Lake Cumbeline Pty Ltd v Effem Foods Pty Ltd
[1995] FCA 451
•29 JUNE 1995
CATCHWORDS
TRADE PRACTICES - misleading or deceptive conduct - investment and continuation of investment in fish processing company with one major customer - alleged misrepresentation by major customer to investors - whether representation made that binding contract entered into - whether representation made that fish processing company had capacity to supply in accordance with contract - whether duty to investigate, for benefit of potential investors, capacity of supplier to fulfil supply - whether representation made of exclusive contract - whether representations made as to capacity to process - whether representation made of confidence in and good relationship with fish processing company - whether representation made that there would be a long term relationship with fish processing company, involving profitability and mutuality of benefits - whether representation that respondent "looked after its suppliers" - whether representation made of payment on a cost plus basis - whether representation made that an evergreen, continuing long term relationship for the supply of fish was intended - whether representation made that respondent would source in the first instance its requirements for fish from fish processing company - whether representation made that respondent would assist in sourcing fish - whether representation made that jack mackerel was a long term need for respondent - whether representation made that proposals and investment strategy being pursued by applicant satisfactory to respondent and in accordance with arrangements made between them - whether representation made that if third and fourth applicants controlled management, then respondent would give fish processing company all the business it could handle - whether representation made that fish processing company could be assured of a long and profitable future as a supplier to respondent - whether representation made that respondent had never offered to buy fish from a certain supplier and had no intention of doing so - whether representation made that respondent would pay a price to give a return on all expenditure to date and further investment, so long as certain persons were removed from management - whether representation made that respondent would give a long term contract such as to give back investment and a profit - whether representation made that respondent's requirements for mackerel were budgeted to go up tremendously - whether representation made that respondent would give fish processing company the profits and future certainty to satisfy its bankers and repay loans - whether representation made that respondent would give more than standard twelve month contract - whether any of these representations constituted misrepresentations - whether there was reliance on any misrepresentations by applicants - whether investment would have been made if alleged representations had not been made.
TRADE PRACTICES - misleading or deceptive conduct - whether misrepresentation by silence - whether silence as to
interpretation of agreement constitutes misrepresentation - whether obligation to disclose intentions in relation to agreements - whether reasonable expectation of disclosure - whether silence deliberate.
Trade Practices Act 1974 (Cth) s 52
Brown v Jam Factory Pty Ltd (1981) 53 FLR 340
Taco Co of Australia Inc V Taco Bell Pty Ltd (1982) 42 ALR 177
Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25
Yorke v Lucas (1985) 158 CLR 661
General Newspapers Pty Ltd v Telstra Corporation
(1993) 45 FCR 164
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216
Lam v Ausintel Investments Australia Pty Ltd
(1990) 12 ATPR 50, 866
Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470
Gould v Vaggelas (1985) 157 CLR 215
Ricochet Pty Ltd v Equity Trustees Executors and Agency Company Ltd (1993) 41 FCR 229
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546
Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337
Halton Pty Ltd v Stewart Bros Drilling Contractors Pty Ltd (1992) 14 ATPR 40, 146
Mander Forklift Pty Ltd v Dairy Farmers Co-operative
(1990) 12 ATPR 53, 227
Lawson v Ampol Ltd (1993) ATPR 41-204
Hooper v Commonwealth of Australia (unreported, Sup Ct, NSW, Comm Div, Gleeson CJ - 16 Nov 1990)
Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd
(1991) 24 NSWLR 1
Kimberley NZI Finance Ltd v Torero Pty Ltd
[1989] ATPR (Digest) 53, 193
McWilliam's Wines Pty Ltd v L S Booth Wine Transport Pty Ltd (1992) 25 NSWLR 723
LAKE CUMBELINE PTY LIMITED, IDOBOOK PTY LIMITED,
PETER HORROBIN, RICHARD SANDS AND RAYMOND PRIDMORE v
EFFEM FOODS PTY LIMITED trading as UNCLE BEN'S OF AUSTRALIA
No NG 129 of 1990
Tamberlin J
Sydney
29 June 1995
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 129 of 1990
GENERAL DIVISION )
BETWEEN: LAKE CUMBELINE PTY LIMITED
First Applicant
IDOBOOK PTY LIMITED
Second ApplicantPETER HORROBIN
Third ApplicantRICHARD SANDS
Fourth ApplicantRAYMOND PRIDMORE
Fifth Applicant
AND: EFFEM FOODS PTY LIMITED
Trading as
UNCLE BEN'S OF AUSTRALIA
Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 29 JUNE 1995
MINUTE OF ORDERS
THE COURT ORDERS THAT:
The application be dismissed.
The applicants pay the respondent's costs, except for any costs awarded to the applicants in interlocutory proceedings.
NOTE: Settlement and entry of orders is dealt with in accordance with Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 129 of 1990
GENERAL DIVISION )
BETWEEN: LAKE CUMBELINE PTY LIMITED
First Applicant
IDOBOOK PTY LIMITED
Second ApplicantPETER HORROBIN
Third ApplicantRICHARD SANDS
Fourth ApplicantRAYMOND PRIDMORE
Fifth Applicant
AND: EFFEM FOODS PTY LIMITED
Trading as
UNCLE BEN'S OF AUSTRALIA
Respondent
CORAM: TAMBERLIN J
PLACE: SYDNEY
DATED: 29 JUNE 1995
REASONS FOR JUDGMENT
Introduction
This action arises from an investment by the first applicant, Lake Cumbeline Pty Limited ("Cumbeline") made on 30 March 1987, in purchasing the shares of a company named Trawl Industries of Australia Pty Limited ("Trawl"), which was engaged in the processing and supply of fish, mainly pilchards and jack mackerel. The 50% shareholding was purchased from Atasco Australia Pty Limited ("Atasco") which was controlled
by Bruce Fasham ("Fasham"), Jon Wilson ("J Wilson") and Gavin Wilson ("G Wilson).
At the time of the investment Trawl had one major customer, namely Effem Foods Pty Limited, the respondent, which traded under the name of Uncle Ben's of Australia (hereafter referred to as "UBA").
UBA is a fully-owned subsidiary of Mars Inc, an American multi-national corporation which is one of the largest food supply companies in the world. UBA is said to be the largest pet food manufacturer in the Southern hemisphere. In Australia UBA, in addition to marketing a wide variety of food for human consumption, marketed and sold pet food products including foods for cats and dogs. The brands used by UBA are well known and include products such as "WHISKAS" and "PAL".
At the time of purchase of the shares in Trawl by Cumbeline on 30 March 1987, there was a contract and a Heads of Agreement in force between Trawl and UBA relating to the supply of fish to UBA for use in the manufacture of pet food. These agreements were an order (Contract No W17299) dated 11 February 1987, for the purchase of 6,250 tonnes of fish worth over $4 million, and Heads of Agreement, dated 26 March 1987 between Trawl and UBA relating to the supply of fish. At all material times the directors of Atasco were Fasham and members of the Wilson family.
Shortly, the claim is that Cumbeline and the other applicants initially invested in Trawl and persisted with that investment on the basis of a series of misrepresentations (24 in all) made by UBA as to Trawl's business and as to the relationship between Trawl and UBA as a result of which the applicants, in reliance on the misrepresentations, made, and continued with the Trawl investment and as a result suffered substantial loss and damage.
The investment proved to be a disaster. Receivers were appointed to Trawl on 18 April 1989 and liquidators appointed on or about 20 August 1990. The applicants face substantial liabilities as a result of and arising from the investment.
Application and Statement of Claim
The applicants claim damages under s 82 of the Trade Practices Act 1974 (Cth) ("TPA"), exemplary damages and interest, together with an indemnity under s 87 of the TPA and costs. The claim is for a total amount in the order of $16 million.
In brief, the applicants' case is that the respondent, UBA, engaged in false and misleading conduct within the meaning of s 52 of the TPA on at least ten separate occasions, and has made in all approximately twenty-four misrepresentations. It is also claimed that in respect of each of the misrepresentations, the conduct of the respondent also amounted to negligent misrepresentation at common law. In respect of four of the occasions on which it is alleged misrepresentations were made, it is said that the misrepresentations were false to the knowledge of UBA, or were made recklessly. It is claimed that the applicants acted to their detriment in reliance on those false representations and as a result UBA is liable to the applicants in damages for negligence, fraud and deceit.
The Parties
Cumbeline
Cumbeline was incorporated prior to 1987. Up to 31 August 1987, the third applicant, Peter Horrobin ("Horrobin") and the fourth applicant, Richard Sands ("Sands") were the sole shareholders and directors of Cumbeline. Horrobin and Sands each held one share in Cumbeline. On 1 September 1987, a further share in Cumbeline was issued to a family company controlled by the fifth applicant, Raymond Pridmore ("Pridmore"), namely Meriadoc Pty Limited ("Meriadoc"). About that time Pridmore also became a director of Cumbeline along with Sands and Horrobin.
As at 30 March 1987, Cumbeline had a paid-up capital of $2 and net assets of $26,265. It was the primary vehicle through which the investment was made in Trawl.
Idobook Pty Limited ("Idobook"), the second applicant, also made investments in Trawl. It was a company controlled by Sands and his family. Idobook also lent funds to Cumbeline both initially and on an ongoing basis. Funds for the investment by Cumbeline, in Trawl, were obtained in the main from the ANZ Bank ("ANZ").
On 30 March 1987 Cumbeline acquired a 50% shareholding interest in Trawl. By July 1988 it had acquired the further 50% interest giving it total ownership of Trawl.
Pridmore
In December 1986 Cerberus Investments Pty Limited ("Cerberus"), a company controlled by Pridmore, was engaged by companies associated with Horrobin and Sands to find investment opportunities for their consideration. Pridmore was not a direct investor in Cumbeline or Trawl, and his interest in these proceedings principally arises from guarantees given in respect of the debts incurred by Cumbeline and Trawl.
Pridmore had substantial experience in locating suitable business investments and he regarded himself as competent in that area. He was employed because he claimed, and Sands and Horrobin believed, he had a particular expertise in the field of small manufacturing companies which they did not have.
Pridmore had a degree in Economics, and was experienced in investigating a variety of companies for the purpose of business investment. He had done this almost continuously since 1977. He was competent in the business investment area and had specialised expertise in takeovers and acquisitions. He had experience in "company-type doctor" consulting activities and had been a director of several companies including three major listed companies. He was not "a babe in the woods" when it came to investigating prospective business investments. He was a sophisticated and skilful businessman. He studied some contract law for his Economics degree. He made his own independent judgments in relation to documents and if he did not agree with Horrobin or other persons he would say so. However, he could recall no occasion on which he disagreed with Horrobin in relation to matters of contract.
Pridmore worked on investigating the proposed acquisition prior to 30 March 1987. He undertook his own investigation of the financial position of Trawl. His investigations began after he first met the Atasco directors in February 1987, and continued until the shares were purchased. He was satisfied with the investigation which he carried out prior to the Cumbeline investment on 30 March 1987.
Horrobin
Horrobin was a graduate of the University of Sydney, with degrees in Arts and Law. He was admitted as a solicitor in 1968. Prior to 1968 he was an articled clerk from 1965 to 1968, and from 1968 to 1971 he worked as a solicitor at the firm then known as Stephen Jaques and Stephen and was engaged in commercial and corporate work. In 1971 to 1972 he was head of the Consultant's Section of the Asian Development Bank in Manila assisting in the implementation of technical assistance programs in connection with regional development projects supported by the Asian Development Bank. His responsibility there was for the contractual and financial administration of all consultants and consulting firms employed by the Asian Development Bank throughout Asia, including assisting in the selection of consultants and the evaluation of consultants' proposals.
From 1972 to 1977 he was the General Counsel with the Export Finance and Insurance Corporation ("EFIC") in Sydney and created the office of General Counsel within that body. He played a leading role in establishing and operating EFIC's buyer credit and export banking facilities. His functions included commercial activities, with particular emphasis on risk assessment and abatement, involving underwriting, borrowing, lending, control over loan disbursements and loan administration, foreign negotiations, debt rescheduling, debt recoveries, liaison with international organisations and foreign government authorities.
