MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust

[2022] NSWSC 881

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

MindChamps Preschool Limited v M & W Zaki Pty Limited ATF the Zaki Group Trust & Ors [2022] NSWSC 881

Hearing dates:

12, 13, 14, 15, 16, 29 & 30 July and 11 August 2021

Date of orders:

1 July 2022

Decision date:

01 July 2022

Jurisdiction:

Equity

Before:

Slattery J

Decision:

Misleading and deceptive conduct case dismissed. Plaintiff successful on case in contract. Order for the return of the deposit of $500,000. Directions made for the calculation of interest and determination of issues of costs.

Catchwords:

MISLEADING AND DECEPTIVE CONDUCT – plaintiff executes an agreement on 1 September 2016 for the acquisition of nine childcare centres from the first, second and third defendants – plaintiff alleges the fourth and fifth defendants engaged in misleading and deceptive conduct on behalf of themselves and other defendants inducing the plaintiff to execute the agreement – plaintiff terminates agreement and seeks recovery of the deposit – whether the fourth and fifth defendants represented to the plaintiff before execution of the agreement that a) due diligence documents required by the plaintiff were fully ready to allow the plaintiff to complete due diligence by 30 September 2016 (b) the accounts for the childcare businesses were audited by PwC (c) the due diligence ‘data room’ of the defendants was complete; and (d) there was another potential buyer of the childcare centres who had already commenced the due diligence process, and who was willing to pay a non-refundable deposit of AUD$1 million – whether any representations made by the fourth and fifth defendants were misleading – whether the plaintiff relied upon any representations made – what loss was caused by any misleading deceptive conduct of the defendants and what relief should be given, including return of the deposit. Alternatively, whether the circumstances occasion relief for negligent misrepresentation.

CONTRACT – breach of contract – interpretation of contract terms – agreement for the acquisition of nine childcare centres – conditions precedent – deposit held in escrow – provisions of the agreement requiring due diligence before entry into a long form agreement on 30 September 2016 – a term of the agreement provides for the return of the deposit, if the sellers breached their obligations with respect to the due diligence process, or if the seller breaches certain obligations in relation to exclusive dealing with the plaintiff – whether the sellers have breached either their due diligence process obligations or their exclusivity obligations under the agreement – whether the sellers are required to the return of the deposit.

Legislation Cited:

Australian Consumer Law

Civil Procedure Act 2005, s 100

Cases Cited:

Strike Australia Pty Ltd v Data Based Corporate Pty Ltd (2019) 19 BPR 39,621; [2019] NSWCA 205

Category:

Principal judgment

Parties:

Plaintiff: MindChamps Preschool (Worldwide) Pty Ltd
First Defendant: M & W Zaki Pty Ltd ATF the Zaki Group Trust ABN 99233987815
Second Defendant: Child Care Income Protection Pty Ltd ATF The KZ Trust ABN 94358741310
Third Defendant: Mark Zaki
Fourth Defendant: Maged Zaki
Fifth Defendant: Kerelos Zaki

Representation:

Counsel:
Plaintiff: M. Izzo SC; B. Hancock
First to Fifth Defendants: R. Newlinds SC; A. Horvath

Solicitors:
Plaintiff: Dentons Australia Ltd
First to Fifth Defendants: Hitch Advisory

File Number(s):

2017/00063546

Publication restriction:

No

Judgment

1. The plaintiff, MindChamps Preschool Limited (“MindChamps”), is a Singapore-based international provider of childcare services. The first defendant M & W Zaki Pty Limited as trustee for the Zaki Group Trust (“M & W Zaki”) and related entities operate childcare centres under the name “Little Zak’s Academy” or simply “Little Zak's” in New South Wales. On 1 September 2016 MindChamps executed an agreement entitled “Term Sheet”, to acquire nine of M & W Zaki’s NSW childcare centres for a consideration of $68,500,000 subject to agreed adjustments. The Term Sheet required the payment of a deposit of $500,000 and was subject to conditions precedent, including due diligence obligations which were to lead to the execution by 30 September of what was described in the Term Sheet as a Long Form Agreement.

2. On 16 September 2016 MindChamps communicated to M & W Zaki that it had decided not to proceed with the purchase under the Term Sheet and gave notice of that decision to M & W Zaki. MindChamps contends it was induced to enter the Term Sheet by the misleading deceptive conduct of M & W Zaki and entities and persons related to it and that it is now entitled to rescind the Term Sheet pursuant to Australian Consumer Law, ss 237, 242 and 243 (“the ACL”) and have the $500,000 deposit returned to it. MindChamps further alleges it was entitled to terminate the purchase, because of M & W Zaki’s failure to satisfy the conditions precedent to the Term Sheet and because of its breaches of the Term Sheet. MindChamps claims the return of the deposit of $500,000 and recovery of some $16,655.34 in travel expenses it incurred in undertaking due diligence following entry into the Term Sheet.

3. MindChamps executed the Term Sheet in its then corporate name, as a private company incorporated in Singapore, MindChamps Preschool (Worldwide) Pte. Limited. In November 2017 the plaintiff subsequently changed its status to that of a public company, also altering its name to its present title.

4. The first, second and third defendants executed the Term Sheet as co-vendors. The fourth and fifth defendants are joined into the proceedings as persons said to have engaged in misleading and deceptive conduct, including on behalf of the other defendants. All defendants are members of the Zaki family, or are entities controlled by family members. The second and third defendants, Childcare Income Protection Pty Limited as trustee for KZ Trust and Mr Mark Zaki, the co-vendors with M & W Zaki under the Term Sheet did not otherwise feature significantly in the evidence. Mr Maged Zaki, the fourth defendant, and his son Kerelos (referred to in evidence as “Carlos”) Zaki, the fifth defendant together controlled and managed the day-to-day business operations of M & W Zaki and played the principal roles on behalf of the sellers in relevant events. The second defendant is a family company associated with Mr Carlos Zaki. These reasons refer to defendants as vendors collectively from time to time as M & W Zaki, or Little Zak’s; and members of the Zaki family are sometimes referred to as “the Zakis”

5. MindChamps alleges the defendants, specifically Mr Maged Zaki and Mr Carlos Zaki engaged in misleading deceptive conduct during negotiations inducing it to sign the Term Sheet. It says that these defendants represented: (a) that due diligence documents required by MindChamps were fully ready so as to allow MindChamps to complete its due diligence process by 30 September 2016; (b) that the accounts for the childcare businesses owned by the defendants were audited by PwC or some other external accountant; (c) that the due diligence “data room” of the defendants was “complete” prior to MindChamps executing the Term Sheet; and (d) that there was another potential buyer of the childcare centres who had already commenced the due diligence process, and who was willing to pay a non-refundable deposit of AUD$1 million. The last of these was not ultimately pursued.

6. The defendants contest the misrepresentation case. They allege that the representations were not made and if they were, when properly construed, they were either not misleading or were not relied upon.

7. MindChamps also brings a case in contract. It alleges breach of the sellers’ obligations of due diligence, under Term Sheet, clause 9 and the sellers’ obligations to afford exclusive negotiations to MindChamps under Term Sheet, clause 12. As to the former, MindChamps alleges that in breach of clause 9 the sellers did not provide all the information reasonably required by it as the buyer to enable due diligence investigations. As to the latter, MindChamps alleges the sellers were continuing to conduct negotiations with at least one third-party after 1 September 2012 in breach of clause 12.

8. The defendants contest MindChamps’ breach of contract case. They dispute MindChamps’ construction of the contract that founds MindChamps case of breach. But even if MindChamps construction is accepted, the defendants deny both claimed breaches of contract. As to clause 9, the defendants contend that they did provide all information reasonably required to enable MindChamps to conduct its diligence investigations. As to clause 12, they admit having had some contact with other potential purchases but submit that properly construed it was not a breach of clause 12.

9. The defendants also develop a case that MindChamps decision to terminate the Term Sheet was not the result of the sellers’ breaches of the Term Sheet. Rather they submit MindChamps realised that it lacked the finances to complete its next contractual payment obligations required under the Term Sheet, being the payment of $20,000,000 on execution of the long form agreement on 30 September 2016 and $47 million on the completion date. MindChamps contend this is an irrelevant issue.

10. The contest conveniently divides the narrative of the facts into two distinct time periods.

1. The alleged misleading deceptive conduct and the negligent misrepresentation claims identify conduct in August 2016 that predates the execution of the Term Sheet.

2. The alleged breach of contract case relates to the defendants’ compliance with their Term Sheet due diligence obligations and exclusivity obligations from 1 September to 16 September 2016.

11. This matter was initially listed for a hearing of 5 days commencing on 12 July 2021. A combination of the need for video-link evidence from witnesses, and for video-link appearances and submissions from counsel meant that the proceedings went longer, and they were ultimately heard over eight days, 12, 13, 14, 15, 16, 29 & 30 July and 11 August 2021. Mr M. Izzo and Mr B. Hancock of counsel acted for the plaintiff, instructed by Dentons. Mr R. Newlinds SC and Ms A. Hovarth of counsel acted for the defendant, instructed by Hitch Advisory. In a case with finely tuned debates about interpretation of a commercial agreement and a relatively dense narrative of events, the Court was greatly assisted by the careful presentation of the case on both sides by counsel and solicitors.

12. Shortly these reasons will commence a narrative of the Court’s relevant findings. But before commencing that narrative Court makes observations about credibility of various parties and witnesses. This was not an in-person hearing in the courtroom due to Covid 19 restrictions. The oral evidence on both sides of the proceedings was given by video-link, some from Singapore and some from within Australia. The fact that the witnesses were giving evidence remotely added a degree of caution to the Court’s assessment of them, but the Court was nevertheless generally able to form clear impressions of witness credibility and recorded them during the hearing.

Credibility of Parties and Witnesses

13. Mr David Chiem. Mr Phuan (‘David’) Chiem is the founder and chief executive officer of MindChamps. He gave evidence by video-link from Singapore. Mr Chiem was an honest and a reliable witness on most issues. He had a clear long-term vision and firm views about how the corporate group of which MindChamps is part would be run. He was very ambitious for its future expansion to realise that vision. He was intimately associated with all the detail of the company which he had founded, its transactions and its general business affairs.

14. But Mr Chiem was well practised in putting MindChamps in the best light possible. As circumstances required, when giving evidence he could demonstrate studied vagueness, put the best face on events and be slow to answer the more difficult questions confronting him and when appropriate he could give lengthy explanations. His personal style was diplomatic tending to the formal rather than informal communication.

