent to average the VWAP Value that had been determined by it (AUD 8.19) and the Alternative Value as determined by the one Independent Valuer (here, RBC) who had confirmed that the VWAP Value did not reflect the market value and who had specified an Alternative Value (i.e., AUD 8.60).

47. What the Calculation Agent in fact did (as described in its notification to the parties) was to calculate the Cash Settlement Amount based on “the average of the Alternative Value and the VWAP Value as determined by the two Independent Valuers” (my emphasis), which it noted as being AUD 8.395. That may simply have been an infelicitous description of the task carried out. It is not suggested that anything turns on this.

48. Based on the value so averaged at AUD 8.395, the Calculation Agent concluded that the Cash Settlement Amount was AUD 62,976,564.26. That amount was paid to IPIC on 3 April 2014. A further amount is held in escrow pending the outcome of the present appeal and cross-appeal.

Equity Division Proceedings

49. IPIC commenced proceedings in the Commercial List of the Equity Division seeking, by way of declaratory relief, declarations that IPBC was not entitled to serve its Alternative Valuation Notice; that the Alternative Valuation Notice was not valid and effective for the purposes of condition 7.5.9 of the Bond Deed; and that the determination by RBC purporting to specify an Alternative Value for an Ordinary Share in Oil Search was affected by manifest or proven error and was not binding on the parties.

50. IPBC in turn filed a Commercial List cross-claim contending that the KPMG determination was affected by manifest or proven error. It contended that the KPMG determination was not binding and of no effect and that condition 7.5.9(v) applied, so that the RBC determination was the Current Market Value for the purposes of condition 7.5.8(i)(b) of the Bond Deed. In its amended cross-claim statement it contended, further and in the alternative to the preceding contention, that, on a proper construction of the Bond Deed, condition 7.5.9 required that, in the event that there is a manifest or proven error in the determination of an Independent Valuer:

1. if the effect of that manifest or proven error on the final determination can be identified, then the parties are bound by that determination as adjusted for the manifest or proven error ([7]); or

2. if the effect of that manifest or proven error on the final determination cannot be identified, then the Independent Valuer is required to produce a substitute determination which will, in the absence of manifest or proven error, bind all parties concerned ([8]).

Primary judgment

51. The primary judge rejected IPIC’s contention that IPBC’s Alternative Valuation Notice was invalid and of no effect, concluding (at [134]) that IPBC had successfully invoked the Alternative Valuation Notice procedure. There is no challenge to that conclusion.

52. In respect of the challenges made by each of the parties to the validity or efficacy of the determination of market value made by the other party’s appointed Independent Valuer, his Honour concluded that the KPMG valuation was binding on the parties (as to which there is now no challenge) but that the RBC valuation was not ([208]). The reason for the latter conclusion was that the methodology adopted in the RBC valuation did not yield a determination of market value (or was not directed at market value) as that term was construed by his Honour and therefore did not produce an Alternative Value within the meaning of condition 7.5 ([196]; [197]); and hence the RBC valuation was not binding on the parties, being affected by manifest and/or proven error.

53. On his Honour’s findings, the position was thus that while both parties had appointed an Independent Valuer in accordance with the procedure specified in condition 7.5.9(ii) only one of those Independent Valuers had produced a binding determination. Clearly, in those circumstances none of (c), (d) and (e) of condition 7.5.9(vi) could in its terms apply.

54. His Honour did not accept IPBC’s contention that the machinery specified in the contract for the determination of Current Market Value had failed. Rather, his Honour considered it was still capable of working. Therefore, his Honour did not consider that the Court could impose an alternative machinery upon the parties (referring to Candoora No. 19 Pty Ltd v Freixenet Australasia Pty Ltd(No 2) [2008] VSC 478 at [15]). His Honour characterised the situation in effect as one in which the contractual machinery had not to that point operated as contemplated by the parties, without the fault of either, because the expert chosen by IPBC did not undertake the contractually mandated task ([212]).