From 1977 to 1981 he was the executive director of S G Warburg & Co Ltd of London, one of England's larger merchant banks. He was head of the Project Finance Group in charge of Warburg's finance and resource development activities worldwide. The assignments he undertook included major mining, transportation, oil and gas, refinery, pipeline and industrial manufacturing and processing projects. He was primarily responsible for the advisory service in the field of natural resource development provided to governments of developing countries and their instrumentalities by an international advisory group comprised of Warburg's (London), Maison Lazard Freres et cie of Paris and Lehmann Bros Kuhn Loeb of New York City.
Between 1982 and 1985 Horrobin did freelance consultancy work.
During the period 1 January 1980 to 31 December 1987 he claimed expertise in project finance, government export, credit finance and capital goods and services, with particular experience in developing countries, government aid projects and legal matters. From 1986 or possibly earlier, he conducted a corporate advisory practice in Sydney. In that advisory service it appears substantial amounts were earned.
Sands
Sands was a director of Trawl from March 1987. He was a guarantor of the debts of Trawl and Idobook.
As at early 1987 Sands was 36 years of age. He was a chartered accountant and an Associate member of the Institute of Chartered Accountants in Australia and the Institute of Chartered Accountants Secretaries and Administrators. He had a Bachelor of Commerce degree from the University of New South Wales. Since 1983 he has been primarily responsible for all computer assisted financial modelling and analysis carried out by P R Horrobin Pty Ltd, a consultancy firm, over a broad range of assignments. During the period prior to the establishment of his own chartered accounting firm in 1980, he spent five years with Lloyds International Limited where he designed and implemented all of the computer systems used by that bank in Australia, including all accounting functions, all money market, securities trading and loan transactions and departmental accounting for profit and cost centre reporting. Sands was initially Company Secretary and Principal Accounting Officer of Lloyds International Limited in Australia, subsequently becoming Manager of the Corporate Lending section. He held this position for about 18 months. His previous accounting training was obtained with Messrs Wayland & Wayland, Chartered Accountants of Sydney, where over a period of five years he gained broad experience of the operations of manufacturing companies. He had a wide range of business interests as at early 1987.
Sands had been associated with Horrobin since 1983 and prior to 1987 had investigated the purchase of a number of businesses. He had on his own account, or through a number of entities, bought interests in various businesses and in particular prior to the investment in Trawl he had been involved in the purchase of interests in three businesses. One of these, which was known as Duraframe Pty Ltd was made in July 1986. This was a steel housing frame business. He had an interest in a company which had a 30% interest in that company. Indirectly he was also interested in an orange orchard through an interest in another company. That company was one in which Horrobin and he had an indirect shareholding. After Cumbeline acquired its initial 50% interest in Trawl he, or a company associated with him, acquired an interest in the business owned by Telads Pty Ltd. This interest was a 75% interest. He did some parts of the investigations in relation to matters concerning those businesses in which he was directly or indirectly interested. He was also involved in a company called Restran Pty Ltd which undertook financial advisory services. Sands provided services to Horrobin's commercial consultancy business. He had certain expertise in business as at March 1987.
Prior to the contemplated acquisition of an interest in Cumbeline he had looked at and on occasions bought interests in a number of other businesses, and had experience in banking and lending.
At all material times from 1984 until 17 April 1989 Sands and his wife were the only shareholders and directors of the second applicant, Idobook, and thereafter the shareholders and directors of Idobook were varied, but this is not important for present purposes. Idobook lent money to Cumbeline and also to Trawl to assist its business operations.
It can be seen from the above that the individual applicants were at all relevant times persons of considerable expertise in wide ranging areas of business, including banking, investment and legal matters. They had financial qualifications and significant substantial commercial experience at both the national and international level as at the relevant times. They had occupied positions of great responsibility. It is important to bear in mind the extent of the qualifications and the depth of experience which the individual applicants possessed when considering the issues in the present case.
Lees
The main witness for UBA is Mr Robert Lees, ("Lees") who joined UBA in 1970 as a management trainee. Subsequently he filled other positions with the company including seven years as Purchasing Officer from 1974 - 1981. In 1981 he became a Senior Buyer for UBA, responsible for all wet raw materials. These included fish. He held that position until June 1985. From then until 1 January 1987 he was Project Manager for UBA at its Bathurst Plant, although still physically stationed at Wodonga, Victoria. From 1 January 1987 until July 1988 he was the Senior Wet Raw Materials Buyer for UBA at Wodonga. In July 1988 Mr Gordon McBurnie ("McBurnie"), took over as Senior Wet Raw Materials Buyer. From 1 July 1988 Lees was Commercial Development Manager for Masterfoods, another subsidiary of Mars Inc in Tokyo, Japan. He left the employ of UBA in March 1990. In his role as Senior Wet Raw Materials Buyer he reported directly to Mr Ian Armstrong, the Commercial Director of UBA. Lees enjoyed a great degree of autonomy and held a very senior position with the respondent. He was responsible for a budget of between $18-21 million per annum in respect of annual purchases of in excess of 100,000 tonnes of raw materials, and he negotiated all major contracts himself.
Trawl
Trawl, the fish processing and supply company, was incorporated on 8 May 1984. As at 30 March 1987 the sole shareholder in Trawl was Atasco. Fasham was a director of Trawl until February 1988. G Wilson was a director of Trawl until July 1988 and General Manager of Trawl's operations until mid-1987. J Wilson was a director of Trawl until early 1988. Kerry Wilson ("KW") became a director of Trawl to replace G Wilson. Atasco was a company controlled at all material times by Fasham and the Wilsons.
Alleged Misrepresentations
The misrepresentations alleged in the Further Amended Statement of Claim to have been made by UBA are set out below. In cases where fraud has been alleged reference is made to that allegation. The misrepresentations are claimed to have taken place between mid-March 1987 through to 27 March 1988.
Date Substance
16 March 1987 (i) That UBA had entered into a binding contract with Trawl for the supply by Trawl to UBA of 6,250 tonnes of fish in 1987. (Fraud alleged)
(ii)That UBA intended to honour its obligations under that contract. (Fraud alleged)
(iii)That the contract was a genuine one intended to be fulfilled by the parties to it. (Fraud alleged)
(iv)That Trawl presently had and/or would have the ability and capacity to supply 6,250 tonnes of fish in accordance with that contract.
18 March 1987 (v) UBA's fish requirements were projected to grow from 13,000 tonnes to 28,000 tonnes per annum over the next five years. (This alleged misrepresentation was not pressed).
(vi)That the proposed contract then under discussion with Trawl would be an exclusive one for any fish other than West Australian pilchards and that all other local suppliers would have to deal with Trawl in order to supply UBA. (Fraud alleged)
`(vii) That Trawl presently had and/or would have the capacity to process UBA's requirements and to handle the required volumes. (Fraud alleged)
(viii)That UBA had confidence in Trawl and its management and had a very good relationship with it. (Fraud alleged)
(ix)That UBA intended to have a long term relationship with Trawl involving profitability for Trawl and mutuality of benefit between Trawl and UBA.
(x)That UBA looked after its suppliers such as Trawl.
(xi)That Trawl would be paid by UBA on a cost plus basis and would make a substantial profit from the relationship between the parties. (Fraud alleged)
26 March 1987 (xii) That UBA would establish with Trawl an evergreen, continuing long term relationship for the supply of fish by Trawl to UBA.
(xiii)That UBA would source in the first instance its requirements for fish from Trawl except for Western Australia. (Fraud alleged)
(xiv)That UBA would assist and co-operate with Trawl in its effort to source raw material fish from various fishermen and enterprises within Australia. (Fraud alleged)
About April 1987 (xv) That UBA was constantly reviewing upwards its budgeted use of jack mackerel and that jack mackerel was a long term need for UBA.
About early June 87
(xvi)That the proposals contained in the documents entitled "Trawl Industries of Australia Limited - Fish Processing Plant Geelong - Development Plan" and "Purchase of New Vessels - Licences - Acquisitions Strategy" were satisfactory to UBA and were in accordance with the arrangement which had been made between Trawl and UBA.
11 September 1987
(xvii)That if Horrobin and Pridmore controlled the management of Trawl, UBA would give Trawl all the business it could handle.
(xviii)That Trawl could be assured of a long and profitable future as supplier to UBA.
August/September 1987
(xix)That UBA had never offered to buy fish from Mr Harry Mitchelson ("Mitchelson") and had no intention of doing so. (Fraud alleged)
October 1987-
January 1988 (xx) That UBA was happy to deal with Trawl and to pay a price which would give Trawl a return on all expenditure to date and which would cover a further investment by Trawl in heading and gutting equipment so long as Messrs Wilson and Fasham were removed from the management of Trawl.
18 February 1988 (xxi) That UBA was prepared to give Trawl a long term contract which would give back to the applicants their investment and a profit.
(xxii)That UBA's requirements for mackerel were budgeted to go up tremendously.
23 March 1988 (xxiii) That UBA would give Trawl the profits and the future certainty it needed to satisfy its bankers and to repay its interest and pay off its loans within the period of the contract then under discussion.
(xxiv)That UBA would give to Trawl more than the standard 12 month contract and would in fact give it a binding long term contract covering a period up to 1993.
It should be noted that the applicants do not press the claim made in (v) above that there was a misrepresentation to the effect that UBA's fish requirements were projected to grow from 13,000 tonnes to 28,000 tonnes per annum over the next five years.
The Vessels
A number of fishing vessels feature in the history of events set out below. In order to appreciate their roles, it is useful to describe briefly the types of vessel used and the fishing methods undertaken to catch fish for processing and supply to UBA.
By 23 December 1987 Pridmore recorded that Trawl had purchased its own vessels valued at about $3.5 million in the last 6 months. One reason given for the purchases was to reduce the dependence of Trawl on supplies from fishermen by carrying out its own fishing operations.
A purse-seiner was described as a fishing vessel which strings a net in the water and moves in a circle leaving the net as a large ring in the order of 200 metres diameter around a shoal of fish. The net has a drawstring on it and is drawn up like a purse and is then gradually pulled in. These vessels are used to catch fish such as mackerel and pilchards which swim on top, or close to the top of the water (pelagic fish). Jack mackerel, for example, swim in water of about 17 degrees Celsius and for part of the year they swim on the surface and they are fished by purse-seiner. From January to June of each year purse-seining takes place off the east coast of Tasmania which is the only proven jack mackerel grounds. In June the mackerel are found in deeper water and after that it is necessary to fish at greater depths and use a mid-water trawler.
A mid-water trawler is a trawler that drags its net along at a depth of about 20-30 metres. Fish can be caught most of the year round that way but they are more abundant in the half-year when they are not swimming close to the surface between say July and December. The mid-water trawlers catch the fish off the east coast of New South Wales or else in Bass Strait.
Another type of fishing vessel described as the normal trawler used to catch table fish such as orange roughy and John Dory, is referred to as a bottom trawler because the net goes virtually along the bottom of the ocean floor.
The Fishing Vessels:
The "Allied Star"
Trawl purchased the "Allied Star" for the sum of $715,000 on 22 March 1985. It was proposed to use it as a dry ice boat and so rigged up it had a fish carrying capacity of in the order of 70 tonnes. It was a trawler. Whilst it was owned by Trawl, it never caught any fish, nor did it engage in any fishing operations. Large sums of money in the order of hundreds of thousands of dollars were spent on, or in relation to, the "Allied Star" whilst it was in the ownership of Trawl. The vessel sank at the quay in 1987 and substantial costs were incurred in repairing the damage. As at 16 February 1988 it did not have an endorsement to trawl in the south-east fishery grounds.
The "Marine Countess"
This was a large purse-seine vessel purchased by Trawl on 16 April 1987. It arrived in Geelong in August 1987 after a history of problems. It was bought for $495,000. Between that time and 9 September 1987 it was not in a condition to catch fish. It had a capacity to carry 100 tonnes of fish in refrigerated sea water. It was intended that the "Marine Countess" would fish for tuna during January 1988 and then fish for either pilchards or jack mackerel depending upon the demand for those species.
The "Ole Madsen"
This vessel was also a purse-seiner. It was purchased by Trawl on 8 July 1987 for $300,000, and had a carrying capacity of about 55 tonnes of fish in refrigerated sea water. As at 16 February 1988 it was not licensed to fish in Port Phillip Bay.
The "Ilana"
This was a small vessel with a carrying capacity of about 25 tonnes. It would carry its load dry packed in boxes in the hold and not in refrigerated sea water. It was purchased on 5 August 1987 for the sum of $154,000. It was intended to be used in fishing for pilchards within Port Phillip Bay. It did not catch a fish until mid-1989.