15. Mr Chiem speaks of MindChamps very much as his own creation. He clearly constantly thinks about the company, is inspired by its future possibilities and readily grasps its potential for growth and improvement. His firm enthusiasm for the progress and future success of MindChamps had an evidentiary downside. He has some capacity to convince himself that his own memory of events concerning MindChamps consistent with his vision for it, must be correct. At times the quality of his recollection of events is to be doubted when compared with other contemporaneous events and objectively verifiable evidence. The Court cannot accept all his evidence about meetings and statements made to him: his memory was less reliable than some other witnesses with respect to certain crucial events.

16. Ms Catherine Du. Ms Catherine Du is the executive director of MindChamps. She gave evidence by video-link from Singapore. She has worked for MindChamps since its inception. She came across to the Court as a highly competent businesswoman of deep skill and ability. She attempted to answer questions diligently. But in places her memory failed her, and the Court was not always confident as to its quality, particularly with respect to the claimed PwC representation. And the Court at times had the impression that she had convinced herself that some events and meetings had taken place in a particular way such that the Court was cautious about accepting all her evidence and instead preferred the evidence of other witnesses.

17. Mr Nicholas Caswell. Mr Nicholas Caswell is the senior manager of business development at MindChamps Australia Pty Ltd (“MindChamps Australia”), a local subsidiary of MindChamps. He gave evidence in Sydney but by video-link due to the Covid-19 pandemic restrictions. He was a reasonably good witness who was present at some of the meetings at which other MindChamps witnesses say that they were present, but his role was somewhat subsidiary and his focus at those meetings was not upon the issues that have become central to these proceedings.

18. Mr Wee-Jone Teo. Mr Teo is the chief financial officer of MindChamps. He gave evidence via video-link from Singapore. Mr Teo was a good witness, who was clearly across his financial brief in relation to this acquisition on behalf of MindChamps. He was answerable in the corporate hierarchy to Mr Chiem, followed instructions from Mr Chiem, and was closely attuned to Mr Chiem’s outlook for the future expansion of MindChamps, which influenced his outlook. He was very focused on this transaction because it was a substantial step up in the size of acquisitions that MindChamps was making at the time. His evidence was generally reliable. He confessed that he had “learned a lesson” from the failure of this transaction.

19. Mr Chng Kwang (I-Ren or Lawrence) Tan. Mr Tan is the general manager of MindChamps. He gave evidence via video-link from Singapore. Mr Tan had been employed by MindChamps for about eight years prior to the events in question in these proceedings as general manager but prior to that he had worked for MindChamps holding company for about seven years. He was part of the management team at MindChamps that reviewed the potential acquisition of the Little Zak’s childcare centres. At the time of the hearing, he was no longer employed by MindChamps. Mr Tan came across as a precise person who was attempting to tell the truth. He took notes of some of the contentious meetings. Some of his answers could be indirect, he tended to avoid answering questions in relation to the more contentious meetings by talking of what was said in other meetings. His evidence is mostly accepted but like Ms Du he had an unreliable recall of some crucial disputed meetings.

20. Mr David Willis. Mr Willis is a partner of KPMG Advisory in Sydney. He gave evidence via video-link due to the Covid-19 pandemic restrictions. Mr Willis is an accountant in the Transaction Services business unit of KPMG’s Deals, Tax and Legal Division. He has advised in respect of corporate and private equity transactions for over 20 years. He commenced work at KPMG in January 2006 and became a partner in July 2007. KPMG were engaged by MindChamps to inspect the information in the data room in the due diligence process for this proposed acquisition by MindChamps. He was a reliable witness who demonstrated sound and reasonable professional judgments in the events in which he was involved. He made appropriate concessions when required and stated the facts as he recalled them crisply and concisely. He was cognisant of but not overly defensive of his client’s interests. His answers were a direct and businesslike. His evidence is accepted.

21. Mr Maged Zaki. Together with his wife, Wafaa, Mr Maged Zaki is one of two directors of the first defendant, M & W Zaki. He gave evidence from Sydney via video-link due to the Covid-19 pandemic restrictions. He was the founder of Little Zak's Academy. He came across to the Court as an honest and astute businessman. He was a reasonably good witness, who answered questions in cross-examination as fully as he could. He was prepared to make concessions about matters that he did not remember, and he consciously confined his evidence to material well within memory. Mr Maged Zaki genuinely did not remember the contested meeting that the MindChamps witnesses say took place about 15 or 16 August 2016.

22. Mr Carlos Zaki. Mr Carlos Zaki is the sole director of the second defendant, Childcare Income Protection Pty Limited ATF the KZ Trust. He gave evidence via video-link due to the Covid-19 pandemic restrictions. Mr Carlos Zaki is the son of Mr Maged Zaki and has followed his father’s business leadership into the childcare industry. He came across to the Court as an honest, astute, intelligent, and insightful businessman. He had quite a good memory of the contested events, with a definite recollection of what was said. He could convey subtle linguistic distinctions about the contents of conversations. He had a good understanding of all financial aspects of this transaction and showed a competent mastery of accounts. He was prepared to make concessions when required by circumstances. His evidence is accepted.

23. Mr Douglas Lilley. Mr Douglas Lilley helped introduce the parties to this transaction. He has been a licensed real estate agent and business broker since 1991. He and his wife Debbie operate Lilley Childcare Sales, a childcare centre brokerage, promoting the sale of leasehold and freehold childcare centres. He appeared via video-link from Christchurch, New Zealand. Mr Lilley and his wife have operated that business since about 2006. Mr Lilley was requested to give evidence for the defendants in 2018 but declined to do so because of an existing working relationship with MindChamps. But as the hearing approached, he decided he would give evidence and was called for the defendants. Mr Lilley was a generally credible witness. He appeared to be relaxed in style. He does not hold many formal meetings or take notes. He has an intuitive, spontaneous, and sales-oriented style of communication. He had a good recollection of contentious events, and his evidence is accepted.

24. The following is a narrative of the relevant history. This narrative represents the Court’s findings on the matters covered, except to the extent that the context indicates that only the parties’ allegations are being recorded in these reasons. For reasons of economy this narrative does not always include reference to versions of the facts that have been rejected.

MindChamps, Little Zak’s and the Term Sheet: the Misrepresentation Case

25. This section of these reasons deals with MindChamps misrepresentation case. It includes a narrative of findings covering the period prior to execution of the term sheet. Then it considers whether the misrepresentation case is made out. These reasons then proceed to the factual narrative and analysis for the breach of contract claims

MindChamps – Some Background

26. Mr Chiem is an Australian citizen currently residing in Singapore. Not only is he the chief executive officer of MindChamps, he is also the founder and Group CEO of MindChamps Holdings Pte Limited, which established MindChamps in Singapore in 2008. MindChamps is now a leading provider of preschool education in Singapore. Mr Chiem has long had a vision to bring MindChamps back to Australia and establish preschool operations in Mr Chiem’s home ground here in Australia.

27. It was in pursuit of that vision that Mr Chiem authorised MindChamps staff to explore opportunities for the acquisition of childcare centres in Eastern Australia. They engaged with Lilley Childcare Sales, leading to an introduction to Mr Maged Zaki and Mr Carlos Zaki.

28. MindChamps originally started in Sydney as both a learning idea and as a business entity. Due to circumstances its business later migrated to and developed in Singapore rather than in Sydney. The MindChamps concept began as a method of learning. Mr Chiem confirmed that it was focussed on “filling in the gaps of learning” for early childhood education and “engaging kids from [when they are] young”. But one of Mr Chiem’s ambitions has long been to bring the idea back to Australia.

29. The wider corporate group of which MindChamps is a part does not play a significant role in these proceedings, except in relation to issues concerning mounting an initial public offering (“IPO”) of the group in late 2016. Based on evidence from this IPO the defendant say that MindChamps did not have the funds to complete the acquisition of the Little Zak’s childcare centres.

30. MindChamps’ holding company is MindChamps Holdings Pty Limited (“MindChamps Holdings”). Many other companies in the group need not be mentioned by name, other than MindChamps Australia Pty Limited (“MindChamps Australia”) which in 2016 was planned to be the entity conducting MindChamps’ projected Australian operations. When the expression “MindChamps” is used in these proceedings it is a reference to the plaintiff rather than the MindChamps Group.

Little Zak's – Some Background

31. Mr Maged Zaki and his wife Wafaa are the directors of the first defendant, M & W Zaki, the corporate vehicle for the ownership of several of their family conducted businesses. Mr Maged Zaki his wife and family migrated to Australia from Egypt in 1991. He came from a background of corporate management in Egypt and soon after arriving in Australia began investing in childcare centres. He judged that childcare was a growth sector would expand and he perceived there was a gap in the Australian market for high-quality childcare centres.

32. From a single childcare centre in the 1993 M & W Zaki had expanded sufficiently by 2012 to sell seven of its 11 centres that year. In 2013 Mr Maged Zaki and his son Mr Carlos Zaki decided to start a new childcare brand together called “Little Zak's Academy”. The Zakis expanded this business in the following four years into a larger enterprise of childcare centres. And in 2016 they marketed that enlarged enterprise for sale to MindChamps.

33. From the 1990s M & W Zaki and the Zaki family had essentially conducted a small to medium business with many of the characteristics of that type of enterprise. During most of their expansion they used their own internal bookkeeping staff and a single primary external accountant, Mr Sherif Michael of Sherif Dastur & Co. The Zaki family found that by 2015 that the demands of all the accounting work for M & W Zaki (not only in their Little Zak's business but in their other small businesses) was becoming unmanageable for Mr Maged Zaki and his son.

34. So, in January 2016 to address these pressures across all of M & W Zaki’s businesses they decided to retain PwC as their accountants, to start overseeing aspects of their business, to help them foresee and avoid accounting issues, to reduce their tax burden, and to restructure their businesses to greater advantage. But they continued to retain both Mr Sherif Michael and PwC to perform their financial accounting, financial reporting and taxation lodgment and compliance.

The January 2016 PwC agreement

35. Mr Maged Zaki says, and the Court accepts, that M & W Zaki did not retain PwC to provide auditing services to audit M & W Zaki’s various companies, including Little Zak's. On 18 January 2016 PwC agreed in writing with various companies described as the “Zaki Group”, to provide services in accordance with a Statement of Work, describing the specific work for which PwC would be engaged by the Zaki Group and an Umbrella Engagement Agreement, describing the general terms applicable to the engagement.

36. The terms of this agreement are significant for determining the content of any representations Mr Maged Zaki made to MindChamps about the quality of financial accounts that could be provided to MindChamps. Mr Maged Zaki signed the January 2016 PwC agreement. He was alert and astute and unlikely to have forgotten in August 2016 the nature of the services stipulated for between PwC and the Zaki group in this agreement.

37. The January 2016 PwC agreement described the services in the covering letter to the agreement as “income tax compliance and consulting services”. In the Statement of Services these were divided into two parts. The first was a “detailed review of the current structure of the Zaki Group” which would include the following:

“Provide high-level commentary on debt/equity funding;

Identify key risks and opportunities with regard to income tax, asset protection and general commercial exposure; and

Provide initial recommendations regarding structuring options.”