55. In circumstances where his Honour did not consider that the time limit imposed by condition 7.5.9(vi)(b) rendered nugatory the “entitlement” of IPBC to have a valid and binding determination by an Independent Valuer appointed by it; where there was nothing at that point to suggest that RBC was unwilling to make a fresh determination in accordance with the Bond Deed; and where IPIC had not identified any reason why RBC could not properly re-do the valuation, his Honour considered (at [215]) that IPBC was entitled to request RBC to make a further determination in accordance with the Bond Deed. Although his Honour did not order IPBC to do so, IPBC then proceeded to make such a request of RBC and the Court has been informed (IPIC submissions [19]) that the outcome of RBC’s subsequent valuation was that it concluded that AUD 8.34, based on a one day VWAP at the end of the 20 day VWAP period represented the market value of an Oil Search Ordinary Share on the Valuation Date). There is no suggestion that RBC’s second determination was affected by manifest or proven error.

56. His Honour, by way of final orders, made a declaration that the RBC valuation was not binding on the parties and dismissed IPBC’s cross-claim. IPBC was ordered to pay to IPIC the amount of AUD 25,558,433 with interest on that amount from 3 April 2014 to the date it was paid (the interest accruing at a daily rate of AUD 4,901.64 as calculated in accordance with condition 6.4.2 of the Bond Deed). His Honour ordered IPBC to pay the costs of its cross-claim and 62.5% of the costs of the IPIC’s claim.

Appeal

57. IPIC appeals from that part of his Honour’s decision ([210]-[216]) in which his Honour found that IPBC was entitled to request RBC to make a further determination in accordance with the Bond Deed, contending that his Honour:

1. erred in finding that IPBC was entitled in accordance with the Bond Deed to request RBC to make a further determination of the market value of the shares in Oil Search Limited; and

2. should have found that the “Current Market Value” of the shares under the Bond Deed was to be determined based on 20 day VWAP.

58. IPIC seeks an order, in lieu of orders 3, 4, 5 and 6(ii) made on 6 February 2015, that IPBC pay to it the amount of AUD 40,303,856.33 plus interest at the default rate specified in condition 6.4 of the Bond Deed from 3 April 2014; and also seeks an order that IPBC pay the whole of its costs.

Cross-Appeal

59. By notice of cross-appeal, IPBC appeals from that part of his Honour’s reasons ([99]-[104], [172]-[197], [208] and [218]), relating to his Honour’s finding (at [208]) that the RBC determination of 18 March 2014 was not binding. It seeks to set aside orders 1, 3, 4, 5 and 6 made on 6 February 2015. It contends that his Honour:

(1)   (a)   erred in concluding that the RBC Determination of 18 March 2014 (RBC Determination) was not a determination in accordance with cl 7.5.9 of the Bond Deed and was affected by manifest or proven error;

(b)   erred in concluding that the RBC Determination did not assess the market value of an Oil Search share; and

(c)   erred in concluding that “market value” for the purposes of cl 7.5.9 of the Bond Deed was, in the absence of abnormalities in the operation of the market, confined to prices actually obtainable in market sales;

(2)   (a)   ought to have concluded that “market value” for the purposes of cl 7.5.9 of the Bond Deed included a value calculated by any methodology reasonably considered by an investment banker as appropriate to calculate market value;

(b)   ought to have concluded that the methodology employed in the RBC Determination was such a methodology;

(c)   further or alternatively, ought to have concluded that the observable market prices were affected by abnormalities in the operation of the market;

(d)   ought to have concluded that the RBC Determination assessed the market value of an Oil Search share; and

(e)   ought to have concluded that the RBC Determination was a valid determination of market value within the meaning of cl 7.5.9 of the Bond Deed and therefore binding on the parties.