The "Bacardi"
Trawl resolved to purchase this vessel on 3 July 1987 for $65,000. It was a small vessel and was purchased to obtain the benefit of its fishing licence.
The "Able"
This was another small vessel purchased for the licence entitlement. It was licensed to fish in Tasmanian waters.
Trawl Sales March 1987-June 1989
It is important when considering the history of this matter to bear in mind the sales which were achieved by Trawl to UBA over the period from March 1987 to June 1989. Set out below is a table which details the quantity of fish sold by Trawl over the period.
Sales by Trawl to UBA March 1987 through June 1989
The initial investment was made by the applicants in Trawl on 30 March 1987. Contract No W17299 dated 11 February 1987 was for 6,250 tonnes of fish with a value of over $4 million for delivery over the period including February through December 1987.
Contract No W17402 issued on 8 July 1987 replaced Contract No W17299 and was for sales of 2,460 tonnes of fish and provided for delivery during July 1987 through December 1987.
The table above shows that during March through June 1987 there were large sales to UBA of mackerel. It must be borne in mind that the main jack mackerel season generally ran from January through June or July in each year. By 9 June 1987 all mackerel the subject of W17299 had been delivered to UBA. There were also substantial sales of pilchards but in much lesser quantities during this period. There were no deliveries of mackerel by Trawl to UBA between the end of June 1987 and the beginning of May 1988. During the period July 1987 through February 1988 there were relatively small deliveries of pilchards. There were virtually no sales of salmon from May 1987 to October 1988.
It will be seen that after UBA cancelled Contract W17402 for failure to supply on 10 September 1987, UBA continued to take deliveries of fish through to June 1989.
Total sales to UBA during the 27 month period from February 1987 to end June 1989 were 5,831 tonnes or 419 tonnes less than contracted for by UBA in W17299 for delivery in 1987.
By April 1989 the parties were in litigation over the meaning of the pricing clause in the new Heads of Agreement which were executed in June 1988. In October 1989 Cole J in the Supreme Court of New South Wales held that Trawl had repudiated those Heads of Agreement. This decision was upheld by the New South Wales Court of Appeal. On 18 April 1989 receivers were appointed to Trawl.
Pre-Investment Investigations
The main investigations in relation to the investment on 30 March 1987 were made by Pridmore. In February 1987 he met with Fasham and J Wilson who discussed the Trawl operation with him. He subsequently had several conversations with J Wilson and Fasham during that month. During one of those conversations he was shown an unsigned copy of a contract for the purchase of the Geelong Cold Stores situated at Corio Quay North, Geelong. He was not given a copy of this contract. He also obtained a draft of the 26 March 1987 Heads of Agreement with UBA. In March 1987 he discussed the results of his investigation of Trawl with Horrobin and Sands, and decided to make further investigations. In March 1987, he got a copy of purchase order W17299 and a costing document.
Prior to 18 March 1987 he visited ANZ and saw a Mr Goldsworthy ("Goldsworthy"). He took steps to seek verification from Goldsworthy in relation to Trawl and the good standing of the Atasco directors. These inquiries were made under time constraints because of the need to obtain the relevant Minister's consent to purchase the Corio Quay facility; that is, the cold store at Geelong. He said there was less time than usual to chase up contingent liabilities and "things of that nature". Accordingly, the applicants took indemnities from the vendors to cover those contingencies. He said that the visit to ANZ was to assure the applicants that the vendors were in fact able to meet the indemnities. He discovered that Trawl had two overdrafts which totalled $1 million. His understanding at that time was that Trawl was in some financial difficulty. He relayed the results of his inquiries as to the financial position of Trawl with ANZ and the State Bank of Victoria to Horrobin and Sands. He regarded it as essential that the vendors should give indemnities and he relied on those indemnities.
He agreed that there was no consideration given to the possibility of Trawl raising its own funds since it was always assumed that it would not need its own funds and that the input from Cumbeline would have been sufficient to carry the venture through. His understanding before the investment was that if Trawl had its own vessels, factory, blast freezer and storage, it provided a unique asset in Australia.
He could not recall whether he saw a set of accounts for year ended 30 June 1986 before the investment. The probability is that he did not. He said that this situation would be unusual but it would also be "inconsequential in terms of this investment". He said that he sat down with Trawl's accountant to examine the general ledger, the costing sheets and working papers.
He sought information as to the business ability, character and financial capacity of the Atasco directors.
Prior to the investment he obtained a letter from the Port of Geelong Authority ("PGA") confirming that the Minister had approved a new lease of the cold store premises to Trawl. On 26 March 1987 he obtained a letter from Fasham confirming conversations about work necessary to be done to meet the requirements of UBA. He was assured by Fasham that there were no outstanding works or further plant to be installed to meet any requirements of UBA. He wanted confirmation about the existence of a replacement agreement with UBA and got confirmation in the letter.
The shareholders' agreement required as a condition precedent that fishing licence endorsement should be provided for the south-east trawl region in respect of the "Allied Star". He said that this condition was waived before completion. He agreed that the applicants obtained a comprehensive set of warranties prior to investment as these were essential for this transaction in the applicants' view. He undertook his own financial investigation of the financial position of Trawl and was satisfied with that investigation. He obtained a copy of the executed Heads of Agreement of 26 March 1987 on or about that date. The applicants were content with these Heads of Agreement. His understanding was that the agreement imposed no obligation on either party to supply or accept fish in the absence of an agreement as to price, but said this was in the context of a cost plus method of negotiating price.
The main input of Sands prior to the investment was to obtain information to prepare computer models and to make a projection as to the future operations of Trawl. The Heads of Agreement of 26 March 1987 and Contract W17299 were the only documentary evidence he saw prior to 30 March 1987, which supported his understanding of the "exclusive" arrangement with UBA. He was party to discussions with Atasco representatives on 9 March 1987. He was not party to the discussions with Lees on 18 March 1987 (which are referred to in more detail below), but was informed of them. He made some investigation of the accounting records. Sands prepared the budget which was attached to the shareholders' agreement. He agreed that the profit gross margins were attractive. He believed that the assumptions in the budget were realistic and capable of achievement. He prepared the budget in consultation with Horrobin and Pridmore and it reflected his own independent investigation of the business prospects of Trawl.
Sands analysed Pridmore's material and discussed matters with Pridmore and prepared draft computer models. He also had discussions with Horrobin, but as far as the investigation was concerned, he didn't do anything else. He said that Pridmore had been employed to do the investigation. He said he had received a balance sheet from Pridmore, but he made no investigation of the accounting records prior to 30 March 1987. He understood that Pridmore had looked at those records. J Wilson had produced some accounts for 28 February 1987.
Horrobin was aware that Trawl was in a very unhealthy situation for a trading company, without an injection of capital. His interest was principally in respect of one item, namely the gross profit made for the month of February 1987 on increased sales of fish. He formed the view that the profitability of the company was strongly increasing from what was previously, in his understanding, a start-up phase. He left the investigations basically to Sands and Pridmore and did not himself engage in that exercise. He did not examine any of the accounting records, but left this to Pridmore. He said that the applicants decided to invest after Sands had prepared a computer model which showed what the adjusted figures on performance of the contract looked like. He referred to various computer models having been prepared by Sands up to 30 March 1987. He considered that the timing of the investment became important after 9 March 1987 because he was told that the Victorian Minister for Transport was threatening to cancel the sale of the cold stores at Geelong to Trawl. As best he could recollect, this was about 12 March 1987.
He agreed that the applicants were of the opinion that for $2 million they had bought into a company which had a "fantastic" future so far as profitability was concerned and that it had strong early cash flows and the potential for growth.
The only investigations that Horrobin personally made before 30 March 1987 was at the brief meeting with J Wilson and Fasham on 9 March 1987 and a visit to Geelong on 18 March 1987, when he looked at the plant and talked to some people, and also had discussions with the Atasco shareholders. The only direct inquiries made by Horrobin of UBA were those discussions which he had with Lees on 18 March 1987, which lasted in the order of 15-30 minutes. He was interested in the model projections prepared by Sands.
History
Pre-Investment History to 30 March 1987
In order to set the context and to appreciate the substance of the submissions of both parties, especially those of the applicants, in relation to the misrepresentations alleged, it is necessary to consider in detail the pre-investment history.
1984
Trawl was incorporated on 8 May 1984. In early December 1984, discussions took place between Lees, on behalf of UBA, and Fasham on behalf of Trawl, in relation to plans by Trawl for the operation of fishing vessels in the south-eastern trawl region off the Tasmanian coast. This was the main fishing ground for trawlers. A Commonwealth endorsement to the fishing licence was necessary to fish in that region. Lees indicated that UBA was ready to open negotiations for the supply of up to 6,500 tonnes per annum of pilchards and mackerel. The requirements of UBA were then showing rapid growth and UBA desired to source requirements locally rather than importing. UBA saw any prospective commitment which might be made as being an ongoing one over an extended time period. The quantity of 6,500 tonnes of pilchards and mackerel is a large one and was considerably greater than the amount in fact used by UBA during the 1985 calendar year.
1985
Between January and March 1985 there was further contact between Lees and Fasham in relation to contemplated arrangements with Trawl.
On 21 March 1985 the First Heads of Agreement ("the first agreement") was entered into between Trawl and UBA. The preamble to that agreement stated that Trawl was the owner of a modern fishing vessel of large capacity and was presently planning to purchase other vessels to be worked out of Victorian ports. The vessel referred to was the "Allied Star".
Under the first agreement Trawl agreed to deliver to UBA a minimum total of 3,000 tonnes of pilchards and/or other agreed species Between May and December 1985. During the subsequent twelve months Trawl was to deliver a minimum of 6,500 tonnes of agreed species. As regards price, the parties agreed that price should be fixed for fish delivered during the first 11 months of the operation of the agreement within 14 days from the signing of the agreement. UBA was to issue its standard order for the quantity and prices determined. The standard orders took the form of the "W" contracts. There were various other provisions relating to continuing arrangements, delivery, storage pending delivery, payment terms, technical advice, quality assurance and confidentiality.
The first agreement was executed by Lees for UBA and J Wilson on behalf of Trawl.
As it turned out in the whole period from 21 March 1985 to January 1987 Trawl supplied only 420 tonnes of fish to UBA.
On 21 March 1985 there were discussions between Fasham, Lees, J Wilson and the Harbour Master at Portland in which further details of Trawl's proposed operations were discussed.
The "Allied Star" was purchased by Trawl for $715,000 on 22 March 1985 using funds borrowed by Trawl from ANZ.
On 29 March 1985, J Wilson wrote to Lees stating that Trawl proposed to lease premises at Portland to provide a dedicated facility for the processing and storage of fish for UBA. He stated that Trawl was counting on UBA's help and advice particularly relative to the design, layout and equipment necessary for the processing room and the blast freeze area in the Portland complex.
On 2 April 1985, the first applicant, Cumbeline was incorporated.
The directors' meeting Minutes of Trawl for 1 May 1985 recorded the purchase of the "Allied Star" and referred to a current certificate of valuation showing the value of the vessel at $1 million. In addition, the first agreement with UBA was tabled. An estimated profit of $900,000 per annum in the first two years was anticipated and a goodwill valuation of $1.8 million was created in the accounts in respect of the first agreement.
On 3 May 1985 the PGA wrote to Trawl indicating that it was prepared to lease the bay adjacent to the cold store together with the shared use of amenities within the cold store area. Rates were quoted in relation to blast freezing of product on the basis of ordinary working hours of 7.45am - 4.30pm. About 8 May 1985 Fasham records that he spoke with UBA and that UBA saw no difficulty with the Geelong store. UBA suggested that their Product Development Manager, Mr Voigt, should look at both the Portland and the Geelong plants before a final decision was made by Trawl as to which were the more suitable premises and facilities.
On 14 May 1985 Voigt met with J Wilson and the Port of Portland Authority and the PGA concerning the lease of cold store and processing facilities. Trawl was anxious that UBA should see both facilities before negotiations were finalised for the lease of amenities and facilities for fish processing. The appropriate course of action in Voigt's view was to proceed immediately to conclude a formal agreement and establish the operation at Geelong.
On 29 May 1985 Trawl wrote to Lees enclosing a draft form of Heads of Agreement to take account of the change in location to Geelong, a change in the form of packaging to instant quick frozen product, and an alteration of the starting date to 1 July 1985. The draft Heads of Agreement were also expressed to make clear the intent of the parties that the agreement should operate on an "evergreen" basis.