38. The second part of the services was the provision of services to ensure that the Zaki group complied with its taxation obligations for FY 15,

“we will review your statement of taxable income, prepare financial accounts and lodge income tax returns in respect of the year ended 30 June 2015 as required for the following members of the Zaki group”

39. PwC defined services as including the examination of financial statements and trial balances prepared by an employee of the Zaki group “to identify material account balances that may give rise to tax adjustments” but the description disclaimed the kind of verification work that an auditor would ordinarily undertake:

“In performing our services we will rely on the account descriptions in your financial records, and any account analyses and verbal representations provided to us to determine the account balances and amounts that may require a tax adjustment.”

40. The Statement of Services provided that ATO “reviews and audits” may be conducted in relation to periods preceding PwC’s appointment, which PwC made clear was only for FY 15. But pre-FY 15 “reviews and audits” would be outside the agreed scope of works. It is clear from the Statement of Works that the only kind of audit that PwC could become involved in as part of its Statement of Works would have been an audit resulting from ATO intervention during the tax assessment process. Nothing in the January 2016 PwC agreement suggested PwC was engaged to undertake general auditing of any Zaki Group companies, which was not required by law.

41. It is to be expected that if PwC had agreed to provide general auditing services they would have been clearly defined in the Statement of Work, to accommodate the declarations required of the client, the financial sampling of transactions, and the cross checking required in the delivery of auditing services. Moreover, auditing services are likely to have required a wholly different pricing structure from “income tax compliance and consulting services”.

42. In his principal affidavit Mr Maged Zaki places a gloss on PwC’s role with respect to the Zaki Group’s accounts for FY 15. The Court accepts his evidence that at the time PwC had been retained Mr Sherif Michael had not finalised the FY 15 accounts. Mr Maged Zaki says that PwC made clear in their retainer letter “that they would not involve themselves in our 2014 - 2015 financial accounts”. That needs clarification. PwC did agree to prepare financial accounts and lodge income tax returns for FY 15. But it is equally clear that PwC did so, as it said, on the basis that the work task was functionally limited so it did not involve examination of individual transactions, such as might be undertaken by an auditor:

“Our work will include examining the financial statements and/or trial balances prepared by Ms Brooke Gilmour to identify material account balances that may give rise to tax adjustments. We will also make enquiries through correspondence or discussions regarding the nature of the balances to determine the appropriate tax treatment.”

43. The fact that the Zaki’s recognised that with businesses of their size and variety that they needed to engage PwC supports the judgment of astuteness in business that the Court makes about both Mr Maged Zaki and Mr Carlos Zaki. They foresaw that their accounting needs were growing beyond the capability of a single external accountant and so they went to PwC. But they had both been intimately involved in taking that important business step and in defining the boundaries between the scope of work to be undertaken in the future by their own in-house bookkeepers and by Mr Sherif Michael on the one hand, and PwC on the other.

44. The Court also judges Mr Maged Zaki and Mr Carlos Zaki as both honest and as having reasonably sensitive business foresight. Apart from the Court’s preference for the general credibility of their version on this contested issue of the audited accounts representations, it is impossible to reconcile the making of such representations with the known facts and the character of each of Mr Maged Zaki and Mr Carlos Zaki. They were both aware that they could not produce PwC audited accounts to MindChamps before the transaction closed because in August 2016, they had not engaged PwC for that purpose for either FY 15 or FY 16. Neither of them was so clueless or dishonest that he would have said to Mr Chiem or other MindChamps representatives, something that he not only knew was incorrect, but which was likely to proven false quickly during the due diligence period.

45. Other surrounding facts point to the same conclusion. But PwC’s engagement is a powerful foundation for rejecting this aspect of MindChamps’ case.

Pitcher Partners and the Information Memorandum – May to July 2016

46. Mr Maged Zaki and Mr Carlos Zaki decided in early 2016 that they would sell some eight of M & W Zaki’s then 15 Little Zak's childcare centres. This later became nine centres when the Belrose centre was added. They retained Mr Simon Johnson of Pitcher Partners Sydney Corporate Finance Pty Ltd (“Pitcher Partners”) to assist in brokering the sale of the centres. They knew that Mr Johnson had sold childcare centres on behalf of an acquaintance.

47. With Mr Johnson’s assistance by May 2016 M & W Zaki had prepared and issued a confidential Information Memorandum for distribution to potential buyers to promote the proposed sale. The Information Memorandum introduced the sale proposal, gave an industry overview, described the business of the eight childcare centres, identified the management and key employees of the centres and provided financial information about their businesses. It was clear to the business reader of the information memorandum that the eight childcare businesses were being sold and that the financial information supplied described their local operations.

48. The Information Memorandum gave a simplified breakdown of the major components of profit and loss for each centre, providing actual figures for FY15 and forecast figures for FY16. Those major components were revenue from which was deducted employee expenses, property expenses and administration costs to produce a figure for net profit before tax. Figures provided for each centre for FY15 were actual and given the Information Memorandum’s date of publication of May 2016, the figures for FY16 were in part a forecast. The forecast FY16 figures were consolidated for all eight centres to show the following:

Revenue	$23,000,732.68
Employment Expenses	$8,698, 069
Property Expenses	$654,756
Administration Costs	$698,027
Net Profit Before Tax	$9,681,526

49. In early August 2016 Mr Johnson introduced Mr Maged Zaki and Mr Carlos Zaki to potential international buyers, Chiwayland and Eden Academy (“Eden”). On 15 August 2016 M & W Zaki received an expression of interest letter from a representative of Chiwayland. Mr Maged Zaki was satisfied that they had a potential buyer. But he was more doubtful than Mr Johnson about the experience of this buyer in running childcare centres, in what by 2016 he saw as an increasingly regulated environment. Moreover, he says, and the Court accepts, that he was unsure that that Chiwayland was dedicated to the same values as M & W Zaki and would be able to represent M & W Zaki’s name well, given that the terms of sale would allow the seller’s name to be used for an initial period after purchase.

50. The signed expression of interest with Chiwayland, provided for an unconditional deposit of $300,000 which was fully refundable during a non-exclusive due diligence period. The expression of interest agreement provided that if the seller received a request from a third party unrelated to the seller for exclusive due diligence or received a formal offer to execute a sales agreement then M & W Zaki should immediately notify Chiwayland and give Chiwayland a 48-hour opportunity to secure exclusivity. Chiwayland had the right to secure exclusivity over any other third-party bidders within these 48 hours, provided it informed M & W Zaki in writing and its gross purchase price was greater than the highest bid from the third-party bidder. If Chiwayland chose to secure exclusivity and that was agreed by M & W Zaki then the deposit would become non-refundable subject to certain conditions, including some related to whether the due diligence resulted in revision of the projected performance of the business, as contrasted with the Information Memorandum. Discussions were also taking place with Eden. These are referred to later in these reasons.

51. The signed 15 August 2016 expression of interest issued by Chiwayland and signed by Mr Maged Zaki provided for the due diligence process and included the following statement on that subject drafted by Chiwayland:

“We are willing and able to commence full due diligence investigations. We, our financiers, and our advisors are experienced in completing transactions and propose to commence the due diligence within 30 days from commencement. Assuming all of the due diligence materials that the purchaser would reasonably require are readily available in an electronic data room or equivalent with appropriate assistance from management.”

52. Once Chiwayland had paid $300,000 into Mr Johnson’s trust account on 18 August 2016 its due diligence commenced. This included a Chiwayland representative making site visits to three M & W Zaki childcare centres on Monday, 22 August 2016, accompanied by Mr Maged Zaki. The timing of this site visit is significant, as both Maged and Carlos Zaki say that they did not meet anybody from MindChamps before that date but the MindChamps witnesses say that they first met with them on 16 August 2016.

53. The Chiwayland EOI made an indicative offer of a "gross target purchase price of AUD$60 million and rents as indicated within IM” (clause [1.1]) and was based upon the future maintainable earnings for the combined group of AUD$9.68 million, as reflected in the Information Memorandum (clause 2.7)

54. The Chiwayland EOI deposit was paid on 15 August 2016, and Chiwayland gained access to the data room on 16 August 2016. It had 25 days to complete due diligence on 9 September.

Mr Lilley Introduces the Parties – Late July to Early August 2016

55. Mr Lilley brought MindChamps and the Zakis together. His business Lilley Childcare Sales was experienced in facilitating childcare sales transactions as simple as for a single childcare centre and as complex as for multi-centre transactions. Lilley Childcare Sales was a substantial player in brokering the sale of childcare centres. For example, in FY21 the company introduced or serviced a total of 92 childcare centre transactions.

56. In late July 2016 a representative of MindChamps approached Mr Lilley and informed him that they were an active buyer of childcare centres in Australia. He arranged to meet Mr Chiem at Ovolo Café in Woolloomooloo. He left that meeting with the clear impression that MindChamps were looking to acquire childcare centres in Australia.

57. Mr Lilley heard that Mr Simon Johnson of Pitcher Partners had been marketing a portfolio of eight or nine childcare centres operated by the Zaki family. Having met the MindChamps representatives, he wanted to introduce them to members of the the Zaki family. He contacted Mr Carlos Zaki by text message on 2 August 2016 to enquire about the progress of the sale of the Zaki family childcare centres. But what meetings occurred between that text message and 23 August 2016 is a matter of hot dispute between the parties.

A Disputed Meeting - 16 August 2016

58. These proceedings embed an unusual dispute: whether a business meeting involving at least six people took place in the Sydney suburb of Ryde on 16 August 2016. MindChamps says it did that several of the misrepresentations occurred at the meeting: about PwC auditing M & W Zaki accounts and about the data room being ready. The defendants deny such a meeting occurred. But they accept that two later meetings occurred on 23 and 26 August.

59. It is intriguing that such a dispute could be debated in the digital age, in the internet rich environment of suburban Sydney. But the contest was not conducted using the internet of things, mobile phone data, electronic calendars, emails referring to the meeting, or other digital footprints. Rather it was a contest of old-fashioned competing recollections. The fact that it was waged as a nondigital contest in a digital world, points to the absence of a contemporaneous digital footprint to confirm that the meeting took place on 16 August. The lack of such evidence does not assist MindChamps’ case and strengthens the inference that a meeting did not occur between these parties that day.

60. The Court’s approach to resolving this important dispute is first to look at such independent or objective evidence as there is about the meeting and then to analyse the competing witness evidence about the meeting.