Notice of Contention

60. IPBC has also filed a notice of contention, which it presses only in the event that IPIC’s appeal is successful on the basis that his Honour erred in holding that IPBC was entitled to request RBC to make a second determination. It contends, in the alternative or in addition to its notice of cross-appeal, that his Honour’s decision should be affirmed on grounds other than those relied upon by the Court below, namely on the grounds that:

1. Having concluded that the RBC valuation did not produce an Alternative Value within the meaning of condition 7.5 ([196]) and was not binding on the parties ([208]), the trial judge could have concluded but that the determination of the Alternative Value by IPBC’s appointed valuer had miscarried; and

1. determined the Alternative Value for the purposes of condition 7.5.9(vi)(d) of the Bond Deed (either himself or by referral to an expert) of an Oil Search Limited share at the market price on 17 February 2014 of $8.34; or alternatively

2. corrected the error identified by the Court in the RBC valuation such that the RBC determination of the value of an Oil Search Limited share was the market price on 17 February 2014 of $8.34.

2. In the event that the trial judge was incorrect to find (at [213]) that the contractual machinery in condition 7.5.9 of the Bond Deed was still capable of working, the trial judge could have concluded that the contractual machinery in condition 7.5.9 of the Bond Deed had failed and:

1. determined the Alternative Value for the purposes of condition 7.5.9(vi)(d) of the Bond Deed (either himself or by referral to an expert) of an Oil Search Limited share at the market price on 17 February 2014 of $8.34; or alternatively

2. corrected the error identified by the Court in the RBC valuation such that the RBC determination of the value of an Oil Search Limited share was the market price on 17 February 2014 of $8.34; or alternatively

3. ordered or permitted IPBC to procure a fresh determination from RBC of the value of an Oil Search Limited share on 17 February 2014.

61. Pausing here, IPBC’s cross-appeal and notice of contention refer variously to the RBC determination of 18 March 2014 and the RBC valuation. In IPBC’s opening oral submissions on the cross-appeal, Mr Moore SC nevertheless submitted that the essence of the error in IPIC’s position was an assumption that condition 7.5.9 deals with the provision of “valuations” rather than the provision of “determinations”.

62. To be precise, condition 7.5.9(vi), read with the definition of Alternative Value in condition 7.5.9(v)(b), refers to the conduct by the Independent Valuers of the “valuation” of the relevant security, followed (if the Independent Valuer confirms that the VWAP Value does not reflect the market value of the relevant security) by the specification of the market value of that security “as determined” by that Independent Valuer. Elsewhere (in conditions 7.5.9(vi)(d) and (e)) condition 7.5.9 provides for an averaging process by reference in part to the Alternative Value(s) “as determined” or “determined” by that Independent Valuer or the Independent Valuers as the case may be. In those circumstances, what flows from any distinction between “valuation” and “determination” for the purposes of IPBC’s argument is unclear to say the least. In these reasons, where I use the terms “valuation” and “determination [i.e., meaning a determination of market value consequent upon the conduct of a valuation]” by the Independent Valuer(s), I am not intending to draw any distinction between the two.

Outcome of the present proceedings

63. The parties are agreed that the possible outcomes in these proceedings are as follows:

1. If IPIC succeeds on its appeal (and IPBC fails on its cross-appeal), then the Current Market Value of the relevant share was AUD 8.19 and the Cash Settlement Amount was AUD 103,280.420.55 with the result that IPIC is entitled to recover the additional amount of AUD 40,303,856.33 plus interest;

2. If both IPIC and IPBC fail in their appeal and cross-appeal, respectively, then the position is as reflected in the orders made by the primary judge, namely, the Current Market Value of the relevant share is the average of AUD 8.19 and AUD 8.34 (i.e., AUD 8.265) and the Cash Settlement Amount was AUD 88,534,997.23, with the result that IPIC is entitled to recover the additional amount of AUD 25,558,433 plus interest;

3. If IPBC succeeds on its cross-appeal, and the RBC determination was valid, then the Current Market Value of the relevant share is the average of AUD 8.19 and AUD 8.60 (i.e., AUD 8.395) and the Cash Settlement Amount was the amount paid to IPIC on 3 April 2014 (AUD 62,976,564.23) with the result that no further amount is payable by way of the Cash Settlement Amount.