On 31 May 1985 Trawl wrote to one Brian Murray. The letter records a meeting to discuss Trawl's interest in contracting to buy fish from the "Marine Countess" for processing at Geelong. The letter sets out an outline of a proposal for consideration. This proposal sought the supply to Trawl of 350 tonnes per month of pilchards and 150 tonnes per month of jack mackerel at a price of $150 per tonne.
On 5 June 1985 Fasham wrote to Lees and to Mr Death of UBA to confirm that agreement had been reached with PGA. The telex states that work had commenced on the process area at Geelong and Trawl undertook to keep Lees and Mr Death advised of progress on a regular basis. Further reference is made to a new form of Heads of Agreement to give better expression to the original intent of the parties to establish an evergreen rolling agreement within a twelve month price and quantity fixing framework.
On 13 June 1985 a second form of Heads of Agreement ("the second agreement") between Trawl and UBA was executed. It was referred to on its face as an attachment to contract W16811. In substance it was a replacement for the first agreement.
During the six month period July-December 1985, the second agreement provided for Trawl to deliver to UBA a minimum total of 3,000 tonnes of pilchards or other agreed species. During subsequent 12 month periods Trawl was to deliver an estimated minimum of 6,500 tonnes of pilchards or agreed species.
Contract note W16811, dated 14 June 1985, was issued to Trawl for an estimated 1,500 tonnes of pilchards at 42.5c kg FOT
Geelong, for delivery during July-August-September 1985. The contract note was signed by Lees on behalf of Mr Death.
On 1 September 1985 Lees was transferred from the position of "Senior Buyer" at UBA Wodonga to become "Project Co-ordinator" at UBA Bathurst. Mr Peter Terry ("Terry") assumed Lees' position dealing with Trawl until early 1987. Although his responsibility in that period was in respect of the Bathurst project Lees remained stationed at Wodonga.
On 2 September 1985 Trawl wrote to PGA complaining about the failure of the blast freezer and cold store during trials on 29 August 1985. The letter records that Mr Bruce Perkin from the Product Development department of UBA was present at those trials. J Wilson expressed concern that another failure could seriously jeopardise the contractual relationship between Trawl and UBA with direct consequent and substantial losses to Trawl. The block product after 7 hours in the blast freezer had not reached zero temperature and the performance of both the blast freezer and the main cold store were unacceptable to UBA.
Also on 2 September 1985 Trawl wrote to PGA asserting that the basis of the lease to Trawl was that it would be provided with premises that would meet Department of Primary Industry ("DPI") export standards at all times.
On 17 September 1985 J Wilson wrote to PGA pointing out that over a seven hour period temperature in block centres in all cases failed to reach zero, whereas the UBA specification called for temperatures of minus 20 degrees at block centre within six hours for pilchards.
By 4 October 1985, Terry wrote that he was most disappointed at the performance by Trawl up to that time. He stated that a lot of criticism had been levelled at him for letting the project slide without achieving any precise operating dates. After recording the foregoing he sought to obtain the current programme on an accurate basis so that reliable information could be provided at director level which could be used to enable forward plans to be formulated by UBA. The applicants point to the use of the term "the project" in this telex as having significance in relation to events in 1987 and 1988. It is said to support the inference that the Trawl operation was a "project" of importance to the directors of UBA.
On 11 October 1985 Fasham wrote to Terry of UBA giving information concerning dealings with PGA, the conduct of freezer trials, staff appointments, plant and installation of equipment. This telex shows that UBA was being kept informed of the detailed operation of Trawl.
On 22 October 1985 Trawl conducted freezing trials at Geelong at which Mr Perkin of UBA was present. He spelt out action necessary to comply with the UBA specification. The letter
also anticipated the running of a large scale processing and freezing trial.
In November 1985 UBA issued its operating plan for calendar year 1986. Reference is made in that document to the weakness of the Australian dollar, which made supply from local sources more desirable, and to reducing the reliance of UBA on a limited number of suppliers and species. It is submitted that the encouragement of Trawl to begin supplying fish to UBA was part of an attempt to expand the number of suppliers to UBA and this seems to be correct.
On 19 November 1985 Terry wrote to Fasham and G Wilson noting that the indications were that Trawl would be catching only about 10 tonnes a week of pilchards to the end of calendar year 1985 and seeking an increase to a figure more like 40 tonnes per week.
In the December 1985 issue of a trade publication "Australian Fisheries", an article appeared suggesting that there would be large increases in UBA's use of locally caught fish and a decrease in reliance on imported fish including pilchards. There is also reference to UBA wanting to enter agreements for the supply of product on a long term basis. Emphasis is placed on finding further suppliers of quality fish for which good prices would be paid by UBA. Reference was made to UBA processing engineers touring plants determining freezing temperatures and times. Further reference was made to UBA
having reached the view that Australian pilchards were "superior" to Thai sardines for UBA purposes. A copy of this article was shown to Lees on 18 March 1987 at the meeting with Horrobin and Pridmore. This was the date on which a number of important representations are stated to have been made.
On 5 December 1985 Terry wrote to G Wilson, who was managing the Trawl operation, referring to the proposed use of the "Marine Countess" and the need to get UBA specifications quite clear, and to have them satisfied by Trawl. Concern was expressed about the salt level in the fish and a suggestion was made that Bruce Perkin of UBA should talk to the "Marine Countess" people before too great a catch was acquired. This is part of the mosaic of evidence which demonstrates UBA's concern about and involvement in the operations of Trawl during the period 1985 to March 1987.
The Trawl processing plant was formally opened on 13 December 1985. In a letter to the Victorian Minister for Sport and Recreation of 9 December 1985 reference is made to the plant being located alongside and within the cold store of PGA. It is stated that the plant would process a wide variety of scale and shell fish for a number of widely different markets and would employ up to 40 process workers as employment built up during the ensuing six months.
On 20 December 1985 G Wilson, Trawl's General Manager, wrote to PGA making it clear that Trawl was ready to process table fish for the export market. They were not restricting themselves to production of pet food for UBA. In fact, as the applicants point out Trawl did not process table fish of any kind until about September 1987, although it foreshadowed its intention to do so on a number of occasions before then.
1986
On 6 March 1986 Terry issued a contract W17042 to West Ocean Canning Pty Ltd for 100 tonnes of tuna. This contract appears to have been extended to cover deliveries up to the end of 1987.
By 26 March 1986 Terry became concerned about what he saw to be an apparent lack of effort to acquire fish for processing on the part of Trawl. The concern was that lack of communication from Trawl led him to believe that Trawl had "given up" its efforts to obtain fish.
On 27 March 1986 G Wilson rejected the suggestion that Trawl had given up and pointed to an impasse in negotiations with the fishermen in respect of price. He states that every effort was being taken by Trawl to commence processing but that Trawl was at the mercy of market prices and uncooperative fishermen. Trawl had offered them 20c kg but they wanted 25c kg for pilchards.
On 24 April 1986 invoices in respect of freezer trials conducted at UBA's request were sent by Trawl to Terry indicating that UBA paid for the PGA freezer trials. The invoices sent to UBA claimed costs incurred by Trawl in searching for fish including the costs of fuel and labour. UBA paid for freezer rent for pilchards and other fish.
In May 1986 UBA introduced its medium term plan for 1987-1991. This plan stated that it would achieve significant savings in raw materials and that current development work on the east coast of Australia would result in reduced fish prices. Reference is also made to the quality focus since 1984 having been a significant factor in the growth of UBA's business together with its commitment to quality.
On 2 May 1986 UBA issued contract No. W17073 to Trawl for approximately 3,000 tonnes of Australian pilchards.
On 19 May 1986 Trawl records discussions with Kevin Warren who was to sell fish to Trawl in the maximum possible quantities of all fish types acceptable to UBA. On 19 May 1986 Fasham wrote to Terry recording the meeting with Kevin Warren.
On 22 May 1986 G Wilson wrote to UBA informing it of discussions with Terry regarding the use of 9 kg blocks of fish. The telex asserts that Terry was advised of extra costs involved in the processing by Trawl of the blocks and that was accepted by him as "inevitable".
On 3 June 1986 UBA placed order A60816 with Trawl for 200 tonnes of blue mackerel at 55c kg ex works Geelong.("A" as opposed to "W" orders were raised for fish which had been delivered or which were required for near or short-term delivery). In fact only 23 tonnes of blue mackerel were processed by Trawl in June 1986 and there were none processed in July or August of that year.
On 6 June 1986 Trawl wrote to Mitchelson, a fish supplier to Trawl, recording an arrangement to supply Trawl with the maximum quantities of all fish types acceptable to UBA. The price specified was 20c kg for mackerel, 20c kg for pilchards and 50c kg for Australian salmon. There was a similar letter on the same day to other suppliers, but at different prices, namely 45c kg for salmon; mackerel and pilchards were 19c kg.
On 11 June 1986 G Wilson wrote to Terry confirming that current prices for fish were pilchards 47.5c kg; 9 kg block pilchards 53c kg; jack mackerel 55c kg and Australian salmon 84c kg. Reference was made to an attached agreement which revised the first agreement of 21 March 1985. This was prepared by Trawl.
The 1986 draft Heads of Agreement nominated fish prices. They also included figures which set out the way in which the prices were calculated. The calculations indicate that prices were calculated by having regard to costs. With the exception of the price for pilchards, the prices calculated were those in the draft Heads of Agreement and then ultimately these went into the third Heads of Agreement of 13 September 1986. The price for pilchards was reduced by 2 cents but was above cost. A total of 3,000 tonnes of fish was used as the production figure over which to spread Trawl's anticipated fixed costs.
On 30 June 1986 an agreement was made between Trawl and Brian Murray in relation to fish caught by the "Marine Countess". The prices were to be 20c kg for mackerel, 20c kg for pilchards and 45c kg for Australian salmon. The fish was to be delivered in bins, iced and loaded onto trucks at the Lakes Entrance wharf.
The financial statements for Trawl in respect of year ending 30 June 1986 showed that Trawl derived an operating revenue of $72,300 but incurred an operating loss of $420,587. Processing costs were shown at $66,008 with a manufacturing profit of $5,084. Overheads totalled $230,369 of which management fees of $156,000 were the major component.
In the three months April, May, June 1986 Trawl processed only 132.7 tonnes of fish.
On 15 July 1986 G Wilson wrote to Terry to confirm recent discussions regarding salmon, to the effect that the agreement of Trawl was to process the salmon on a cost plus basis.
On the same day a further telex was sent by G Wilson to Terry referring to discussion concerning additional UBA products being stored at Geelong. This was said to be in keeping with the tenor of previous agreements and discussions from the outset of the relationship. G Wilson said that the original budget of Trawl included a percentage of storage by UBA at Geelong and stated that Trawl had pursued the matter with UBA since the discussion but that there was no finality. Concern was expressed at UBA communicating directly with PGA concerning storage. Clarification was sought on this matter.
On 12 August 1986 Terry wrote to G Wilson complaining about some string found in a block of mackerel supplied by Trawl.
On 29 August 1986 G Wilson wrote to UBA requesting a meeting to review pricing and finalise the proposed revised Heads of Agreement.
On 2 September 1986 UBA arranged to send to Trawl 120 tonnes of fish comprising blue mackerel and whole salmon for "re-processing".
The third Heads of Agreement ("the third agreement") were dated 13 September 1986. They were not signed until 30 September 1986. They provided for the delivery of a minimum of 3,000 tonnes of pilchards or other agreed species from June 1986 to May 1987. The price fixed was pilchards 47.5c kg, "special Australian pilchards" 53c kg, mackerel 55c kg, Australian salmon 84c kg. The agreement provided that during the subsequent 12 month period from May 1987 Trawl would deliver a minimum of 4,000 tonnes of agreed species. The document is signed on behalf of UBA by Terry.
On 23 September 1986 UBA issued Contract No W17141 to Trawl for the supply of 500 tonnes of pilchards and sheba pilchards at 53c kg.
On 29 September 1986 UBA complained to Trawl that 40 tonnes of salmon were in a "deplorable state" in that the fish were said to be all frozen together.
On 30 September 1986, the third agreement was executed by G Wilson on behalf of Trawl. The prices in this document except one, were those provided for in the schedules to the letter of 11 June 1986 and with that exception were calculated by reference to cost.