61. 16 August: the independent evidence. Mr Lilley is an important independent starting point for analysis. As little had happened after his 2 August text Mr Lilley decided to follow it up to secure a face-to-face introduction of potential seller and buyer. On 23 August Mr Lilley sent Mr Carlos Zaki a text message;

“Hi Mate, Sorry to bug you but these buyers are desperate to get through the centres as the big chief is going back to Singapore.”

62. The content of this text is more compatible with a meeting not having taken place by that time between the MindChamps representatives and members of the Zaki family. If a meeting had taken place on 16 August, it would be the logical occasion for the potential buyer to organise to visit the premises. Indeed, that is what occurred shortly after the meeting on 23 August.

63. Mr Lilley does not recall being present at a meeting on 16 August. And it is difficult to understand why the agent introducing seller and buyer would be present at the second meeting between the parties. It was in his financial interest to be present at the first meeting to get the relationship off to a good start. He recalls, and the Court accepts, that following this 23 August text message the first meeting in which he was involved was arranged for 5.00 pm the same day, at Little Zak's head office in Ryde.

64. Mr Lilley recalls, and the Court accepts, that he and his wife arrived at the head office of Little Zak's a little before 5.00 pm, where a meeting took place in the boardroom. He recalls that apart from he and his wife present were Mr Maged Zaki, Mr Carlos Zaki, Mr Chiem, Ms Du, and Mr Tan. He was clear that he had not had any other meeting at which MindChamps representatives were present with members of the Zaki family before that. He recalls “the bulk of the meeting was spent with Mr Chiem describing his vision and philosophy for MindChamps. Mr Chiem has a powerful vision for MindChamps and Mr Lilley’s recollection of the event rings true.

62. Mr Lilley does not recall any reference in conversation on 23 August to an earlier meeting having taken place between the parties. He does not recall any of the MindChamps personnel asking members of the Zaki family whether their accounts were audited by PwC, or members of the Zaki family claiming that their accounts had been so audited. And he does not recall either Mr Carlos Zaki or Mr Maged Zaki saying that M & W Zaki’s data room was “ready”, “fully ready” or any words to that effect. He does recall Mr Carlos Zaki saying that the data room had been opened and some information was available within it.

63. If Mr Lilley had attended a meeting on 15 August with Mr Carlos Zaki and MindChamps’ representatives as Ms Du says he did Mr Lilley's text message to Mr Carlos Zaki the following day is jarring. At 10:34 a.m. on 17 August Mr Lilley emailed Mr Carlos Zaki saying:

"Hi Mate. You still interested in me running your centres past those Asian buyers? Cheers Doug”.

67. Not only does Mr Lilley not refer to the meeting two days before but he is writing on the basis that there has been no earlier contact with the “Asian buyers”. A little over an hour later the same day Mr Lilley emailed Mr Tan communicating to him some of the information which Mr Tan and Ms Du say they were told at the 15 and 16 August meetings but Mr Lilley says he obtained the information by telephone from Mr Carlos Zaki:

"By the way, I just got off the phone from Carlos Zaki. The reason for his delay in getting back to me was because he had been approached by a Chinese consortium, who have apparently made an offer of $60 million."

68. Once again, Mr Lilley does not refer to the meeting in the days before. The next day, 18 August, Mr Lilley sends a further email to Mr Tan summarising a recent discussion with Mr Carlos Zaki, which refers to some of the subject matters that Ms Du and Mr Tan claim were discussed at the alleged 15 and 16 August meetings. Not only is there no reference to those meetings in Mr Lilley's email but it speaks upon the premise that Mr Lilley has acquired his information on a one-to-one basis from Mr Carlos Zaki rather than at a broader meeting, the opening words being “I had a chat to Carlos and the situation is as follows”. Even if he was not present at the meetings it might be expected that reference would be made to them.

69. 15/16 August: the Contested Evidence. Analysis of the competing evidence of the parties leads to the conclusion that no meeting took place on 15 or 16 August.

70. Both Mr Maged Zaki and Mr Carlos Zaki deny meeting with MindChamps representatives before 23 August. They disagree with the evidence of the MindChamps witnesses that a meeting took place on 15 or 16 August at which Mr Maged Zaki made representations to representatives of MindChamps.

71. Mr Maged Zaki recalls only two meetings with MindChamps representatives before signing of the Term Sheet together with a site visit to the Artarmon childcare centre. He does not have an exact recollection of their dates but is able to place them between other events.

72. Mr Maged Zaki recalls and the Court accepts that the first meeting with MindChamps representatives occurred at the Little Zak's offices in Ryde. But he does recall that the first meeting occurred after the $300,000 deposit from Chiwayland had been received on 18 August and after he had undertaken site visits with representatives of Chiwayland.

73. Mr Chiem does not claim to have been present at the first meeting between representatives of MindChamps and representatives of Little Zak's. But he says that he believes that meeting took place on either 15 or 16 August 2016. He says he had a conversation with MindChamps Executive Director, and CEO Australia, Ms Du following these meetings. He has a strong conviction that he was reported to about these meetings by Ms Du and others within MindChamps. But if those meetings did not take place, he must be mistaken about this.

74. He does remember Ms Du reporting to him in what he believes was shortly after 16 August saying words to the following effect:

“We need to act quickly on this deal, there are also Chinese buyers interested and they have already commenced their due diligence. The data room is already to go. They have had their accounts audited by PwC. I think you should come and meet the Zakis.”

75. Mr Chiem’s recollection as recorded through these words shows Ms Du communicating to him as early as 16 August the opportunity for MindChamps to acquire the Little Zak's childcare centres. It is his belief that this communication followed meetings with representatives of Little Zak's. But the content of the conversation he recalls does not include a statement from Ms Du that she has just recently met representatives of Little Zak's. And the Court is not persuaded that such a meeting took place.

76. Some of what Mr Chiem says Ms Du reported to him before 23 August is indeed likely to have been reported. Mr Chiem did meet the Zakis on 23 August. It is undoubted that Ms Du was keen for Mr Chiem to meet the Zakis. And it is not unlikely that Ms Du had become aware of the general profile of Little Zak's offering. The Information Memorandum contains detailed information about what was being sold.

77. Mr Lilley was a well-informed point of contact for MindChamps personnel. It can be accepted that Ms Du informed Mr Chiem that MindChamps needed “to act quickly on this deal”. Mr Chiem did act quickly and attended the meeting on 23 August. Her opinion about the need for rapid action was most likely informed by knowledge from Mr Lilley of the competing bid from Chiwayland. It is only a small step from that knowledge to infer that Ms Du was also aware that a data room had already been set up for Chiwayland. The idea of a data room being “ready” is an easy inference that is likely to have been drawn by Ms Du herself.

78. It is also likely, because it reflected the facts: Ms Du had become aware by then that M & W Zaki had engaged PwC as its accountants. Whether she was also told, or whether she and others from MindChamps assumed, that PwC were also auditing M & W Zaki’s accounts is more contentious. It is probable that before 23 August she had only a very inchoate idea of PwC’s accounting involvement with Little Zak's, with PwC as auditor being just one of the possibilities.

79. But in summary Mr Chiem’s evidence is not a basis to infer that MindChamps and Little Zak’s representatives met on 15 or 16 August 2016.

80. Ms Du and Mr Tan and Mr Nicholas Caswell were the principal actors said to be present on behalf of MindChamps at the alleged meetings on 15 and 16 August. Their evidence about these meetings is advanced in support of MindChamps’ misrepresentation case. But the Court is not confident it can rely upon their evidence that any meetings took place on these days. The focus in this analysis is on the parts of Ms Du’s and Mr Tan’s evidence relating to the alleged misleading and deceptive conduct on 15 or 16 August.

81. Ms Du says that at the meeting on 15 August Mr Carlos Zaki said to her words to the effect "our accounting records have been audited by PwC and they are all in order and ready to go". She says that at a meeting on 16 August, Mr Carlos Zaki also said to the MindChamps representatives words to the effect, "PwC are one of the four major accounting firms in Australia. They audited our accounts".

82. But Ms Du’s evidence about these two alleged meetings is unsatisfactory at several levels. She is clearly a thorough and diligent corporate executive. She normally takes notes of meetings, but she took no notes of the alleged 15 and 16 August meetings. She explains that on the basis that "I did a lot of talking." But the thrust of her evidence is that she also did some important listening and took in information that she now relies upon about the PwC audit. In an executive of her competence such omission to note such essentials stands at odds with her declared practice, "I probably normally take my own notes, in addition to Mr Tan”. But even if she did not take notes at the meeting, there is no email from her to Mr Chiem or any other executive reporting on this meeting, as might be expected if it had taken place.

83. But a troubling part of Ms Du’s evidence is that she could not coherently sequence how the important subject matter of the Little Zak’s PwC audit arose at this meeting. When the Court asked her how Mr Carlos Zaki’s statement about PwC audit accounts arose in the conversation, she said that someone mentioned PwC and she thought "this could be the deal that we are looking for because their accounts are audited." So, she says she then "spent a fair bit of time asking him… At least a couple of questions… To confirm that his accounts are being audited by PwC."

84. But this does not explain the context in which a PwC audit was first raised. She said that she was trying to pin Mr Carlos Zaki down with several questions about a PwC audit. But she did not give an account of what those several questions were. When asked again to explain the context, the Court received vague answers that did not indicate the witness was drawing upon real memory of such a meeting, but rather trying to reconstruct what she thought must have happened.

85. Mr Tan says that at a meeting on 16 August at the Little Zak’s offices with Ms Du and Mr Caswell, he heard Ms Du ask, "Who audited the accounts?” to which Mr Carlos Zaki replied "PwC audited the accounts". But the Court is not confident that Mr Tan witnessed any such statement to the MindChamps representatives at a meeting on or about 16 August for several reasons.

86. First, Mr Tan is an assiduous notetaker, as is attested by his notes of the meeting he undoubtedly attended on 23 August. But he did not take any notes of meetings on 15 or 16 August 2016. Although it was his habit to take notes of "something that is of importance” at meetings, despite apparently hearing an important statement about accounts being audited by PwC, he took no note. Moreover, he did not report by email to any other executive about this alleged meeting and his notes of the next meeting of 23 August make no reference to any prior meetings.

87. Second, his oral evidence diverged from his affidavit evidence on the central question of what questions Ms Du asked. In his oral evidence he has Ms Du asking the more fundamental question "Are the accounts audited?", not the secondary question "who audited the accounts?", as he deposed.

88. Third, once again, like Ms Du, Mr Tan was not able to give a compelling narrative of how the statements about PwC auditing the accounts arose and became embedded in the wider conversation on the day.

89. Mr Caswell’s evidence of his involvement in a 16 August meeting is no more compelling than Ms Du or Mr Tan. He was not confident in the date, saying it was "on or around" 16 August. He neither took notes during the meeting, nor emailed anyone about it afterwards. And he could not give any compelling explanation as to how he reached the date of 16 August, as distinct from a later date for the meeting, and he could not exclude the possibility that the meeting could have been 24 or 25 August. Like Ms Du and Mr Tan, Mr Caswell has very little convincingly to anchor meetings with Little Zak's personnel to the dates of 15 or 16 August.