Structure of these reasons

64. If his Honour erred in concluding that the RBC determination of Alternative Value was not binding on the parties, then the issues raised in IPIC’s appeal and IPBC’s notice of contention do not arise. It is therefore convenient first to address IPBC’s cross-appeal, which challenges his Honour’s finding that the RBC determination did not assess or direct itself to the “market value” of an Oil Search share and thus was not a determination in accordance with condition 7.5.9 of the Bond Deed.

IPBC’s cross-appeal – validity of RBC determination

Market Value

65. The first question that arises in this context is what, properly construed, is meant by the term “market value” in condition 7.5.9. Unlike “Current Market Value”, this term is not defined in the Bond Deed.

His Honour’s reasoning

66. His Honour addressed this question at [99]-[104].

67. His Honour referred (at [100]) to the settled meaning at general law of the concept of, and test for, market value as articulated in Spencer v The Commonwealth [1907] HCA 82; (1907) 5 CLR 418, namely that which a willing and knowledgeable but not anxious purchaser would pay a willing and knowledgeable but not anxious vendor in an arm’s length transaction, and to the expression of the test in Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 514 as the value identified according to what price freely contracting, fully informed parties would have offered and accepted.

68. His Honour noted (at [101]) that, at general law, market values are the prices actually attainable in market sales (citing HTW Valuers Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640) and that this is an objective standard (citing MMAL Rentals Pty Ltd v Brunning [2004] NSWCA 451; (2004) 63 NSWLR 167 at 177). His Honour also noted that the test for market value is to be contrasted with tests for value expressed in different terms, though observing that the distinction between them is sometimes difficult to draw.

69. At [104], his Honour concluded that the structure and operation of the Bond Deed in general, and a number of its specific provisions, made clear that, absent abnormalities in the operation of the market, the parties intended that the test for the market value of an Oil Search share would be the prices actually obtainable in market sales. His Honour drew support for that conclusion from two specific aspects of the Bond Deed.

70. First, that IPIC was to receive shares and, if necessary, cash in exchange for the fixed money face value amount of the Bonds plus interest and that the number of shares to be delivered “as part of the effective repayment” was fixed by reference to stock exchange prices. His Honour observed that “the mechanism is intended to give IPIC its money back”, it being able to recover its money by selling the shares on the market.

71. Second, his Honour considered that the opening words of condition 7.5.9 (“following the occurrence of an event or a series of events”) made it clear that the parties expected that, absent the occurrence of a relevant event or events, VWAP would reflect the market value and hence the Alternative Valuation Notice must specify a reasonable basis for a different view. His Honour noted that Current Market Value, as defined in condition 7.5.8, was objectively ascertained by reference to VWAP and that the definition of VWAP itself excluded from the calculation transactions that were not in the ordinary course. His Honour further noted that each Independent Valuer was required to confirm that VWAP either reflected market value or it did not (and that the Issuer Redemption Procedure in condition 7.2, to which it is not necessary here to refer, incorporated the same objective procedure).

IPBC’s submissions

72. IPBC contends that his Honour erred in concluding that “market value” for the purposes of condition 7.5.9 of the Bond Deed was so confined as expressed by his Honour at [104] (see [69] above). It advances three reasons for that contention.

73. First, it is submitted that “market value” must be read in light of the identity of the possible entities selected to conduct the valuation, the limits on their discretion to select a valuation method, and the limits on the circumstances in which their valuation could be set aside.

74. IPBC argues that the requirement that “each” Valuer consider its own methodology to be appropriate for valuing the relevant security recognises that reasonable valuers may differ in the methodologies chosen; that the requirement that this methodology be considered “reasonable”, being an objective standard, means reasonable having regard to the range of potential methodologies that could be used within the stipulated profession of the valuer (i.e., investment banker or accountant); and that the stipulation that a valuation will bind the parties unless affected by manifest or proven error must be construed as “manifest or proven error in applying the methodology reasonably considered as appropriate” by that Independent Valuer.