In October 1986 UBA issued its 1987 operating plan. This plan states that UBA intended to broaden the supply base of key materials by December 1987.
On 3 October 1986 UBA contracted with Ocean Fresh Eden Pty Ltd ("Ocean Fresh") by contract W17147 for 1,000 tonnes approximately of jack mackerel, deheaded at 62.5c kg, together with 100 tonnes of white fish at 24c kg, and 200 tonnes of pilchards at 48.6c kg.
On 10 October 1986 G Wilson notified Terry of UBA of the revised prices under the Heads of Agreement of 30 September 1986, namely 58c kg for mackerel, 55.5c kg for sheba pilchards, 50c kg for pilchards and 87c kg for Australian salmon.
On 10 November 1986 UBA contracted with Sanford Limited of New Zealand for 200 tonnes of jack mackerel and 100 tonnes of a fish known as Kahawai.
On 20 November 1986 UBA contracted with Miroz International Co Ltd of Thailand for 630 tonnes of south-east Asian pilchards, delivery to arrive in Melbourne in January, February and March 1987.
At about this time UBA issued a contract to United DNS for 840 tonnes of south-east Asian pilchards.
On 27 November 1986 Fasham on behalf of Trawl wrote to PGA proposing a long term lease for the whole of the cold store complex at Corio Quay at Geelong.
On 15 December 1986 Atasco sought from Mason Greene & Associates a valuation of the Corio Quay cold store as a going concern. The total of the fish processed by Trawl during 1986 was only 680 tonnes, but Trawl projected that in 1987 it would increase to a minimum of 2,500 tonnes.
This report was made by the valuers who issued a preliminary valuation on 24 December 1986 based on processing of 8,000 tonnes of fish giving an estimate as at 22 December 1986 of $2.5 million for the Geelong cold store.
On 16 December 1986, UBA issued contract No. W17206 to Maryborough Fish Processors for 500 tonnes of white fish for delivery in January-December 1987. This was followed on 19 December 1986 by a contract W17213 between UBA and D R Johnson Pty Limited for 2,000 tonnes of white fish.
1987
January
In early January 1987 Lees finished working on the Bathurst project assignment and resumed dealing with Trawl under the title of "Senior Wet Raw Materials Supply Buyer". Terry remained involved with Trawl until about 14 January 1987.
In early January 1987 UBA issued a further contract W17207 to United DNC Enterprises, Malaysia for 1,260 tonnes of south-east Asian pilchards with delivery from February to May 1987. This was later reduced to 50 containers of fish or approximately 700 tonnes.
In Lees' diary of 8 January 1987, there is a notation referring to J Wilson and Trawl in relation to "problems with UBA".
On 12 January 1987 UBA issued a further contract W17247 to Ocean Fresh for 20 tonnes of squid. On the same day UBA placed a contract with Wanganui Trawlers Ltd for 12 tonnes of headed and gutted jack mackerel.
On 14 January 1987 UBA issued contract W17262 to Ocean Fresh for 2,150 tonnes, including approximately 1,000 tonnes of jack mackerel at 60c kg FIS Melbourne and approximately 500 tonnes of pilchards at 48.6c kg FIS Melbourne. There was also provision for delivery of white fish, blue mackerel and calamari.
On the same date UBA issued a contract W17263 to Kailis & France of Western Australia for a total of approximately 4,450 tonnes of pilchards to be delivered throughout 1987. Again on the same date, UBA drew up contract W17264 to be issued to Trawl for the supply of 200 tonnes of blue mackerel at 70c kg, 100 tonnes of salmon, headed and gutted at $1.01 kg, 500 tonnes of jack mackerel at 65c kg and 3,000 tonnes of pilchards at 50c kg, together with 200 tonnes of sheba mackerel at 62c kg and 350 tonnes of sheba pilchards at 55.5c kg. Handwritten amendments were made to a copy of this document increasing both the tonnages of salmon and jack mackerel and the price of each type of fish on the order. This was made by Lees after 14 January 1987 and the original date of the contract was changed to 11 February 1987. This date also appears on W17299, a contract of importance in this proceeding.
On the same day UBA issued contract A69005 to Ocean Fresh Canberra for 10 tonnes of white fish.
On 15 January 1987 Terry of UBA complained to G Wilson that 3 invoices issued by UBA had not been paid by Trawl.
On 19 January 1987 Lees' diary records
"Bruce Fasham/Jon Wilson... Geelong 56 year lease of land. Trawl buying alterations + extensions. $1.5 million to purchase..."
This entry indicates that Lees was aware of a proposal by Trawl to purchase the lease of the blast freezer and cold store at Geelong.
On 29 January 1987 UBA issued two contracts to Safcol and Heinz each for 50 tonnes of tuna red meat.
February
In early February 1987 UBA issued a further contract to Miroz International Thailand for 336 tonnes of south-east Asian pilchards.
A telex from Trawl to J Wilson of 3 February 1987 records that the accountant at UBA would not pay an invoice because Trawl owed about $50,000 to UBA.
On 8 February 1987 McBurnie of UBA visited Trawl and made notes regarding the proposed processing method for jack mackerel. Lees was given a copy of this. This document indicates that McBurnie was making assessments on behalf of UBA of Trawl's method of dealing with mackerel and informing Lees of his views.
Contract W17299 - Dated 11 February 1987
This is an important document. It was issued by UBA to Trawl for the supply of approximately 6,250 tonnes of fish for delivery between February and December 1987 "as scheduled by UBA". The total value of the contract was $4.042 million. The contract bears the date 11 February 1987.
With the exception of blue mackerel every price on this contract note reflected the changes made by Lees on contract W17264 referred to earlier which was originally issued on 14 January 1987. This contract is executed by Lees. It appears from the evidence that the new prices for the fish supplied by Trawl were agreed on 11 February 1987.
It will be seen that Contract W17299 bears a "Received" date of 26 February 1987. This was probably the date it was received by Trawl.
Contract W17299
On 16 February 1987 McBurnie visited Trawl's premises at Geelong and recorded in his notes:
"Fish in centre of block on pallet + spacer still -0.5 - +0.7 6 hours after placing in freezer. This could be a problem."
This seems to be a similar problem to that noted earlier in September 1985.
On 17 February 1987 UBA issued two contracts, one to Safcol Seafoods Pty Ltd for 20 tonnes of calamari and to Skeggs Foods Ltd for 500 tonnes of headed and gutted Kahawai, for delivery in March-May 1987.
Supply to February 1987
Fasham wrote to the State Bank of Victoria on 18 February 1987 setting out details of pilchards and mackerel delivered to Trawl up to that date, namely 75 tonnes of mackerel, and 78.35 tonnes of pilchards. In that letter reference was made by Fasham to a contract in place to purchase up to 3,000 tonnes of mackerel from the Stehr group of companies. The letter was written to obtain funds from the State Bank of Victoria and it places considerable emphasis on the arrangements in place with UBA.
On 18 February 1987 Fasham also wrote to the Commonwealth Fisheries and Wildlife Service referring to the opportunity
which Trawl had to win substantial export contracts if fish were available in quantities exceeding their domestic contract requirements. The letter sought the licensing of the "Allied Star" which was regarded as a major factor in ensuring that fish was available to the company both to maintain production and employment in the plant and to enter new markets. The letter asserts that Trawl then held contracts for delivery of over 8,000 tonnes of fish during the remainder of the calendar year 1987 into both domestic and export markets. It also asserted that Trawl was to deliver over 6,000 tonnes of fish to the canning plant at Wodonga owned by UBA. Reference was made to the cold store with a capacity to hold over 4,200 tonnes of fish and to the plant and cold store being export licensed by DPI. The letter stated that:
"Our major contract with Uncle Bens .... to a value in excess of $4 million during the next four month period".
This was a reference to W17299.
UBA sought and obtained a credit report on Trawl in February 1987 which concluded that trading terms should be well defined and the account kept under close supervision until a trading pattern had been established by Trawl.
The credit report also stated that enquiries in trade quarters revealed only smaller accounts were held, which payments were met in 30-90 days in a satisfactory manner. Overall, the report was not an unduly adverse one although it cautioned that careful monitoring would be required.
On 21 February 1987 J Wilson for Trawl wrote to Lees enclosing a copy of a draft revised Heads of Agreement which later became the Heads of Agreement of 26 March 1987. This document was stated to bring into effect changes necessary to embody the latest terms of agreement and style of operation. The covering letter stated that Trawl was awaiting receipt of the contract from UBA which represented the agreement reached on 11 February 1987. The letter then goes on to set out the prices for various products contained in W17299, with the addition of a tonnage and price for base fish. The letter goes on to say that all other terms and conditions were embodied in the Heads of Agreement attached. The Heads of Agreement was attached together with a copy of the costing schedule discussed at an earlier meeting. J Wilson reported that supply to 21 February 1987 had been running to schedule, that an 18 fishermen delegation in Geelong had undertaken to supply 2,500 tonnes of pilchards and that the Hobart operation was running successfully with Mr Hagen Stehr ("Stehr"), already planning to divert another vessel into supplying Trawl. This was believed to increase the delivery capacity from 50 tonnes per load to a minimum of 100 tonnes per load.
The revised draft Heads of Agreement sent by Trawl to UBA included a clause headed "Exclusively" and this draft is discussed in some detail later in these reasons. The applicants' case placed a great deal of emphasis on the differences between the draft heads of Agreement sent to UBA on 21 February 1987 and the executed Heads of Agreement dated 26 March 1987, particularly in relation to the "Exclusively" clause.
On 23 February 1987 Lees made a diary note referring to Mitchelson and to "Own freezing plant. Thinking about est". This is said by the applicants to be the first record of the line of communication with Mitchelson directed towards his becoming a supplier to UBA.
At some unspecified time in February Pridmore first met Fasham and J Wilson and discussed the operations of Trawl and the need for an investor to put money in. Pridmore says that he had a series of discussions with Trawl in February/March 1987.
On 26 February 1987 contract note No W17299, as appears from a stamp on its face, was received by Trawl. Clause 2 of the standard conditions of contract which appear on W17299 provide for alterations and variations to the terms of that contract to be made by written agreement between the parties. The applicants contend that the delivery period specified in W17299 which provides for delivery over 11 months was in fact altered to 6 months as a result of the terms set out on page 5 of the Heads of Agreement of 26 March 1987. This is said to support the applicants' argument that contract W17299 ordering 6,250 tonnes in fact when read with the Heads of Agreement provided for delivery over a 6 month period. The effect of this is said to be that the contract contemplated that the plant at Corio Quay would be capable of processing 6,250 tonnes over the 6 month period and not over an 11 month period, with the consequence that the rate of processing and throughput to achieve this result would need to be much greater.
During the month of February 1987, Trawl only processed 291.2 tonnes of fish.
March 1987
On 4 March 1987 Lees wrote to Ocean Fresh stating that the UBA 1987 fish requirement was 14,600 tonnes of which imports comprised 6,500 tonnes. The 1992 estimates were for 29,600 tonnes of fish and it was not possible to tell what proportion would be imported.
On 5 March 1987 Ocean Fresh wrote to Lees thanking him for assistance with figures and stating that a licence had been granted and that Ocean Fresh was now beginning to fund the purchase of vessels.
On 9 March 1987 there was a meeting between Fasham, J Wilson, Horrobin and Sands to discuss possible investment by Cumbeline in Trawl.
This was said to be a lengthy conversation mainly between Fasham and Horrobin in relation to arrangements with UBA and Trawl. There was some input by J Wilson to the effect that the fish was priced on a cost plus basis and that Trawl met with UBA twice a year to agree costs, tonnages and prices for the next half year. J Wilson also spoke about bringing in an investor to inject development capital into Trawl and stated that Atasco, which was the sole shareholder in Trawl, was seeking $2.5 million for a 50% interest in Trawl.
About this time J Wilson and Fasham raised with Pridmore the threat by the Minister to withdraw consent to the sale of the cold stores because funds for the purchase had not been forthcoming.
On 12 March 1987 PGA wrote to Fasham and J Wilson withdrawing its offer and advising that the cold store would only be open during normal working hours on a 9 day fortnight basis with no overtime. Some time between 9 March and 18 March 1987 J Wilson told Horrobin that the Minister was threatening to withdraw his consent to the proposed sale of the Geelong complex by PGA.