Activity Escalates – Thursday, 18 August

90. MindChamps and Little Zak’s were in active discussions by 18 August. Mr Lilley emailed Mr Tan on 18 August, passing onto him information he had recently received from Mr Carlos Zaki. Mr Tan was interested in Little Zak's dealings with Chiwayland. Mr Lilley reported that Mr Carlos Zaki had told Chiwayland of the MindChamps interest and indicated to Chiwayland that if it wanted exclusivity it would have to make its $300,000 deposit essentially non-refundable and meet certain conditions linking the outcome of the due diligence to the refundability of the deposit. These conditions were structured in a somewhat similar fashion to those ultimately found in the Term Sheet and were stated as follows:

“(1) If the figures as provided by Price Waterhouse varied 5% from the IM you have been provided then the sale price would not vary and if the buyer withdrew then the deposit would not be refunded.

(2) If the figures provided by Price Waterhouse varied by between 5 and 10 % a pro rata discount would be made to the sale price to reflect this and if the buyer pulled out the deposit would not be refunded.

(3) If the figures provided by Price Waterhouse varied by more than 10% from the IM then the buyer could pull out and the deposit would be refunded.”

91. Thus, as early as 18 August Little Zak's were telling MindChamps that figures would be “provided by Price Waterhouse” but just what that meant was yet to be understood in clear terms. MindChamps began to think it meant audited accounts but Little Zak's always had in mind the actual arrangement they had with PwC. At the conclusion of his email Mr Lilley reported that Chiwayland had not agreed to the conditions Little Zak's had requested and therefore did not have exclusivity. Mr Lilley then set out Mr Carlos Zaki’s position at that time as follows:

“This being the case Carlos said if you were okay with that and pay the deposit with those conditions, he would tell the other buyers that he had another buyer he was dealing with exclusively and thus cut the Chinese buyers out of the deal was prepared to let Chiwayland go.

92. Mr Lilley and Mr Tan had a conversation the same day in which Mr Lilley elaborated to Mr Tan that Little Zak's had accepted a verbal $60,000,000 offer from Chiwayland and offered 30 days due diligence. But as at 18 August “no request for any due diligence rollout” had occurred. In an internal email that day Mr Tan calculated that the Chiwayland offer was 6.2 times forecast FY16 earnings of $9.681 million. Clearly MindChamps were pondering the right price-earnings multiple to apply to sustainable earnings to calculate an appropriate offer to Little Zak's.

93. On the same day, 18 August, Little Zak’s were preparing internally and in consultation with their advisor, Mr Simon Johnson of Pitcher Partners. Mr Johnson advised Little Zak's that Chiwayland’s $300,000 deposit had been received that day. He also reported that although he had not yet spoken to KPMG and been given a list of what they wanted to inspect, he expected from his experience that MindChamps would want a “per centre” breakdown of 14 categories of information, including weekly occupancy, fortnightly or weekly billing deposits, payroll runs since opening and significantly for the issues in these proceedings the following:

4) Employment contracts including casuals and their files to support police checks, working with children, qualifications etc

5) All General ledgers per centre for at least current and last financial years

6) P&L statement and Balance Sheet for same period per centre (last FY and this FY) if PwC has audited these please include

94. Mr Johnson’s reference to “if PwC has audited these please include”, does not indicate that Little Zak’s thought it was committed to providing PwC audited accounts. The idea is clearly expressed as an option only and is ambivalent on the issue of audited accounts.

95. Mr Johnson made clear to his client, Little Zak’s, his professional attitude to being ready to provide the information that he expected would be requested:

“I would prefer to be proactive and have the data ready rather than waiting for them to ask for it. We can turn items on/off in the data room for access according to your preferences. We also like to review all information before making it available to them.”

96. But what data needed to be made ready had not yet been discussed in the negotiations between the parties.

The Meeting of 23 August

97. The parties agreed that a meeting took place on 23 August at Little Zak’s Ryde offices at which Mr and Mrs Lilley, Mr Carlos Zaki, Mr Maged Zaki, Mr Chiem, Ms Du and Mr Tan were all present. They disagree about what was said. MindChamps’ witnesses say that the subject matter of accounts audited by PwC and the data room being “ready” were discussed at this meeting in the context of the 30-day due diligence period being “very tight”.

98. The Court accepts Little Zak’s case that there was high level discussion at the 23 August meeting about the Chiwayland consortium undertaking due diligence and that if MindChamps wanted to make an offer they would need to proceed quickly, partly because the Chiwayland consortium was already ahead of them and partly because the Zaki family wanted to conclude the sale by the end of November and then go on holiday.

99. Mr Maged Zaki says that apart from himself, present at this first meeting were his son Carlos, Mr Lilley, Debbie Lilley, Mr Chiem and Ms Du. He believes there were other attendees present from MindChamps but does not recall who they were.

100. Much of the structure of his account of what was said at this first meeting can be accepted as consistent with the evidence of the MindChamps witnesses. At their first meeting MindChamps representatives explained their experience in running childcare centres, their desire to establish a childcare centre chain, why they were investing in childcare centres in Australia and how they would continue to live in Singapore but operated a business in Australia.

101. The Court accepts Mr Maged Zaki told those present at the first meeting he says he had that he was selling the eight childcare centres to get a break from the business, the Zakis parties desire to close the deal before November that year, that four weeks of due diligence would be offered and then a further eight weeks to close the sale, that Chiwayland had paid a deposit and commenced due diligence, but the agreement with Chiwayland was non-exclusive at that time but MindChamps would need to proceed quickly.

102. These statements were a reasonably accurate although incomplete account of the Zaki parties’ dealings with Chiwayland to that point.

103. Mr Maged Zaki denies that either he or Mr Carlos Zaki ever said that PwC had provided M & W Zaki with audited accounts. Mr Maged Zaki explained accurately that M & W Zaki had retained PwC to provide high level advice and then as their accountants. He probably did say that the data room was ready to get started with due diligence in a general sense, as Mr Carlos Zaki says something like this was said. But for the reasons examined below such a statement is meaningless in this context and MindChamps did not rely upon it.

104. Mr Chiem says that he complained on 23 August, “You are only giving us four weeks due diligence. We need to make sure the accounts are fully ready”, and that he asked for more time. But there was no offer from Little Zak’s prior to that date stipulating only four weeks for due diligence. The first offer during that period was made by MindChamps the following day, in the MindChamps EOI.

105. Mr Tan says that Mr Carlos and Mr Maged Zaki said at this meeting, “the due diligence documents are fully ready. We have all of PwC’s audited accounts in our possession. PwC provided the accounts and its ready to go”.

106. Ms Du says that she recalls Mr Carlos Zaki saying at this meeting about the data room, “It’s upstairs and ready. The Chinese have already started their due diligence. But we would prefer you over the Chinese”.

107. By these statements MindChamps seek to support its case of representations being made that PwC audited Little Zak’s accounts and that the data room was “ready”. But there are many problems the quality of their recollections of this meeting. But the first observation to be made is that the Court must approach cautiously the assessment of the evidence of witnesses who claimed they were present or were told about meetings held on 15 or 16 August, when it turns out that the meetings did not take place.

108. Mr Tan took detailed notes of the 23 August meeting. They say nothing about PwC audited accounts or about MindChamps’ anxiety about having only 30 days for due diligence. MindChamps says both these matters were important to them. But they were not important enough for Mr Tan to note them down. Mr Maged Zaki denies he said anything to the MindChamps representatives of the kind suggested by Mr Tan. The Court accepts Mr Maged Zaki’s account.

97. Ms Du says that Mr Carlos Zaki said that the data room was “upstairs and ready”. The Court accepts Mr Carlos Zaki’s denial because of the Court’s preference of his evidence and because it accepts that there was no “upstairs” space in the Little Zak’s offices to which the statement could refer.

98. Moreover, this meeting took place only seven weeks after the end of the FY16 financial year. Any Little Zak’s promise that it already had audited accounts from PwC so soon after the end of the financial year should either have been greeted with some scepticism or at least had been the subject of further questioning about which financial year’s accounts Little Zak’s were claiming had been audited. Neither of these matters was pursued on the MindChamps’ account of this meeting.

99. The better explanation for any impression that Mr Chiem and Ms Du took away from this meeting is that they made assumptions based upon Singapore practice. In Singapore private companies have audited accounts. Because PwC were the accountants for Little Zak’s, they assumed that PwC were also likely to be the auditors. But they did not confirm their assumption with any representative of Little Zak’s.

100. Mr Carlos Zaki did not say at this meeting that the due diligence documents in the data room were “fully ready” or that Little Zak’s had audited accounts from PwC. Mr Chiem did not complain at any length about the 30-day time frame for due diligence. And Mr Carlos Zaki did not tell him that he would need it.

MindChamps Makes an Offer – Wednesday 24 August

113. On Wednesday 24 August Ms Du submitted a letter of intent on behalf of MindChamps to Little Zak’s for the eight childcare centres. The letter of intent offered to pay $300,000 as an exclusivity fee for a three-month exclusivity period towards a purchase consideration of $60,000,000 calculated at 6.2 times the FY16 forecast EBIT figure of $9.681 in the Information Memorandum.

114. The same day Chiwayland’s appointed due diligence advisor, KPMG (using a different KPMG partner from Mr Willis) indicated it was standing by for access to the data room. It should be noted at this point that the “data room” was in wholly electronic form and the preparation of an electronic data room for Chiwayland did not inhibit Little Zak’s making available and preparing a parallel electronic data room for MindChamps.

115. Wednesday 24 August also saw Mr Teo communicating with Mr Tan, and another employee, Mr Yongky Widjaja and copying in Mr Chiem and Ms Du about MindChamps raising the funds for the acquisition. He said:

‘Hello Yiren [Mr Tan]

Spoke to D [Mr Chiem] this pm, for such large sum the bank is lending us, they will not depend on our usual internal d [due diligence].

Big 4 accountants and lawyers will be engaged there in Au.

30 days for these people to do the job for eight centres is a stretch.”

116. Mr Chiem seems to already have suspected that to raise bank sourced funds for the acquisition that another level of due diligence on behalf of financiers would be required. The following day, 25 August, the MindChamps CFO, Mr Teo agrees with the tightness of the proposed due diligence period of 30 days and says in a reply email to Mr Chiem among others:

“Hello D

we spoke abut [sic] 30 days due d

it is definitely a stretch but we will start the whole process now now [sic]”

117. This is consistent with MindChamps case that they were saying in meetings with Little Zak’s that they were worried by the shortness of a 30-day due diligence period. They had asked for three months.