75. It is submitted by IPBC that condition 7.5.9 does not permit the setting aside of an Independent Valuer’s valuation in circumstances where that Independent Valuer has adopted a methodology which it reasonably considered as appropriate for the security concerned and where there was no manifest or proven error in applying that methodology.

76. Second, it is submitted that, having regard to the text and context of condition 7.5.9, the condition operates when IPBC “reasonably considers that VWAP (i.e., a measure of market price) does not reflect the market value of the relevant security” (emphasis as per IPBC’s submissions). It is submitted that this suggests that “market value” in condition 7.5.9 is a wider notion than “market price” and may well be distinguished from market price. IPBC also notes that the introductory words of condition 7.5.9 (“following the occurrence of an event or series of events”) are framed in general terms and submits that there is nothing in the text of condition 7.5, or in the Bond Deed as a whole, to suggest that the alternative valuation process was to be available only in some “extremely rare” circumstance.

77. IPBC relies on those two factors considered together as indicating that, while 20 day VWAP is the “default measure” of market value, market value could well differ from a market price measure such as 20 day VWAP and may be assessed using any methodology, not limited to price, reasonably considered appropriate by persons from one of two different disciplines. In those circumstances, it is said that his Honour’s conclusion at [104] is not supported by the structure of the Bond Deed. (Interestingly, given that this is in effect the role IPIC contends it plays in the present scenario, IPBC here appears to accept that VWAP is a default measure of market value.)

78. The third reason put forward for the submission that his Honour’s conclusion as to the meaning of market value was wrong amounts to criticism of the two observations made by his Honour at [104] in support of that conclusion (summarised at [70] and [71] above).

79. As to the first of those (namely that condition 7.5.9 was intended to provide a mechanism to “give IPIC its money back”) IPBC argues that this notion is misplaced because the number of shares to be delivered is fixed not by the alternative valuation procedure but by 20 day VWAP (see condition 7.5.5(i)). It is submitted that since the Alternative Value, if any, was not used to calculate the number of shares which could later be sold on the market by IPIC to recover its money, this notion is irrelevant to the meaning of market value in condition 7.5.9.

80. It is further submitted that the sale of shares on the market is not a means for IPIC to recover its money since on any view its stake in Oil Search was a very large stake. At the time of entry into the Bond Deed, its stake represented 17.6% of the issued share capital of the company (see RBC valuation report dated 18 March 2014). IPBC notes that therefore the sale of a large block of shares, whether on the market or at a private sale, would almost inevitably be at a discount to current market prices (reference being made to Ms Royle’s evidence in that regard, an investment banking expert called by IPBC).

81. As to the second of his Honour’s observations at [104] (namely that the opening words of condition 7.5.9 made clear that the parties expected that, absent the occurrence of a relevant event(s), VWAP would reflect market value), it is submitted by IPBC that the structure of condition 7.5 and the existence of an alternative valuation procedure in 7.5.9 contradicts a construction of “market value” in condition 7.5.9 which ties it to market price.

82. IPBC submits that this Court should construe “market value” as encompassing market value as understood by investment bankers or accountants and should find that, absent any specific identified error, the RBC determination binds the parties “as long as it uses a notion of market value commonly adopted by investment bankers, and as long as the methodology applied is one that a reasonable investment banker would use”.

83. IPBC notes in this regard that Mr Corey Fraiberg, the managing director of a related company to RBC (RBC Dominion Securities Inc), was not cross-examined as to his explanation of the process by which the RBC determination came into existence. IPBC says that there was no suggestion that RBC did not reasonably consider its methodology appropriate to valuing shares in Oil Search. It further notes the expert evidence of Ms Royle to the effect that the methodology was one that a reasonable investment banker would use and submits that her evidence supports the proposition that the notion of market value adopted by RBC is one commonly used by investment bankers.

Proper construction of market value

84. Turning first to the submission that his Honour wrongly took into account that the ascertainment of the Cash Settlement Amount was part of a process by which IPIC was to be repaid the Principal Amount plus interest, it is clear both that the subscription and issue of the Bonds was for the purposes of a financing transaction and that the mandatory exchange procedure (of which payment of any Cash Settlement Amount formed part) was the mechanism by which IPIC was to recoup the funds it had advanced plus interest. This Court was not taken to any other provision by which repayment of the funds that were the subject of the financing transaction was to occur.