On 16 March 1987 UBA issued two defective product notices to Trawl, one of which recorded that blocks of Trawl pilchards contained a large amount of blood/scales/crud and ice. This related to three pallets of fish which is a relatively small quantity. The other complaint was simply that tickets had not been removed and that there was a mislabelling. This was a minor complaint and related again to a small quantity, namely 20 pallets.
On 16 March 1987 Pridmore on the letterhead of Cerberus faxed to Horrobin information including the statement that the sales figures seemed to be in agreement with the UBA contract except for mackerel. The fax included a copy of W17299, together with a copy of the costing sheets. Costings, contracts and orders had been requested by Sands in his conversation with Fasham and J Wilson on 9 March 1987. Sands received a copy of W17299 on 16 March 1987.
The Statement of Claim alleges that the first four misrepresentations were made by UBA on or by 16 March 1987.
Also on that date Trawl instructed Heidtman & Co Solicitors to prepare the shareholders' agreement to effect the purchase by Cumbeline from Atasco of a 50% interest in Trawl. These instructions indicate an advanced stage of negotiation with a tentative commitment to the purchase as early as 16 March 1987.
The four misrepresentations made by UBA up to 16 March 1987 are in substance said to be inferred from the fact that Trawl had a copy of contract W17299, coupled with the allegation that UBA knew that it was going to be shown to potential investors whom UBA knew, or ought to have known, had little or no knowledge of Trawl, its ability to perform the contract and its relationship with UBA.
On 17 March 1987 Trawl wrote to Lees seeking reimbursement of a sum of $5,805.40 in respect of accounts said to have been paid on behalf of UBA for the use of a "fish spotting" plane at Hobart. Lees responded to this with a strongly expressed letter of 19 March 1987, referred to below.
On 18 March 1987 Lees records a meeting with Tom Kivelos ("Kivelos"), a fish supplier, and makes reference to a 30 tonne blast freezing facility. There appears to be reference to McBurnie of UBA investigating the facility. There is also reference to Stehr, another fish supplier, who later became a partner of Kivelos.
Meeting of 18 March 1987
On 18 March 1987, while inspecting the Geelong facility, Horrobin and Pridmore became aware that Lees was also visiting the site and there was a brief meeting in the order of 15 to 30 minutes between Pridmore, Horrobin and Lees, at which Lees is said to have made a number of critical misrepresentations to Horrobin and Pridmore, which in substance comprise alleged misrepresentations (v) to (xi) inclusive. With the exception of a brief telephone conversation later that day between Pridmore and Lees in relation to the Minister's proposed withdrawal from the sale of the Geelong complex, this is the only occasion on which there was any discussion between the applicants and Lees prior to execution of the shareholders' agreement on 30 March 1987.
There is no suggestion that Lees gave any detailed history of the previous relations between Trawl and UBA at this meeting.
Also, on that date, Fasham wrote to Goldsworthy of ANZ reporting on the grant of a Commonwealth fishing boat licence to the "Allied Star" and asserting that Trawl was confident that the application for a south-east trawl fishery endorsement would be successful. The grant of the Commonwealth fishing boat licence was a condition precedent expressed in the shareholders' agreement of 30 March 1987.
On 19 March 1987 Lees replied in a letter of that date to the letter from Mr Lever, the Financial Manager of Trawl, in relation to the invoices for $5,806.40, for the "spotting" plane. The letter included the following:
"I refer to your letter of March 17, 1987 enclosing copy invoices for $5,806.40 for services apparently supplied by Tasair Pty. Ltd. to Trawl Industries.
I am disappointed to the stage of being extremely annoyed as at no time during any of my discussions with yourself, John and Gavin Wilson or Bruce Fasham have I agreed or implied that Uncle Ben's would be responsible for any debts incurred by Trawl Industries to Tasair Pty. Ltd. or any other aircraft charter operator.
My disappointment is deepened by the fact that having been in your office for approximately four hours yesterday discussing all issues, including payment of accounts, that this particular matter was not raised or even referred to, particularly as one of my major points was the fact that the long standing relationship between Uncle Ben's and Trawl Industries was being jeopardised by Trawl's apparent inability to conform to their own telex advices regarding account settlements with UBA.
As you are aware, Uncle Ben's have made a large number of concessions and allowances to Trawl Industries in an endeavour to establish the operation on a sound and viable footing through financial and technical assistance.
Thus, if we cannot begin to conduct our business on an open and honest basis, then I am left with little alternative but to withdraw this support for the continuation of the business..."
The applicants assert that this letter demonstrates that Lees, prior to meeting with Horrobin and Pridmore on 18 March 1987, was aware that the long standing relationship between UBA and Trawl was in jeopardy because of the problems with account settlements, and that this was an ongoing dispute. This in turn is said to be relevant to the alleged misrepresentation that UBA stated that it had a good relationship with Trawl and that UBA was acting deceptively by not informing Pridmore and Horrobin of the dispute with Trawl. This matter will be discussed later.
On March 23 1987, Lees' diary contains a record referring to Kivelos and specifications which appears to be a record of Lees sending specifications to Kivelos.
On the same date UBA received a telex from United DNC referring to fish being shipped on 23 March 1987.
On 24 March 1987 Trawl paid the amounts outstanding to UBA previously referred to.
On 24 March 1987 ANZ (Goldsworthy), Regional Executive, wrote to Trawl, confirming that ANZ was happy to consent to the proposed allotment of shares, equal to 50% of the total issued shares to Cumbeline in consideration of the sum of $2 million. It was stated that the consent did not in any way prejudice ANZ's rights under its mortgage. The mortgage related to the "Allied Star". The letter confirmed that Trawl was not in breach of its mortgage with ANZ. This was shown to the applicants.
On 25 March 1987 Lees received a telex from Miroz confirming that 84 metric tonnes had been shipped on 24 March 1987 per order W17276.
On 26 March 1987 Fasham wrote to Horrobin on behalf of Trawl advising that Pridmore had been given a copy of the replacement agreement with UBA. This was a reference to the Heads of Agreement signed that day between UBA and Trawl. The letter also expressly confirmed that Pridmore had been given a copy of the current order. The letter refers to a "copy of the current order furnished in the terms of our ongoing frame agreement". This is reference to W17299 for 6,250 tonnes. The letter also confirmed that there were no outstanding works or any further plant to be installed at Geelong to meet any requirements of UBA. The Heads of Agreement were sent in conformity with the requirement of the shareholders' agreement with Trawl.
26 March 1987 - Heads of Agreement
On 26 March 1987 the fourth Heads of Agreement between UBA and Trawl were signed. The relevant parts of that agreement are as follows:
"WHEREAS
TIA has a modern fish processing plant designed to process product for and to the specification of UBA, and has contracted for the purchase of large quantities of fish for UBA requirements.
...
Lees is stated to have said:
"We will give you the profits and the future certainty you need to satisfy your bankers. We can do better than our standard twelve month contract. We can give you a long term contract, but we can't go longer than 1993 because my projections for mackerel don't go beyond 1993."
Lees denies each of these quotes.
Again, it is improbable to say the least, that UBA would concern itself with Trawl's relations with its bankers so as to ensure that Trawl had the profits and certainty to satisfy its bankers. Further, it is even more improbable that Lees would assure Horrobin and Pridmore of a long term contract on such a basis, up to the end of 1993.
Earlier in the conversation, Horrobin said that Trawl already owed ANZ well over $3 million, and was still spending money and it was necessary to spend a lot more money setting up for heading and gutting. Moreover, Trawl would need to borrow well over another million dollars to get through to 1989. This assurance, if given, meant that UBA would underwrite Trawl's interest obligations to ANZ on a capital borrowing of at least $4 million and that profits would be sufficient to pay off the capital over a 5-6 year period.
Pridmore was also at the meeting on this occasion. He does not set out this part of the conversation in his statement, although he was not present during the entire meeting because of the necessity to look after matters in the factory.
However, he does not assert that Horrobin told him about the arrangement which Horrobin allegedly made. This is unusual, in view of the importance such an arrangement would have for Pridmore and Sands. Sands does not say that he was told of the conversation alleged by Horrobin. Obviously, if Lees had agreed to give Trawl the contract asserted by Horrobin, Horrobin would immediately have told his fellow directors, and indeed ANZ. On 25 March 1988, 2 days later, there was a board meeting of Trawl. The minutes do not record the asserted agreement, although they do record that there had been discussions with ANZ. There is no indication that this arrangement was spelt out to ANZ and it would have been a most significant matter to draw to ANZ's attention. Furthermore, the matter is not referred to in any correspondence between the parties prior to entry into the 7 June 1988 Heads of Agreement, nor in the pricing formula contained therein. Horrobin says that the expression "cost to TIA" includes this arrangement. This cannot be right because that expression could not cover repayments of borrowings on capital account such as the purchase of the long term lease of Corio Quay and the purchase of vessels which were substantially financed by ANZ or NMRB. Second, given Horrobin's involvement in the drafting of the agreement of 7 June 1988 it is again improbable that he would not have made express reference to this oral arrangement.
I am not satisfied this representation was made.
Representation (xxiv) - 23 March 1988 - Contract Up To 1993
The representation is formulated in these terms:
On or about 23 March 1988 UBA represented that UBA would give to Trawl more than the standard twelve month contract and would in fact give it a binding long term contract covering a period up to 1993.
Horrobin's statement alleges that Lees said:
"We can do better than our standard twelve month contract. We can give you a long term contract, but we can't go longer than 1993 because my projections for mackerel don't go beyond 1993."
Lees denies this statement.
There is no misrepresentation in relation to this allegation because UBA in fact gave Trawl a binding long term contract covering the period up to 1993. It was examined by the applicants and executed by them, but there was a difference in interpretation. However, at the time of signing they were content with the contract. It was a binding contact, as Cole J and the Court of Appeal held. All judges of the Supreme Court who heard the matter agreed that Trawl had repudiated that binding agreement and that therefore it had been validly terminated. Indeed, Horrobin and Pridmore certainly thought that the 7 June 1988 Heads of Agreement was binding because they took steps to enforce it according to their interpretation of its meaning.
In relation to this matter, it should be noted that there is no allegation that Lees misrepresented his interpretation of the June 1988 Heads of Agreement as has been alleged in relation to the earlier Heads of Agreement.
There was no misrepresentation in respect of this matter.
Reliance
Reliance on Representations Pre-30 March 1987
Even if any of the pre-30 March 1987 representations alleged were in fact made, I am satisfied that there was no reliance by the applicants on any one or more of them in making the initial commitment and investment on 30 March 1987.
The individual applicants were astute, experienced and sophisticated investors with a broad and long history in banking, investment, law and commerce. It is, of course, true that they had no experience in, or knowledge of, the fishing industry. However, in my opinion it is inherently improbable that businessmen with such extensive experience would rely on oral statements made at a chance meeting in a 15-30 minute discussion before committing $2 million to purchase shares in a company such as Trawl.
It is highly significant that no specific record of any kind was made at any time, by any of the applicants, in relation to any of the oral representations. Nor was there any attempt to confirm or record in writing, prior to, on or after 30 March 1987, any of the understandings, arrangements, and commitments allegedly made on behalf of UBA which the applicants say they understood to be derived from the Heads of Agreement or the "W" contracts or any other written material allegedly relied on. There is no correspondence, diary note, memorandum or written record of the representations, nor of any of the assurances said to have been given orally. In particular there is no confirmatory letter or note written to UBA. One particular example is eloquent in this respect.
On 18 March 1987, Pridmore alleges that Horrobin said to Lees:
"Having heard you today we are happy to rely on your assurances. We will invest the money subject to sighting a signed agreement between yourself and Trawl in a form acceptable to us." (emphasis added)
If the above statement was relied on, one would have expected a formal confirmation on such an important matter as the alleged "assurances". The use of the term "assurances" gives rise to an appreciation in the applicants of the importance of the statement and hence the need for a record. The term "assurance" is by definition something that can be relied on. It is in the nature of a guarantee. Horrobin's statement alleges an express intention to rely on the assurances. The applicants would clearly have appreciated that meaning and ensured that if made, it was confirmed or at least recorded before they relied on it, and committed themselves to an investment of $2 million in a totally new area of business venture.