118. Back on 24 August and later in the day Mr Tan had emailed in reply to Mr Teo and Mr Widjaja, copying in Ms Du and communicating information that he appears to have picked up from discussions with Little Zak’s personnel:

“Hi WJ and Yongky [Mr Widjaja],

They engaged PWC for their accounts and audit.

Disclaimer: we did not see the audited statements by PWC.

So, if you need, we can confirm by asking them in writing.

They mentioned about the 30 days for the DD.

If their statements have been audited by PWC, would that reduce the duration of the DD?

Please let us know if you have any questions to clarify

Cath [Ms Du] has updated that Carlos will prepare the Agreement with the attached documents for our signature and transfer of the $300K. For more details you may speak to David/Catherine.”

119. Mr Tan was clearly under some impression that Little Zak’s had engaged PwC for “accounts and audit”. But whether he is mistaken about the “and audit” he is at least uncertain enough to suggest that if MindChamps wants confirmation it should be asked for in writing. This tends to indicate that whatever was said to him he would prefer to have written confirmation before MindChamps relied upon his impression of the conversation. This uncertainty is confirmed by his conditional declaration “if their statements have been audited by PwC, would that…”

120. On the same evening Mr Tan emailed Mr Teo, Mr Widjaja and copied in Ms Du under the title “information from Carlos – Little Zak’s”, listing arrangements information which is described as an “update from the meeting with Carlos, with Cath and I-Ren”. The email then lists information from a meeting with Mr Carlos Zaki in which he has set out his calculation of forecast calendar year 2017 EBIT as being $10,681,757 and that Little Zak’s had given a $1 million-dollar buffer in its Information Memorandum calculations. The email discusses issues of occupancy trends, the range of fee increases, staff to children ratios, pro-rating of expenses and leases among other variables.

121. Between 24 and 26 August 2016, Little Zak’s sent MindChamps the data that was ultimately attached to the Term Sheet as Exhibit A.

The Meeting on 26 August

122. Another meeting was held between representatives of MindChamps and Little Zak’s on 26 August in the boardroom of Little Zak’s Ryde. Mr Caswell was at this meeting but not at the meeting on 23 August. Also present at the 26 August meeting were on the MindChamps side, Mr Chiem, Ms Du and Mr Tan and on the Little Zak’s side, Mr Carlos Zaki and Mr Maged Zaki.

123. Mr Chiem says that he asked at this meeting, “Can we please have more time to do due diligence?” and that Mr Carlos Zaki said to him in reply, “Don’t worry. If you use KPMG, you can start tomorrow”. Mr Chiem also says that Mr Carlos Zaki continued in telephone calls after 26 August and before the signing of the Term Sheet, saying words to the effect:

“The data room is fully ready. Why do you need extra time? The Chinese are already doing due diligence. You appoint KPMG and you can start tomorrow.”

124. The Court prefers Mr Carlos Zaki’s evidence on this subject that he did not say that the data room was “fully ready” either at or after the meeting on 26 August, nor give advice about the appointment of KPMG. The Court accepts Mr Carlos Zaki’s evidence that much of the discussion on this occasion was about the rent for the childcare centres. It is quite likely that some advantages in MindChamps engaging KPMG may have been mentioned by Little Zak’s at this meeting, but only the most general terms.

125. Mr Chiem’s recollection of raising the 30-day time frame for due diligence at this meeting is bolstered in his own mind by conversations he had with Mr Teo about the tight time frame for due diligence in the days afterwards. It can be accepted that there were some conversations between Mr Chiem and Mr Teo about how much time was available for due diligence and the need to plan for it, but the Court does not accept that these resulted in complaints to Little Zak’s about the time available under the proposed Term Sheet.

126. Mr Tan and Ms Du both support MindChamps’ case about the meeting on 26 August. Ms Du says that the Zaki’s said to her, “the books are all ready and have been audited by PwC” at this meeting. Mr Tan says that Mr Carlos Zaki said, “the data room is ready. All the accounts were audited by PwC. There should be no issue with quality”. The Court has no more confidence in Ms Du’s account at this meeting then the meeting of 23 August. She made no contemporaneous note to the effect of these statements and did not report them as having been said.

127. Mr Tan’s detailed note of this meeting does not refer to audited PwC accounts or the data room being ready. His notes do have however refer to PwC being Little Zak’s accountants. That subject was discussed at the 26 August meeting, as Mr Maged Zaki explained. He says that at this meeting the issue of PwC’s role came up and the Court accepts his evidence that the following conversation took place:

“Mr Chiem:   Can you provide us with your accounts as audited by PwC?

Mr Maged Zaki:   No because PwC have not provided us with audited accounts. They have only been retained to give us tax advice and to prepare our accounts for FY16”

128. Mr Maged Zaki says, and the Court accepts that Mr Chiem then turned his request into one for putting Little Zak’s accounts “on a PwC letterhead”. Mr Maged Zaki said he could not promise this could happen, but he would at least put the request to PwC. His version of how PwC came to be mentioned is consistent with Mr Tan’s notes.

129. Mr Chiem says that he was repeatedly assured from the 26 August meeting that the due diligence documents were “fully ready” and that Little Zak’s had PwC audited accounts. But the repeating of such statements is an improbable course of events. Neither Mr Chiem nor Mr Carlos Zaki struck the Court as the kinds of businessmen who are likely to repetitively raise the same issue and make the same statements again and again. In context, the evidence of repeated assurances between 26 August and 1 September to this effect is implausible.

Chiwayland Requests Due Diligence Information – Saturday 27 August

130. By the last week of August Chiwayland had commenced due diligence in its Pitcher Partners–organised data room. MindChamps uses Chiwayland’s information requests during its due diligence process to show a forewarning to Little Zak’s as to what would be required of them when the Term Sheet was signed but also as corroboration of what a sensible buyer acting prudently and is own interests might require. MindChamps points to the common subject matter between what it and Chiwayland were requesting from Little Zak's.

131. Chiwayland had only been in the data room a few days when on Saturday 27 August it made a request for further information through its due diligence advisor KPMG Advisory. When this came to Mr Johnson’s attention, he forwarded the communication on to Mr Carlos Zaki commenting that Chiwayland were “incredibly serious” and “will up their offer significantly if need be”.

132. The Chiwayland information request included some 13 “workstream” financial items of “high” materiality. MindChamps points to four of these items as illustrating the kind of information a reasonable purchaser would expect to receive on due diligence for the potential acquisition described in the Information Memorandum. Set out below are the questions Chiwayland asked about the four items MindChamps relies upon:

1. P&L   Please provide updated file for the period Jan-16 to Jul-16 (or latest available date). Additionally, can monthly P&L information be extracted from MYOB for the periods 1Jan 14 to 31 Jul 16 for all eight childcare centres in the same format as the data room document “1.1 PL all centres’.

3. Balance Sheet   Please provide balance sheets from MYOB for the periods Dec-15 and Jun-16 for all eight childcare centres.

4. Balance Sheet    Please provide closing bank statements for periods ending 31 Dec-14/15 and 31 Jul-16 for all eight childcare centres, ensuring that they reconcile with the closing balance sheets provided for these respective periods.

5.Working Capital    Please provide monthly working capital and cash flows for the periods 1 Jan-14 to 31 Jul-16 for all eight childcare centres.”

133. This set of requests indicates that Chiwayland does not appear to expect audited accounts. The reference to MYOB in the Chiwayland request and the absence of any reference to audited accounts would indicate that up to that point of time Chiwayland had not been told to expect audited PwC accounts by representatives of Little Zak’s.

134. But it does indicate that to undertake due diligence to test a purchase price of $60,000,000 Chiwayland wanted to review a range of management accounts data and bank statements (P&L, balance sheets, reconciled closing bank statements and monthly working capital) back to the calendar year 2014.

Changed Acquisition: from 8 Childcare Centres to 9 – Monday, 29 August

135. Chiwayland’s due diligence and discussions with Little Zak’s had proceeded intensely into the weekend of 27 and 28 August. But Mr Maged Zaki and Mr Carlos Zaki had developed a preference to deal with MindChamps.

136. Very early on Monday 29 August Mr Chiem decided to cut through the corona of advisers and deal directly with Mr Carlos Zaki. He emailed Mr Carlos Zaki offering to “expedite things and save huge lawyers fees”. His aim was to talk about some of the commercial items in the draft Term Sheet before his lawyers responded. He suggested setting up a call at 1.00 pm Sydney time on 29 August.

137. Mr Carlos Zaki responded at 9.40 am indicating that Chiwayland were pressuring Little Zak’s to finish the deal with them and that Chiwayland have “already been through a lot of” their due diligence using KPMG. He revealed that Chiwayland had increased their offer from $60 million to $65 million for the current eight centres without discussing the possibility of acquiring the ninth centre at Belrose; a matter which context indicates had already been discussed between MindChamps and Little Zak’s. Mr Carlos Zaki explained Belrose numbers in the final proposal as follows:

However as discussed with you last week we do prefer to work with you on this deal as you will also be our tenants. I have attached all the info for the Belrose centre for your viewing, we have worked the EBIT to be for 2017 assuming we are calculating on an average of 95% occupancy to be about $1.35 mil. The rental for this centre is also very very reasonable at about $3,000 a child and still has about 21 years remaining on it.

We are happy to finish the deal with you today and enter into exclusivity with you if we could reach the following today. Increase the offer from 60 to $68.5 mil to include Belrose with it and also increase the non refundable deposit to $500,000.

138. Mr Zaki concluded by indicating that the Chiwayland offer was “very hard to say no to” as Chiwayland were happy to pay a $1 million deposit that day to secure the purchase. Disclaiming a desire “to put any pressure on you” Mr Carlos Zaki indicated his advice was to proceed with both parties non-exclusively “until one party is ready to execute contracts and pay the 30% deposit”.

139. It is unclear whether a telephone call took place at 1.00 pm, 29 August between Mr Chiem and Mr Carlos Zaki but on receipt of the draft Term Sheet Mr Teo settled down to re-drafting it. He adjusted the purchase price from $60 million for eight businesses to $68.5 million for the nine businesses and amended the date of the Term Sheet to Thursday, 1 September, giving the advisers and wordsmiths two clear days to polish the draft into a final Term Sheet.

140. Mr Teo communicated internally within MindChamps his clear impression of the main features of the draft Term Sheet that was proceeding: due diligence of one month, a further 14 days (to 14 October) for signing a Long Form Agreement, buyer risks losing $500,000 deposit on failure to complete, and sellers must sell at the agreed price if due diligence showed less than 5% variance and pro rata variance between 5% and 10%.