85. His Honour’s observation as to the “effective repayment” process was not therefore inapt. IPBC does not dispute that the determination of the number of ordinary Oil Search shares to be delivered to IPIC on mandatory exchange was to be made by reference to stock exchange prices (VWAP). The mandatory exchange procedure included provision for any shortfall in the amount notionally so recovered by the delivery of shares to be made by way of the Cash Settlement Amount. In other words, what the parties clearly contemplated was that a combination of the Oil Search shares and cash, to the extent of a shortfall, would be the means by which “repayment” of the funds that had been advanced, plus interest accrued at the Maturity Date, would be effected.

86. Whether IPIC would or might suffer a discount if it chose (or were for some reason forced) immediately to sell a large parcel of the shares obtained as part of the mandatory exchange procedure is not to the point.

87. As to the submission that Alternative Value involved a concept different from the VWAP “market price” or default measure of value, it by no means follows from the fact that the parties had agreed to put in place an alternative valuation procedure to operate if IPBC reasonably considered (following the occurrence of an event or series of events) that VWAP did not reflect “market value”, that “market value” for the purposes of that alternative procedure was to bear whatever meaning the valuers chose to ascribe to it as part of choosing an appropriate methodology for their respective valuations.

88. Finally, insofar as IPBC maintains that his Honour ought to have concluded that “market value” included a value calculated by any methodology reasonably considered by an investment banker as appropriate to calculate market value, this conflates, in my opinion, what was to be determined (market value) with the methodology by which it was to be determined.

89. True it is that condition 7.5.9(vi)(a) makes provision, if two Independent Valuers are appointed, for those Independent Valuers to conduct the valuation of the relevant security by reference to the relevant Valuation Date “using a methodology reasonably considered by each of those Independent Valuers as appropriate for that security” (my emphasis). However, that speaks only to the appropriateness of the valuation methodology to be adopted for the purpose of assessing the market value of the relevant security; not what would be considered the appropriate definition of the market value of that security. Whatever methodology was reasonably considered to be appropriate, it was required to be one that was directed at the determination of “market value” as that term was to be understood. Throughout condition 7.5.9 reference is made to the “valuation of the relevant security” for the purposes of confirming whether or not the VWAP Value reflects “the market value” of the security (and, if it does not, specification of the Alternative Value, namely “the market value of the relevant security”).

147. IPBC’s complaint that this would be an odd result where IPBC has passed through the gateway leading to the independent valuation procedure (and hence has reasonably considered that VWAP does not reflect market value) does not take into account that, however reasonable its consideration may be, the parties’ agreement also contemplates that the end result of the independent valuation procedure may be that VWAP is confirmed and that this may be so in circumstances where there may be a difference of opinion between valuers in that regard. Triggering the independent valuation procedure, in other words, does not foreclose the possibility that the end result may still be VWAP.

148. The fact that (as raised by the submission summarised at [140] above) on IPIC’s construction the parties may bear the risk of the valuation process “miscarrying” through no fault of their own rather begs the question because it assumes that the process has “miscarried” if the “default” measure of VWAP is then the outcome. However, even if it is the case that, due to a failure on the part of the Independent Valuer to deliver an error-free determination, the result of the process leads to the determination of a Cash Settlement Amount that is different from the one which an hypothetically error-free determination would have done, that does not mean that the construction for which IPIC contends is commercially absurd. It simply reflects the fact that the parties bound themselves to a particular process, involving the input of third parties, and that those third parties might for whatever reason not deliver an error-free determination or indeed any determination within the stipulated period. (In some circumstances one can foresee that that might give rise to a complaint against the third parties, but that is beside the point.)