Another significant consideration is that in the shareholders' agreement with itself which Atasco signed on 30 March 1987, there is express reference made in clause 10.6 to the representations, warranties and undertakings made to Cumbeline being set out in the agreement, and that Cumbeline had entered into the agreement on the basis of, and in reliance on, those representations, warranties and undertakings. That clause makes it quite clear that Cumbeline entered into the shareholders' agreement on the basis of the representations, warranties, and undertakings which had been carefully drawn and spelt out in the document. Furthermore, clause 2.1 of that agreement sets out a series of conditions precedent, including provision of evidence that Trawl has certain rights, licences, consents, waivers and other assurances.
Clause 4, as is usual in such agreements, provides that prior to the completion date a large number of documents, records and papers shall be supplied and that certain actions will be taken by the parties. There was no attempt to include a reference to any assurances by UBA or to make the agreement conditional on such assurances.
The extensive and detailed attention given in the shareholders' agreement of 30 March 1987 to these matters is in sharp contrast to the absence of any record or confirmation in relation to the alleged crucial assurances given by UBA and Lees.
The evidence demonstrates that the applicants saw their 50% investment in Trawl in March 1987 as an extremely attractive, if not irresistible investment, with an enormous "upside" of sustained future profits with little "downside". This attraction in their opinion was so great that the clear inference is that Cumbeline and the applicants would have invested in Trawl even if the alleged representations had not been made.
By 16 March 1987, Sands gave instructions for Cumbeline's solicitors Messrs Heidtmann & Co, to prepare a comprehensive warranty agreement in relation to the proposed purchase. This evidences at that time a strong attraction to the investment even before the discussions on 18 March 1987 and the Heads of Agreement having been seen by the applicants. Of course there was no firm commitment to invest at that time but preparation of a detailed draft agreement indicates a substantial attraction to the venture.
On 16 March 1987, Pridmore had faxed to Horrobin a copy of contract W17299 and some financial information relating to cash flows, and profit and loss accounts to December 1986.
Horrobin, Sands and Pridmore gave evidence that on 30 March 1987, Cumbeline's investment in Trawl was regarded as a very attractive proposal.
Horrobin described it as "an extremely good deal". His attention concentrated on Trawl's profitability and whether its profits would increase as turnover increased. It was clearly anticipated that turnover would increase markedly. He considered that Trawl was in a unique strategic position to serve large and profitable markets in Australia and overseas. He also thought that Trawl could profitably sell all the fish it could secure. This was his view when he entered the shareholders' agreement. In his eyes all the applicants considered that for $2 million they had bought into a company which had "a fantastic future" as far as profitability was concerned and it that it would have strong early cash flows and the potential for growth.
Horrobin wrote to First National Ltd on 2 April 1987, three days after the shareholders' agreement had been signed and attached the cash flow prepared by Sands. In the period to December 1987, that cash flow indicated that Trawl would make a net profit in the order of $3.24 million, and be able from its cash flow to finance $5.825 million of capital expenditure.
After answering questions concerning profitability as indicated in the spreadsheet of Sands, Horrobin was asked:
"Q.You must have thought this was a magnificent opportunity to get into?
A.Yes I did."
There is no reason to think that Sands or Pridmore had different views to Horrobin in relation to the investment. Sands compiled the cash flow spreadsheet sent with the letter of 2 April 1987 and Pridmore had caused the investigations and enquiries to be carried out up to that stage. Pridmore did not indicate any disagreement with Horrobin or Sands as to the attraction of the investment.
Horrobin referred to the warranties in the shareholders' agreement as being central to Cumbeline's agreement to acquire an interest. He sought and obtained from Fasham on 26 March 1987, a letter confirming assurances which Fasham had given to him. These assurances provided that there were no outstanding works or further plant to be installed to meet UBA requirements. A letter of assurance was obtained from the Reserve Bank confirming that ANZ consented to the proposed allotment of shares to Cumbeline. In addition, assurances were obtained from ANZ on 26 March 1987, that Trawl was not included in any cross guarantees of other companies in the Atasco Group. The executed Heads of Agreement of 26 March 1987 was obtained and regarded as satisfactory by the applicants.
The applicants made extensive inquiries in relation to all matters which concerned them prior to entry into the transaction, yet there was no confirmation of any assurances from UBA, although confirmations and assurances had been obtained from other parties. The only discussion with UBA was at the chance meeting of 18 March 1987. Investigations by the applicants also included inquiries of ANZ as to the business ability, character and financial capacity of the Atasco directors.
Pridmore had taken steps to visit Tasmania to inspect facilities and investigate mackerel grounds off Tasmania.
Sands was aware of substantially all of the information recorded in the spreadsheet attached to the letter of 2 April 1987, before 30 March 1987, except for some cash flow information. His spreadsheet assumed that by January 1988, Trawl would supply about 14,924 tonnes of fish and that profit would be about $3.24 million and the cash flow would be able to finance $5.825 million of capital expenditure.
Another operative and persuasive inducement to the investment was the plan of the Tasmanian government which the applicants understood prior to 30 March 1987 as involving a decision to close the jack mackerel fishing grounds and to allow no new entrants. This gave rise to an opportunity to buy vessels and thereby obtain a quota entitlement which permitted fishing in an enclosed mackerel fishing grounds, and this would clearly increase the capital value of boats because the licences were transferable.
Prior to April 1987, in my view, the applicants regarded the proposed investment in Trawl as a "venture capital" proposal. It was present to their minds as an attraction of the investment, that if appropriate, they could substantially expand the business of Trawl, and then sell out at a very substantial profit. There was present to their minds that the investment could operate as a short-term investment. Horrobin was not prepared to admit that it was other than a long term investment proposal but in a faxed memorandum of 4 January 1988, to a Mr Arthur Partridge, under the heading "Potential acquisition of Australian fish harvesting processing and freezing company" he stated:
"5. FINANCIAL INFORMATION
These assets and an experienced staff have been assembled over the past six months by an Australian venture capital company as a strategic investment, because of the opportunities created by recent developments which are currently occurring in the Australian Fishing Industry.
The role of the venture capital financier is now essentially completed, and the fishing/processing company will very shortly be ready to commence full scale operations, upon completion of the capital expenditure program. It therefore has no established track record. In appropriately experienced hands, the company should be capable of generating annual pre-tax profits of the order AUS$6 Million.
Estimated new replacement value of the facilities assembled would be of the order of AUS$14 million.
Price sought: AUS$8 Million to AUS$9 Million for 100%" (Emphasis added)
Although this memorandum was written 8 months after the initial investment it does accurately reflect the approach taken by the applicants to the investment. The venture capital financier referred to is, of course, Cumbeline.
That memorandum also emphasised the significance of Trawl's assets. These were said to include large new export-licensed fish processing works set up for both table fish and industrial fish; a large cold store and blast freezers and a fleet of five company owned vessels, supplemented by independent contract fishermen. There was emphasis placed on catching table fish from 10 large trawlers. This latter project had nothing to do with UBA; it was contemplated that table fish could be processed and resold to domestic and export markets. Emphasis was placed on the advantageous geographic location of the company's plant in relation to the developing fisheries, both for table fish and industrial fish. Also, reference was made to the location of the processing plant adjacent to the freezing and cold store facilities, and the wharf and rail line. Further reference was made to an exclusive evergreen contract with UBA. As at the date of this letter of course, there was no "W" contract in existence for the supply of fish, the previous contract having been cancelled in September 1987, for failure to supply.
The importance of the perceived unique position of the location of Trawl's processing plant and the consequent strategic marketing advantages which this conferred were a most important feature in attracting the investment. In a situation where the applicants considered that Trawl had a strong competitive advantage over other suppliers, it was not nearly as essential for them to rely on assurances from UBA, because the fact was, to their thinking, that they were able to rely on the great economic and commercial strategic advantage which the location and size of the plant provided. This in my view was a major inducing factor.
In addition, by 30 March 1987, Trawl had demonstrated a capacity to supply substantial quantities of fish. In February 1987, 291.2 tonnes had been supplied and in March 506.391 tonnes. This must have given considerable confidence to the applicants, apart from any representations, that Trawl had the capacity to obtain and process fish in large quantities. Horrobin gave evidence that he was particularly impressed with, and relied on, the increase in supply effected in February 1987. He did not appear to have considered the great shortfall in supply in the contract in the previous two years. This indicates a certain degree of selective blindness.
It is clear also that reliance was placed on what Fasham and J Wilson had told the applicants in March 1987, and reliance was also placed on what ANZ had allegedly told the applicants about Atasco in particular, and Fasham and J Wilson. These assurances by ANZ were said to be, in later pleadings in relation to ANZ litigation, the basis of the misrepresentation claim by the applicants against ANZ.
Pridmore was extremely optimistic and believed that Trawl's business would be profitable. With its own vessels, blast freezer and storage facility, he also considered that it had a unique asset in Australia. He told Lees in 1987, that the applicants had expected a profit of $2 million, in the period to July 1987.
On 22 April 1987, little more than 3 weeks after the shareholders' agreement was signed, Pridmore wrote to ANZ indicating that by January 1988 Trawl would be a company without gearing and with the capacity to catch, process, freeze and store 25,000 tonnes of fish per annum. He foresaw a profitability in excess of $5 million per annum as being sustainable, given the margin currently experienced at that time and the increase in that margin which would flow from export markets.
There was also expert evidence from Mr Lonergan, of Coopers & Lybrand. He had a long and extensive experience in the purchase and investigation of investment companies and the evaluation of companies and of securities. He was an investment consultant and expert equity valuer called by UBA.
Mr Lonergan, under cross-examination, voiced the opinion that Trawl as at March 1987 was worth considerably less than $2 million, and that the applicants had substantially over-paid for their interest in that company. He pointed out that in his experience, purchasers of businesses do not rely on warranties except as a "fall back position", but they rely on proper and full investigations and enquiries. There can be no doubt that the three individual applicants were astute businessmen. This is readily appreciated from their background, as described earlier in these reasons. Lonergan was of the view that any reasonably prudent businessman who examined the management accounts of Trawl, would have appreciated the risk inherent in making the $2 million investment for a 50% interest in Trawl.
During his cross-examination he pointed out that Trawl had lost about $600,000 in the year ended 30 June 1986, and for the year ended 30 June 1987, the management accounts of Trawl showed a budgeted loss in the order of $821,000, and that these figures would put a purchaser on inquiry. He said that having regard to these considerations:
"It's showing you, put commercially, that this business looks like a dog."
He referred to a number of features of the Trawl arrangements with UBA which would sound warning bells to reasonable businessmen. In particular, he pointed out that any contract must always be subject to catch for example.
The significant fact is that the matters raised by Mr Lonergan were not examined nor appreciated by the applicants prior to investment, and this is consistent with a strong conviction in their minds that this investment was so good that they could not wait to get a substantial interest in Trawl.
It was pointed out in cross-examination that the budgeted loss of $821,000 in the management accounts for 1987 did not take account of revenue from sales and that this would have been realised if a full investigation had been made. However, the salient matter is that no investigation was made by the applicants before committing the $2 million.
The last mentioned matter is not determinative in itself, but is one of a number of factors coupled with the earlier matters mentioned which persuade me there was no reliance of significance before entry into the contract by the applicants on any representations which were said to have been made on behalf of UBA.
Of all the factors mentioned above I think particular emphasis should be placed on the view of the applicants that Trawl held a unique strategic position and that by reason of this perception it was assured of custom from UBA, and collateral statements by UBA did not induce the investment.
In my opinion, prior to 30 March 1987, Trawl was perceived by the applicants to be a highly lucrative, almost irresistible investment, with its promise of an extraordinary profit earning capacity of a sustained nature with the additional opportunity to produce very substantial capital gains given the enhanced sale price of assets coupled with the opportunities to expand into large new markets unrelated to pet foods, such as table fish and export markets. This "fantastic" investment, coupled with a sense of urgency generated by the need to purchase the PGA lease, propelled the applicants into the investment and none of the representations made by UBA were relied on to any extent or at all by them when they made the commitment.
My conclusion is that none of alleged misrepresentations taken either individually or cumulatively were relied on by any of the applicants in entering into the investment.
Reliance - On Post 30 March 1987 - Representations
It is not possible on the evidence before me to attribute any degree of reliance on these representations either individually or cumulatively. Nor is it possible to allocate or quantify any specific damage arising as a result of these representations.