A Telephone call on 30 August

141. Mr Teo says that on Tuesday, 30 August he attended in a telephone conversation held between Mr Carlos Zaki and Mr Chiem, in which Mr Chiem asked for longer than four weeks to conduct due diligence and Mr Carlos Zaki replied, “No we won’t agree to that. The data room is very ready, so there is no need for a longer period of time for the due diligence process”. A telephone call may have taken place that day but the Court does not accept that such statements were made. Moreover, such a blunt refusal is at odds with the very advanced negotiating stage that had been reached by then and the tone and content of Mr Teo’s own email correspondence that same day.

142. Events during the period 31 August to 2 September, leading to the execution of the Term Sheet, are discussed later in these reasons in the context of the breach of contract case. The Term Sheet is dated 1 September but was only complete in executed form on Friday, 2 September.

The Term Sheet – 1 September 2016

143. PwC’s close involvement in the preparation of the Term Sheet is to be inferred from the PwC logos and footers throughout the document. The Term Sheet defined the sellers as M & W Zaki, the second and third defendants and two related partnerships which in these reasons will be referred to as “the Sellers”, as they were defined in the Term Sheet. MindChamps was defined in the Term Sheet as the “Buyer”.

144. The Background to the Term Sheet recites that the Buyers have agreed to purchase nine childcare centres of a number operated by the sellers. And the nine childcare centres being sold are described as “the Businesses” in the Term Sheet.

145. The Term Sheet has a curious structure of binding and non-binding provisions. Term Sheet, clause 1 provides that only parts of the Term Sheet are to be regarded as legally binding. Clause 1 provides as follows:

“1.   Term Sheet

(a)   The parties agree that the contents of this Term Sheet reflect their proposed course of dealing only and:

(i)   other than any terms as to confidentiality (clause 18), Deposit (clause 10), Expert determination in the event of Deposit or Purchase Price dispute (clause 11) and exclusivity (clause 12), this Term Sheet is not intended to be legally binding upon them; and

(ii)   no further legally binding obligations will be created between the parties unless and until formal legal documentation expressed to be legally binding is entered into between them.

(b)   The parties will use their reasonable endeavours to enter a long form legally binding business sale agreement that more fully and precisely sets out the agreement reached in this Term Sheet (Long Form Agreement) on or before 14 October 2016.”

146. Term Sheet, clauses 2 and 3 provide for the sale of the business on the completion date and the setting of a completion date, no later than 30 November 2016, as follows:

“2.   Sale of the Businesses

Subject to satisfaction of the Conditions Precedent set out in clause 7 of this Term Sheet, on the Completion Date, the Sellers agrees to sell the Businesses as a going concern to the Buyer, and the Buyer agrees to buy it, for the Purchase Price as set out in clause 6.

3.   Completion Date

Subject to satisfaction of the Conditions Precedent contemplated in clause 7 of this Term Sheet completion of the Sale (Completion) is to take place no later than 30 November 2016, or any other date agreed in writing between the parties (Completion Date).”

147. Term Sheet, clause 4(a) describes the assets and goodwill of each business as follows:

“4.   Assets and Goodwill

(a)   The parties agree that the Sale of each Business will be comprised of all those assets used in the operation of each Business, including the plant and equipment and goodwill of each Business (including the exclusive right of a person to represent itself as carrying on that Business in succession to the Seller), being the childcare centres at the following locations:

…

however does not include the Excluded Assets as set out in Clause 5.”

148. The Term Sheet, clause 4(a) then identifies the final nine childcare centres being sold as centres in the Sydney suburbs of Artarmon, North Strathfield, Ryde, Meadowbank, Epping, Ingleburn, Dundas Valley, Jordan Springs and Belrose. Clause 4(b) grants a licence following completion of six months from the sellers to the buyer to use the brand name “Little Zak’s Academy” for six months before rebranding the business.

279. Mr Wang understood that his communications with Mr Johnson needed to be kept close hold. Shortly after receiving Mr Johnson's email of 12 September 2016, he replied as follows:

"Thanks Simon. Will not send this to anyone.

It would be good if we could please also confirm the price increase in the new intake will actually take place."

281. Mr Johnson’s email was calculated to maintain Mr Wang's interest in the Chiwayland purchase. Mr Wang apparently had a similar motivation. It could be inferred that these shadow communications would not have continued to take place unless they were regarded at least by Mr Johnson as potentially valuable.

282. Mr Johnson was in text message communication with Mr Carlos Zaki on Monday, 12 and Tuesday, 13 September 2016. In one of those text messages, he communicates to Mr Johnson that "Chinese will do it as is". It is difficult to infer from this alone that any further communication has taken place between Mr Johnson and Mr Wang. Mr Johnson may have just been assessing Chiwayland's negotiating position from his existing accumulated information.

283. These were the only text or email communications with Chiwayland during the life of the Term Sheet. But within hours of MindChamps notifying Little Zak’s that it would not proceed Mr Johnson reported to Mr Maged Zaki and Mr Carlos Zaki about their options. In an email that covered a range of subjects including repayment of the deposit to MindChamps Mr Johnson said the following was “in our favour”:

“(1)   We have two other parties as keen as ever to see it as I have been talking to them and keeping them close without telling them any of our issues other than our frustration at delays

(2)   We hold a deposit for the Chinese and they appear imminent to close out and agree to co[n]tract

(3)   Chris Sacre assuring us he can complete and his equity raising is ‘looking good’. I note the money is not in their bank as yet and so this will need more clarification but for the time being let’s assume he does have the money”

284. Mr Johnson rounded out his opinion by suggesting that the best course was to spend a few days trying to exhaust the options with Chiwayland before turning to Eden.

285. Mr Johnson’s statements, “I have been talking to them and keeping them close” resolve any ambiguities about his communications in the recent past. What Mr Johnson says can be accepted at face value: he had been continuing to talk to both Eden and Chiwayland, executing the objective of keeping them both interested.

286. The defendants did not call Mr Johnson. There is no issue as to his availability. Mr Newlinds SC frankly conceded, not calling him was a “forensic choice”. Applying Jones v Dunkel principles the defendants’ failure to call him is a basis to infer that his evidence would not have assisted the defendants’ case and allows the Court to draw other inferences from the available evidence more confidently against Little Zak’s. In this case the Court can infer with greater confidence that Mr Johnson held discussions on behalf of Little Zak’s with Chiwayland between 1 and 16 September 2016 and that the principals of Little Zak’s, Mr Maged Zaki and Mr Carlos Zaki did not ban Mr Johnson from conducting those discussions, from which it may further be inferred that they at least had reason to believe that such discussions may be occurring. The Court accepts the Zaki’s evidence that they did not have direct communications with anyone from Chiwayland during the exclusivity period.

287. Mr Johnson’s interest in continuing conversations with Chiwayland is unsurprising. He was on a fee calculated as a percentage of the purchase price of the deal ultimately struck. Mr Johnson’s success fee was not inconsiderable and is itself a basis to infer communications are likely to have taken place. Upon completion of the deal to sell the childcare centres for greater than $53 million his fee was $610,000 plus 10 per cent of any proportion above $48 million. The structure of his success fee made it particularly attractive for him to continue to promote Chiwayland to Little Zak’s up to a possible contract value of $75 million, in case the MindChamps transaction fell over.

288. The defendants rely upon the exchange between Mr Johnson and Mr Maged and Mr Carlos Zaki in which they instructed him to tell Chiwayland and Eden “to finish up” and later “lets just deal with Singapore”. But the problem with these exchanges for the defendant’s case is that they delegated to Mr Johnson the performance of a contractual obligation which ultimately lay with the defendants themselves. Little Zak’s evidence amounts to no more than having instructed an agent to perform their contractual obligation by communicating notice of termination of discussions to the other bidder and then to cease further communications. But Little Zak’s has not called that agent to provide direct evidence that those instructions were carried out.

289. Nor has anyone from Chiwayland been called to confirm the instructions were carried out. Mr Johnson’s incentive not to carry out the instructions was substantial. And he directly indicated to Maged Zaki and Carlos Zaki that he wanted to modify the instructions to continue communications inconsistent with the instructions given. Neither Mr Maged Zaki or Mr Carlos Zaki strongly countermanded Mr Johnson’s 31 August pushback, or importantly sought from him clear confirmation after 31 August that their instructions had been carried out. In the circumstances the Court infers the Johnson–Wang discussions continued. Moreover, the 16 September 2016 email confirms that a Chiwayland deposit was not returned, something which should have been obvious to the principals of Little Zak’s.

Breach of the Exclusivity Provisions of Clause 12(a)?

290. As Chiwayland and Eden were holding discussions with Little Zak’s when the time sheet was signed, the relevant breach issue arises out of the first sentence of clause (a) after the word “exclusivity period”. The question is whether Little Zak’s complied with their obligation to “immediately notify that other person that those discussions are terminated” and “cease all further communications with that person”. There is no issue on the Court’s earlier construction of clause 12(a) that “that person” refers to “from any other person” earlier in the sentence, which is a reference to the existing expressions of interest of Chiwayland and Eden.

291. The facts found demonstrate a breach of the exclusivity provisions of clause 12(a). There was no immediate indication to either Chiwayland or Eden that the existing discussions “are terminated”. Compliance with that part of clause 12(a) would require clear notice from either Little Zak’s or Mr Johnson that no more communications should take place, or would not be dealt with, or were inconsistent with Little Zak’s obligations under the Term Sheet. Neither the principals of Little Zak’s nor Mr Johnson under their authority initiated such communication. This itself was a breach of Term Sheet clause 12(a).

292. But there was also a breach of the obligation to “cease all further communication”. Upon the proper construction of clause 12(a) that obligation lay not only upon Little Zak’s but “their advisors”, otherwise the clause 12(a) restraint would be meaningless. The words “such discussions” in clause 12(a) refers to discussions initiated by or through not only the sellers but “their advisers”. Properly construed the words “cease all communications with that person” must apply to communication through the advisors as well as the principals.

293. Mr Johnson represented Little Zak’s to promote competitive bidders for the childcare centres and it was well within the scope of his authority to communicate for that purpose on behalf of Little Zak’s. And the lack of any responsive email of baffled surprise on the part of Mr Carlos Zaki or Mr Maged Zaki upon receipt of Mr Johnson’s email of 16 September 2016, indicates that they probably approved of such discussions having occurred. Analysis of Little Zak’s Construction and Breach Contentions

294. The defendants advanced several contentions to resist this conclusion. First, they contend that the clause 12(a) exclusivity provisions set up an option deal for MindChamps. They submit that MindChamps has no interest one way or the other whether Little Zak’s keeps other bidders interested against the possibility that MindChamps does not enter into a Long Form Agreement. Characterising the Term Sheet as an option held by MindChamps would demote Chiwayland and Eden to no greater status than parties that Little Zak’s would be left to deal with if MindChamps decided not to exercise the legal rights arising from its option to purchase. If that were the true construction of the Term Sheet then Little Zak’s argument would have greater force, if it were compatible with the words of clause 12(a).