149. As to the submission by IPBC that the emphasis placed on the timing considerations is misconceived, IPIC points out that, although 7.5.3 provides for a later issue by IPIC of the Mandatory Exchange Notice, IPIC is not entitled to interest for the period commencing on the Maturity Date and ending on the date of delivery of the Mandatory Exchange Notice in those circumstances and the extension is in any event not open ended, it being limited to a 90 day period. As to the other timing conditions referred to by IPBC, IPIC argues that any delays in the delivery of shares under 7.5.4(ii)(b) would be brought about by failure, on the part of IPIC, and that condition 7.5.4(ii)(c) only applies to “Other Property”, and therefore these provisions do not support a relaxation of timing requirements designed to ensure the prompt repayment of principal and interest.

150. The fact that time is not expressed to be of the essence in relation to the delivery of the valuations does not detract from the fact that the parties have agreed a short time frame for the determination of the Cash Settlement Amount which is consistent with the construction for which IPIC contends. IPIC argues that the delivery of a valuation, which is binding, within the stipulated time period is the condition which must be satisfied in order for the valuation to be taken into account and in that sense it does not matter that the time period is not stated to be of the essence but that in any event, pointing to the imperative language used (“no later than”) and the significance of that which flows from the valuation process, this should be characterised as an essential term.

151. As to the suggestion that potentially uncommercial results would flow from its construction, IPIC argues that IPBC’s examples are based on a misunderstanding of its construction. As noted earlier, IPIC maintains that if an Alternative Value is not determined under condition 7.5.9, then under condition 7.5.8(i) the Current Market Value is 20 day VWAP. It submits that had one Valuer (say KPMG) reached an Alternative Value and the other valuation was not binding due to error, then an Alternative Value for the proposes of condition 7.5.8(i) would have been reached, namely the average of the valid valuation and VWAP (by reference to condition 7.5.9(vi)(d)). IPIC does not submit that in that circumstance the valid determination would be given 100% weight. As to the second example given by IPBC (see [137] above), it is said that in those circumstances, condition 7.5.9(vi)(d) is engaged which would yield an Alternative Value (not VWAP) for the purpose of condition 7.5.8(i).

152. As to the third example (see [138] above), IPIC contends that the result postulated is not uncommercial; the parties’ agreement was that, if a valuation was subject to error, then it was not binding on the parties and, since the parties did not agree that in those circumstances there would be a further attempt to obtain a valuation, there is nothing odd about the default provision (VWAP) applying in the event that both valuations are flawed or subject to error. IPIC points out that in the present case the only valid valuation was one that reached the same result as VWAP.

153. As to the proposition put by IPBC that IPIC would still be entitled to interest for the interim period, and hence its reliance on the timing provisions in that regard is misconceived, IPIC points to condition 6.2.2 which clearly provides that the Bonds will cease to bear interest on the day before the Maturity Date. Condition 6.4 deals with interest on amounts “due and payable”, including the Cash Settlement Amount, for any payment delays arising after the maturity of the Bonds.

154. IPIC submits, and I agree, that the concluding paragraph in condition 7.5.4 does not create an entitlement to interest on the Principal Amount of the Bonds in excess of the value of the shares transferred. IPIC submits that all that condition 7.5.4 does is to make it clear that, in the event that shares are not delivered to IPIC on the Maturity Date but on a later date under condition 7.5.4(ii) (which delay would be due to IPIC’s actions), IPIC does not receive interest for the period following the Maturity Date. Condition 7.5.4 deals with the delivery of the shares and the timing of the delivery of the shares. It does not provide for interest on the Principal Amount of the Bonds beyond the Maturity Date; nor is there any provision that would determine when any such interest would be payable. Instead, condition 6.1, which provides for interest to be payable semi-annually only makes sense during the currency of the Bonds.

155. It is further noted by IPIC that condition 7.5.5 makes no provision for the Calculation Agent to make an additional determination as to the daily amount of interest on the unpaid portion of the principal of the Bonds and does not provide for the amount of accrued interest from the Maturity Date on such amount to be payable at the same time as the Cash Settlement Amount was payable under condition 7.5.7.