The fact is that as from 30 March 1987, the applicants were firmly committed to the business. The second instalment of $1 million was paid on 28 July 1987, by which time they were aware of the significant problems which had beset Trawl's business. A number of these problems were clearly manifest by the end of July 1987. They had no commercial alternative but to continue to carry on the business. The dispute which arose with the Atasco directors was the direct cause of them entering into the buyout deed of 29 November 1987. They could either have sold out or obtained control by buying out Atasco and then selling at an adequate price to recover their investment at that stage.
UBA continued to buy product after July, through October 1987, notwithstanding the cancellation of W17402 on 10 September 1987. Trawl was having problems at that time with its fishermen (arising from non- or late payment). In the latter part of 1987, relations broke down with the Atasco directors and ANZ was unwilling to advance funds whilst the dispute continued; the Trawl vessels were out of action for substantial periods and could not fish; and Trawl did not supply pilchards between early July and 10 September. There were also disputes over the November 1987 deed with Atasco and the dispute and litigation with ANZ over the existence of the scrip lien in December 1987 and following months. Trawl had difficulty in trying to get finance from anyone other than ANZ and substantial financial losses were building up in this period.
As a result of these commercial problems, the applicants were unable to get out of the investment. They were unable to find another equity investor or to sell their own interest despite extensive efforts to do so in this period. The applicants persisted with the investment in the hope that they could get out at a profit.
Put simply, they were plagued by a completely unanticipated series of problems after the investment, and their dominant objective was to stay in business in the hope that circumstances would change. Of course, the custom of UBA was essential to them and they were relying on the probability, as Lees foreshadowed on 11 September 1987, that UBA would order future supplies from them. In 1988, UBA did re-contract with them and on 8 June 1988, signed the new Heads of Agreement with a cost plus formula spelt out in the document. This was then repudiated by Trawl. As a result of the repudiation of the 1988 Heads of Agreement in April 1989, the arrangement with UBA was terminated.
In my view, far from any representations after 30 March 1987 causing or contributing to losses by the investors, they resulted from unforeseen events not contributed to by UBA. The applicants' misfortune was the result of what turned out to be a disastrous business investment.
The applicants did not in my view rely on any of the statements allegedly made after 30 June 1987, to their detriment. The real problems arose from their decision to invest in the first place, which was not done, as I have previously decided, in reliance on any representations by UBA.
I now briefly turn to the individual misrepresentations alleged to have been made after 30 March 1987.
Representation (xv) - Early April 1987
- Revising Estimates Upwards
In early April 1987, contract W17299 was in effect and provided for delivery over the remainder of the year from early February 1987, of 6,250 tonnes. The evidence does not establish that the representation was untrue. It is in the most general of terms. I do not accept that any of the applicants did anything, or refrained from any action in reliance on this alleged representation. This is evidenced by the fact that there is no material to establish that Pridmore took steps to tell Horrobin or Sands about the matter.
Representation (xvi) - Early June 1987 - Documents Satisfactory to UBA and in Accordance with Arrangements
This relates to the upgrading work on the factory and purchase of the vessels.
In my view the vessels were acquired because of Trawl's own independent assessment of the desirability of acquisition, and not in reliance on UBA's representations. By 2 April 1987, the applicants planned to process about 13,000 tonnes of fish by January 1988 which would require an upgrading of the plant. By early June 1987 the plant had processed 2,381.739 tonnes in April and May but by that time there had arisen a blocking or clogging up problem and other operational problems had manifested themselves. Pridmore considered that G Wilson, who was managing the plant prior to May-June 1987, was incompetent to operate the factory.
There is no evidence as to how the applicants would have acted differently if Lees had made the statement alleged. Also, by June 1987, the applicants had envisaged the export of table fish.
The evidence of sales to UBA in April-May 1987, was that the plant was capable of processing 1,082.005 tonnes and 1,299.734 tonnes respectively. This shows a throughput rate in the range approximately of 13,000-15,000 tonnes per annum.
Lees was not shown to be an expert in refrigeration or plant layout, although of course he must have had some acquaintance with these matters. There was no note to the effect that Lees' statements or advice were being relied on.
The evidence of Horrobin was that Lees said the Macdonald Wagner report looked fine to him but he would talk to UBA's engineering people, and would let Horrobin know if they had any suggestions. There is no indication that this matter was pursued any further.
In my view the Macdonald Wagner report was sent to UBA as a matter of good working relations and to establish with UBA that Trawl was making every effort to ensure that fish were supplied.
Representation (xvii) - 11 September 1987 - All the Business They Could Handle if J Wilson and Fasham Were Removed.
This representation is said to have been oral and set out in the letter of that date.
The only reliance which could have existed was that on the letter of 11 September 1987, which sets out the intentions of UBA as requested by Horrobin. This letter does not support the alleged representation at all. No attempt was made to record the alleged representation, or to point out that the letter was inaccurate or incomplete in any way. There is not even a diary note or internal record in Trawl, in relation to this matter.
The letter was concerned with the demonstration of ability to fish, and not with who comprised the management of Trawl. UBA was seeking assurance of ability to supply, understandably so, in view of the non-performance in July and August 1987 by Trawl.
Representation (xix) - August-September 1987
- Dealings with Mitchelson
Pridmore states that had he known any of the discussions with other suppliers were going on and that UBA was purchasing fish from Mitchelson, he would have concluded that the March 1987 Heads of Agreement was worthless and recommended suspension of business and reversion to legal rights against UBA. Pridmore said that the dealing with Mitchelson which had been denied
indicated that UBA would have been proven to be totally untrustworthy. Notwithstanding this and the other allegedly false representations made by UBA up to that time which had become manifest, on the applicants' case, the applicants were prepared to deal with UBA by entering into the 7 June 1988 Heads of Agreement. The applicants clearly knew that UBA was taking product from suppliers other than Trawl during 1987 because of Trawl's failure to supply, though there had been no prior approach to Trawl by UBA in relation to ordering fish from other suppliers. When Pridmore learned of UBA's "second supplier" policy in March 1988, he took no steps to inquire whether that policy had applied during 1987. This would have been a logical inquiry to make if he had believed that there was an "exclusive" supply arrangement. Furthermore, when Sands learned of UBA having a policy of a second supplier in early March 1988, he said that he did not know what the policy related to or whether it was an existing policy or a new requirement, but says that it was a surprise. However, he made no inquiries. He agreed that the existence of the policy was inconsistent with the 26 March 1987 agreement being an "exclusive" supply contract. He said that if he had been aware that UBA was taking mackerel from Ocean Fresh, then he would have voted to appoint a receiver to Trawl. I do not accept this evidence given the financial circumstances in which Trawl was situated at that time and given the circumstances that the major asset of Trawl was its prospects as supplier to UBA once it convinced UBA of its capacity to meet supply and specifications.
In my view, if the applicants had known about the relationship with Mitchelson, their response would have been simply to register a complaint with UBA, but no more.
Representation (xx) - October 1987-January 1988
- Removal of Fasham and J Wilson from Trawl.
In my opinion the removal of Fasham and J Wilson from Trawl was not undertaken because of statements by UBA. These steps to gain complete control of Trawl arose because it was simply impossible for the Cumbeline and Atasco interests to continue to work together.
There was a strong sense of mistrust on the part of the Cumbeline directors in that Trawl's business had proven to be significantly different from that expressed prior to investment. At this time the applicants claimed they were misled and blamed Atasco for their predicament.
As recorded by Oldfield on 27 October 1987 and 9 November 1987, the Cumbeline interests had formed the view that Trawl could not continue and that there would have to be a buy-out or a sale to an outside party. ANZ had refused to lend further funds to Trawl by this time unless disputes and differences were resolved. Sands considered that by November 1987 the liquidation of Trawl was a possibility unless arrangements could be reached between the shareholders in Trawl.
The reality was that there was no commercial alternative, as Sands indicated, but to enter into the November 1987 deed. It is significant that when the deed was signed Pridmore informed the bank manager and an increase in Trawl's overdraft was agreed.
In my view the applicants would have entered into the deed of 29 November 1987 to get rid of the Fasham and Wilson interests apart altogether from any statement by Lees.
This alleged representation also asserts reliance upon a representation that the price which UBA would pay to Trawl would give a return on all expenditure to date and cover further investment by Trawl in heading and gutting equipment. Horrobin did not assert that he was relying on any representation that the price which UBA would pay would give Trawl a return on all expenditure to date when he wrote on 8 March 1988 that future price was to recoup the cost of heading and gutting equipment. If reliance was placed on an assurance that the price would give a return on all expenditure, clearly this would have been referred to in the drafting of the new Heads of Agreement of June 1988.
Representation (xxii) - 18 February 1988
- That Mackerel Requirements Would Go Up Tremendously.
Again, I do not consider the applicants relied on this representation. They relied on the June 1988 Heads of Agreement which set out minimum quantities of mackerel which provided for an increase in the minimum quantity of mackerel to be purchased each year. This was obviously satisfactory to the applicants, otherwise Trawl would not have entered into the agreement.
Representations (xxi), (xxiii), & (xxiv) - 18 February 1988 -23 March 1988 - The Profits and Future Certainty and Long Term Contract
There was no reliance, in my view, on any representations to the effect of the representations alleged.
The applicants drafted the relevant clauses of the document which became the June 1988 Heads of Agreement. It is clear that by entry into the June 1988 Agreement they relied on their own understanding of its legal effect and not on any assertions made by UBA.
Horrobin said there was a meeting with Lees on 23 March 1988 in the course of which Horrobin offered to prepare a draft Heads of Agreement. He prepared a draft and sent it to Pridmore for comments before forwarding it to Lees. He asked Pridmore whether he had any ideas on pricing formula. This sits uneasily with the proposition that Horrobin and Lees had already agreed on a pricing formula. As it turns out there was no material variation or addition to the relevant parts of the draft in the 7 June 1988 Heads of Agreement.
Representation (xxiii), to the effect that UBA would give Trawl the profits needed to satisfy its bankers and repay its
interest and its loans within the period of the contract, was not in my view relied on. The applicants relied on the pricing formula embodied in the June 1988 Heads of Agreement and this said nothing about satisfying bankers and repaying interest and loans.
Representation (xxiv), was believed by the applicants to be embodied in the June 1988 Heads of Agreement and there was no independent reliance on any representation in my view.
Reliance - ANZ and Atasco
Further relevant considerations on the question of reliance are assertions by the applicants that they relied on representations made by ANZ to them prior to investing in Trawl. They have alleged that without the misleading and deceptive conduct of ANZ, Cumbeline would not have invested in Trawl.
Also, it is clear that the applicants relied on the shareholders' agreement and the warranties contained in it, together with the documents obtained prior to the execution of the shareholders' agreement in March 1987. They also relied on warranties given by Atasco. Horrobin agreed that the warranties given by the Atasco interests were "central" to Cumbeline agreeing to acquire an interest in Trawl, but he did point out that there were other considerations. Pridmore said that the representations by UBA were "vital". Notwithstanding
this, it was not until 1989 that he raised the assertions presently relied on.
Damages
In view of the conclusions which I have reached on the issues of misrepresentation and reliance it is neither necessary nor appropriate to decide or deal with the question of damages.
Conclusions
My conclusions are :
Apart from representation (xix) made in August/September 1987, relating to purchases from Mitchelson, I am not satisfied that any of the misrepresentations alleged were made by UBA.
In relation to representation (xix) I do not consider that there was any reliance on it nor was any damage shown to flow from that misrepresentation.
I do not consider that in entering into the investment and persisting with it, the applicants relied on any one or more of the representations alleged, either individually or taken together.
Accordingly, the appropriate order is that the application be dismissed with costs, except that the costs of the interlocutory hearing on legal professional privilege reserved on 14 November 1994, should be paid by UBA.
I certify that this and
the preceding two hundred and seventy-one
(271) pages are a true copy of the
Reasons for Judgment herein of
his Honour Justice Tamberlin.
Associate:
Date: 29 June 1995
Counsel for Applicants: Mr A J Sullivan QC
Mr J B Whittle
Solicitor for Applicants: Blake Dawson Waldron
Counsel for Respondent: Mr R J Bainton QC
Mr R M Smith
Ms J Deamer
Solicitor for Respondent: Sly & Weigall
Date of Hearing: 10,12-14,17-21,24-28,31 October,
14-18,28-30 November
5-9,12-16 December 1994
10,13,16,17 February 1995
Date last written submissions received: 28 March 1995
Date Judgment Delivered: 29 June 1995
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