295. But the Term Sheet does not give MindChamps an option to purchase. Rather it is by the payment of a deposit of $500,000 the acquisition of the right to negotiate exclusively for a period of six weeks from 1 September until the earlier of the execution of a Long Form Agreement or 14 October 2016. Once those events occur the deposit is released to the Sellers. The only legally binding provisions of the Term Sheet, clauses 10, 11 and 12, do not confer on MindChamps the right to compel Little Zak’s to execute a Long Form Agreement. And no Long Form Agreement which could become immediately binding is attached to the Term Sheet, as would be the case with an option. Nor are the other terms of a proposed Long Form Agreement sufficiently certain that the Term Sheet could constitute an option.

296. If the Term Sheet is not an option, MindChamps has a strong commercial interest in seeing Eden and Chiwayland out of the negotiating arena during the six-week exclusivity period under the Term Sheet. For a potentially non-refundable $500,000 MindChamps only gets Little Zak’s exclusive negotiating attention during a period when it admittedly wants to sell quickly. The value of that negotiating attention would be seriously undermined if Little Zak’s could foster an alternative deal and have it waiting in the wings. Moreover, the essential commercial driver of the agreement in the Term Sheet is forcing Little Zak’s to isolate itself from other bidders to incentivise it to enter a Long Form Agreement with MindChamps. So, breaking down Little Zak’s isolation removes that essential driver. The structure of this agreement strongly points to MindChamps’ construction of the clause 12(a) exclusivity provisions.

297. The defendants also argue that clause 12(c) supports their contention. They contend that the words that the sellers "enter into an agreement with any third party for the sale of all or any of the assets of the businesses to that third party" would be otiose if clause 12(a) applied to discussions with parties who had already submitted an expression of interest. This argument is not persuasive for at least three reasons.

298. First, clause 12(c) fulfils, as no other binding part of the Term Sheet does, the function of commanding what will happen to the deposit. Second, clause 12(c) covers breach events after the signing of the Term Sheet, namely the entry into an agreement with a third party, a matter not covered in clause 12(a). Third, clause 12(c) performs an additional assurance function, to ensure that a potential agreement to sell Little Zak’s childcare centres is not indirectly undermined by Little Zak’s independently selling some of the assets of the Businesses, to make them unavailable for acquisition under a Long Form Agreement.

299. The MindChamps construction does not make clause 12(c) otiose. Even if it did, the mere possibility of an overlap is more consistent with the parties repeating themselves out of abundance of caution, rather than leading to a different meaning: cf Strike Australia Pty Ltd v Data Based Corporate Pty Ltd (2019) 19 BPR 39,621 at [58].

300. The defendants also contend that clause 12(c) refers to a breach of clause 12(a)(i) or (ii), relating to due diligence and is not a reference to the introductory chapeau exclusivity portion of clause 12(a). Any other construction is said by the defendants to render the second half of clause 12(c) as nugatory and commercially absurd. This submission is not persuasive. Without any straining of language clause 12(c) refers to the whole of the provisions of clause 12(c).

301. Little Zak’s seeks to answer the exclusivity case by dividing its analysis into different time periods. The first period is the communications between 31 August and 2 September, it can be accepted that no communications between Little Zak’s and Eden or Chiwayland on 31 August or 1 September, before Little Zak’s had signed and returned the Term Sheet could be a breach of its terms. Nevertheless, the communications on those days set the pattern for later communications.

302. The defendants also submitted that Mr Johnson’s receipt of the "further DD request" from Mr Wang on 2 September 2016, could not have been a breach itself because the executed Term Sheet was only being returned at the same time. This can be accepted as not being a breach of the second part of the exclusivity provisions in clause 12(a) but the receipt of the 2 September email highlights the need for compliance by Little Zak’s with the obligation to "immediately notify" Chiwayland that their discussions are terminated, in order to avoid further strained correspondence such as this.

303. Little Zak’s liaised through Mr Carl Wang to bring the Chiwayland investors to the Artarmon centre on the afternoon of Friday, 2 September. The defendants’ submissions can be accepted that it is difficult to establish that this was a breach of Term Sheet, Clause 12(a) because the signed Term Sheet was only returned sometime in the afternoon or early evening of 2 September, possibly after this visit occurred. Nor can any text message exchange immediately after the visit count against the defendants as a breach of clause 12(a) for the same reason. But once again, such communications demonstrate the need for direct compliance by Little Zak’s itself with its obligation to "immediately notify" the termination of discussions.

304. As to the Johnson – Carlos – Wang emails of 9-12 September, Little Zak’s’ submissions focus merely upon the interaction between Mr Johnson and Mr Carlos Zaki, to which Mr Carlos Zaki had not responded. But the analysis above shows that these email exchanges went much further than that, leading to breach because of the communication back to Mr Wang.

305. Finally, in relation to Mr Johnson's post termination email to the Zakis on 16 September at 8:02p.m, the defendants characterised this as a basis to infer that Mr Johnson had spoken to Chiwayland and Eden "at some stage". But that is not correct. The analysis above shows that Mr Johnson’s communications with Chiwayland and Eden are likely to have been post 2 September 2016.

Conclusions and Orders

306. The plaintiff, MindChamps, has been successful in its claims in contract, by the breach of the exclusivity and due diligence provisions of Term Sheet, clause 12(a) and as a result is entitled to the return of the deposit of $500,000 paid under Term Sheet, clause 10. MindChamps’ Amended Statement of Claim seeks declarations and orders to that effect and they are made below. But MindChamps was unsuccessful on its misleading deceptive conduct claim for compensation under Australian Consumer Law sections 236, 237, 242, 243 not only for the deposit but for $16,655.34 in travel expenses, together with the associated claim for damages in tort and all these claims will be dismissed.

307. MindChamps is entitled to interest on the deposit up to the date of judgment in accordance with the rates prescribed from time to time under Civil Procedure Act 2005, s 100. No submissions have yet been made in relation to the proper calculation of interest, but MindChamps was probably entitled to interest on the deposit from at least as early as 14 October 2016, when it was payable in any event under the Term Sheet clause 10(b)(ii)(b). But MindChamps may wish to argue for the earlier date of termination of 16 September 2016. This can either be agreed or be dealt with by supplementary submissions.

308. Costs would ordinarily follow the event. But MindChamps has been unsuccessful in a substantial evidentiary part of the case and Little Zak’s may wish to argue for a special costs order. Moreover, there may be Calderbank letters to consider. The Court will not make a costs order at this stage and will give leave for either party to apply by motion and affidavit for a special costs order within 28 days. If no such application is made the Court will order that the defendants pay the plaintiff’s costs.

309. For these reasons the Court makes the following orders and directions:

1. Declare that upon the true construction of the Term Sheet made between the plaintiff as Buyer and the first, second and third defendants as Sellers on 1 September 2016 (the Term Sheet) and in the events which have occurred, the first, second and third defendants are obliged by clause 10 of the Term Sheet to return the deposit of $500,000 paid by the plaintiff;

2. Order the first, second and third defendants to pay the deposit of $500,000 to the plaintiff within 28 days;

3. Dismiss the plaintiff’s claims for relief made in prayers for relief 1 and 2 of the Amended Statement of Claim;

4. Dismiss the plaintiff’s claims for relief in tort made in prayer for relief 3 of the Amended Statement of Claim;

5. Reserve for further consideration the question of appropriate cost orders in the proceedings, noting that if no party takes up the leave granted pursuant to order (6) below, the Court is minded to make in chambers an order that the first second and third defendants pay the plaintiff’s costs of these proceedings on the ordinary basis;

6. If any party seeks a special costs order that party should file and serve a motion and affidavit in support within 28 days after consulting with the associate to Slattery J about a suitable return date after 12 September 2022; and

7. Grant liberty to apply.

Amendments

04 July 2022 - [308] third line, "14 days" changed to "28 days"

05 July 2022 - [213] "seen" to "soon"

05 July 2022 - [213] "soon" changed to "seen"

04 October 2022 - [4] last three lines, delete “the” before “M & W Zaki”.
[7] second last line, delete “by” before “the buyer”.
[12] last line, add “them” before “during the hearing”.
[13] fifth line, add “is part” before “would be run”.
[22] third line, add “Zaki” before “Carlos”.
[28] third line, add “in” before “Singapore”.
[33] first line, add “and” before “the Zaki”.
[36] last line, add “and” before “the Zaki”.
[39] in quotation delete “to deter”.
[58] third line, delete “in” before “that several”.
[84] second line, add “said” before “that she”.
[85] first line, delete “it” before “at a meeting”.
[91] second last line, add “t” after “a” and add “that” before “time” and delete “bout”.
[101] first line, add “at” before “the first”.
[107] first line, delete “the” before “MindChamps”.
[109] first line, delete “not” before “’upstairs”.
[110] first line, add “the” before “FY16”; second last line, add “had” before “been audited”.
[111] third last line, add “,” before “they”.
[131] second last line, add “Chiwayland” and delete “CHW”.
[136] first line, delete “Chiwayland” and add “Mr Chiem”.
[140] fifth line, delete “th” before “at”.
[141] second line, delete “David” before “Chiem”.
[148] fourth line, after “4” add “(b)” and delete “(B)”.
[152] delete “defines” and add “contains mutual warranties of good faith and proper authority”.
[154] third last line, add “EBIT” and delete “a bit”.
[158] first line, add “The” before “last” and capitals for “Term Sheet”, and delete “is” before “which”.
[159] second line, delete “[CB586]”.
[162] fourth line, delete “it is to be expected” before “that”.
[164] second line, add “(“SPH”)” before “SPH Media Limited”; third line, delete “the” before “SG$3 billion”; fourth line, delete “in taking” before “in Little Zak’s”; third last line, add “.” after “invest”, then capital “T” for “the”.

[167] fourth line, delete “the” before “$78.35 million”.
[168] first line, change “were” to “was”.
[171] fifth line, delete “the” before “ready”.
[183] first line, delete “this” in “one”.
[190] third line, add “…” before “all”, then “a” for “All”; third last line add “available” before “to the Buyer”.
[192] fourth line, change “acquired” to “required”; sixth line” change “diligent” to “diligence”.
[204] first line, add “’s” after “MindChamp” and delete “his”.
[220] change name to “Willis” not “Wallis”.
[233] fourth last line, delete “h” before “as”.
[273] first line, add “just” before “to Singapore”.
[275] second line, replace “Carl Wang” to “he”.
[305] second line, delete “post termination“ after “8:02p.m.”
[307] second last line, replace “October” with “September”.
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Decision last updated: 04 October 2022