156. The commercial consequences of an indeterminate delay in the calculation and payment of the Cash Settlement Amount in my opinion support the construction of conditions 7.5.8 and 7.5.9 for which IPIC contends. The potential loss of interest would be exacerbated if, as IPBC contends, there is no obligation to pay the Cash Settlement Amount until after the delivery by both Valuers of an error-free determination; particularly if there is no defined time period within which that must occur due to the “entitlement” of a party to request further determinations in the event of an error rendering the first or earlier determination(s) not binding.

157. In my opinion, for the above reasons, the operation of the relevant conditions in the circumstances which eventuated, is that for which IPIC contends and its appeal should be allowed.

IPBC’s notice of contention – was it open to his Honour to reach the same result by some other means of determining market value?

165. IPBC submits that, in the event that his Honour was incorrect in construing the Bond Deed as permitting a further determination, his Honour could nevertheless have reached the same result by determining the value himself (as the market price on the Valuation Date); by correcting the error in the RBC valuation; or by referring the matter to an expert for a valuation.

166. On this issue, while IPIC accepts that an obvious arithmetical error would be capable of correction, it submits that the Court cannot amend or re-write the parties’ agreement even when dealing with provisions concerning the machinery for resolving disputes (referring to Tawfik v Bill [2010] NSWSC 1034 at [24]). IPIC submits that reliance upon Sudbrook is misplaced on the basis that, here, there was not a failure of the contractual machinery and hence no need to supply a missing ingredient or mechanism to assist the parties in circumstances where the end point of the contractual machinery was identifiable (as was the case in Sudbrook). Rather, IPIC points to the fact that (albeit, it would seem, only on its construction of the relevant clauses) there was a default value provided for under the Bond Deed, that being VWAP.

167. IPIC argues that any suggestion that the primary judge should have undertaken an exercise of determining market value of the shares in Oil Search or himself correcting the error in the RBC valuation is inconsistent with the requirements specified in the Bond Deed. It points to the fact that condition 7.5.9(ii) requires that the Independent Valuer be within a specified class (into which the primary judge self-evidently does not fall).

168. I agree with his Honour’s view that it was not appropriate for the Court to undertake the valuation process in place of RBC and it is not apparent that the error made by RBC was of an obvious mechanical kind so as to be capable of simple rectification (in such a fashion as a typographical error or arithmetical error may have been).

169. As to the suggestion that a referee could have been appointed or that there could have been enquiry into the market value by a referee, IPIC submits, and I agree, that this would involve a substantial departure from the valuation exercise agreed to by the parties.

170. IPIC further submits that if there has been a breakdown in the contractual machinery and IPBC is correct in contending that the Court should have supplied the result, the only possible outcome would have been that market value was VWAP in circumstances where the Calculation Agent provided a binding determination of VWAP (AUD 8.19) and the only Independent Valuer who provided a binding determination (KPMG) also provided a determination of AUD 8.19.

171. I am not persuaded that his Honour erred in not adopting the courses propounded in the notice of contention. I would therefore dismiss the notice of contention.

Orders

172. For the reasons above, I would allow the appeal and dismiss the cross-appeal and notice of contention. Costs should follow the event. The orders should therefore reflect the outcome set out at [63](i) above. The orders I propose are:

1. Allow the appeal.

2. Set aside orders 3, 4, 5 and 6(ii) of the orders made by Hammerschlag J on 6 February 2015 and in lieu thereof order as follows:

1. The defendant pay to the plaintiff the sum of AUD 40,303,856.33 plus interest from 3 April 2014 at the Default Rate specified in Condition 6.4 of the Bond Deed on that amount;

2. The defendant pay the plaintiff’s costs of the proceedings.

3. The cross-appeal and notice of contention be dismissed.

4. The respondent pay the appellant’s costs of the proceedings in this Court.

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IPBC SCHEDULE (60.4 KB, PDF)

Amendments

04 December 2015 - Typographical errors pars 47, 108, 111

Decision last updated: 04 December 2015