Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd
[2014] NSWSC 1503
•30 October 2014
Supreme Court
New South Wales
- Amendment notes
Medium Neutral Citation: Motor Vehicles Insurance Ltd v Woodlawn Capital Pty Ltd [2014] NSWSC 1503 Hearing dates: 3 - 12 September 2014; further written submissions 7 October 2014 Decision date: 30 October 2014 Jurisdiction: Equity Division - Commercial List Before: Stevenson J Decision: Parties to make further submissions as to the future conduct of the proceedings, in the light of these reasons
Catchwords: CONTRACT - whether void ab initio for want of ministerial approval under Papua New Guinea statute - application of Foreign Corporations (Application of Laws) Act 1989 (Cth) - whether plaintiff estopped from asserting contract void ab initio - proper construction of termination clause - proper construction of investment mandate - whether defendants' conduct in breach of investment mandate - whether plaintiff established damage resulting from breach of investment mandate - proper construction of exclusion clause - whether defendant entitled to rely on exclusion clause; CORPORATIONS - whether defendant obliged to hold an Australian Financial Services License for purposes of s 911A of the Corporations Act 2001 (Cth) - whether defendant provided "financial services" for the purposes of s 766A - whether defendant provided "financial product advice" for the purposes of s 766B - whether defendant dealt in a "financial product" for the purposes of s 766C - whether defendant did not deal in a financial product by reason of Corporations Regulations 2001 (Cth) reg 7.1.35 - whether defendants provided services "in this jurisdiction" for the purposes of s 911A - whether defendants entitled to derivative crown immunity - whether plaintiff lost any statutory right of rescission under s 925A by reason of unreasonable delay under s 925A(2) or affirmation under s 925A(3); MISLEADING OR DECEPTIVE CONDUCT - whether defendants engaged in misleading or deceptive conduct for the purposes of s 1041H of the Corporations Act or s 12EA of the Australia Securities and Investments Commission Act 2001 (Cth) - warranty that held all necessary licenses and authorities - whether plaintiff would not have entered contract but for misleading or deceptive conduct; CONTRACT - proper construction - whether defendants obliged to deduct GST in relation to fees rendered to plaintiff - whether defendant entitled to calculate fees by reference to undrawn fees; TORT - injurious falsehood - whether plaintiff made false and malicious statement concerning defendants' business Legislation Cited: A New Tax System (Goods and Services) Act 1999 (Cth)
Acts Interpretation Act 1901 (Cth)
Australian Broadcasting Corporation Act 1983 (Cth)
Australia Securities and Investments Commission Act 2001 (Cth)
Companies Act 1997 (Papua New Guinea)
Corporations Act 2001 (Cth)
Corporations Regulations 2001 (Cth)
Foreign Corporations (Application of Laws) Act 1989 (Cth)
Foreign States Immunities Act 1985 (Cth)
Independent Public Business Corporation of Papua New Guinea Act 2002 (Papua New Guinea)
Public Finance (Management Act) 1975 (Papua New Guinea)Cases Cited: ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65; 309 ALR 445
Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; 217 CLR 424
Armitage v Nurse [1988] Ch 241
Associated Alloys Pty Limited v ACN 001452106 Pty Limited (in liq) (2000) 202 CLR 588
Associated Plumbing Installation Ltd v Air Niugini Ltd [2011] PGSC 31
Attorney-General v Collom [1916] 2 KB 193
Attorney-General (NSW) v Quin (1990) 170 CLR 1
Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454
Australian Crime Commission v Gray [2003] NSWCA 318
Coghlan v SH Lock (Australia) Ltd (1987) 8 NSWLR 88
Commercial Union Insurance Co of Australia Pty Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Commonwealth v Verwayen (1990) 170 CLR 394
Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 44 Firebird Global Master Fund II Ltd v Republic of Nauru [2014] NSWSC 360
Gould v Vaggelas (1984) 157 CLR 215
Graham v Ingleby (1848) 1 Ex 651; 154 ER 277
Karger v Paul [1984] VR 161
Keboki Business Group Inc and Morobe Provinseal Gavman v Papua New Guinea [1985] PNGLR 369
Laker Airways Ltd v Dept of Trade [1977] QB 643
Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749
Metropolitan Transit Authority v Waverley Transit Pty Ltd [1991] 1 VR 181
Michael Wilson & Partners Limited v Nicholls [2011] HCA 48; 244 CLR 427
Minister for Immigration and Ethnic Affairs v Kurtovic (1990) 21 FCR 193
Newey v Westpac Banking Corporation [2014] NSWCA 319
Nicholls v Michael Wilson & Partners Ltd [2010] NSWCA 222; 243 FLR 177
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451
Palmer Bruyn & Parker Pty Ltd v Parsons [2001] HCA 69; (2001) 208 CLR 388
Plimmer v City of Wellington Corp (1884) 9 App Cas 699
P T Garuda Indonesia Ltd v ACCC [2012] HCA 33; 247 CLR 240
Sargent v ASL Developments Ltd (1974)
131 CLR 634
Saunders v Vautier (1841) 4 Beav 115; 49 ER 282
Shepherd v Felt & Textiles of Australia Ltd (1931) HCA 359; 45 CLR 359
Taylor v Oakes, Roncoroni & Co [1922] All ER 866 at 869
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165
Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; 164 CLR 387
Wells v Minister of Housing and Local Government [1967] 2 All ER 1041Texts Cited: J D Heydon and M J Leeming Jacobs' Law of Trusts in Australia (7th ed, 2006, LexisNexis Butterworths)
Lewison and Hughes, The Interpretation of Contracts in Australia, (2012, Lawbook Co)
M Davies, A S Bell and P L G Brereton, Nygh's Conflict of Laws in Australia, (9th ed 2014, Lexis Nexis Butterworths)
N Seddon, Government Contracts: Federal, State and Local, (5th ed, 2013, The Federation Press)
Young, Croft and Smith, On Equity, (2009, Lawbook Co)Category: Principal judgment Parties: Motor Vehicles Insurance Limited (Plaintiff)
Woodlawn Capital Pty Ltd (First Defendant)
Timothy Patrick Breen (Second Defendant)
Timothy James McNamara (Third Defendant)Representation: Counsel:
Solicitors:
S G Finch SC with J Giles (Plaintiff)
J C Kelly SC with D O'Connor (Defendants)
Gadens Lawyers (Plaintiff)
Uther Webster & Evans (Defendants)
File Number(s): SC 2012/83573
Table of contents
Introduction
7
The issues requiring resolution and my conclusions concerning those issues
10
Section 46B of the IPBC Act
11
Breach of contract
11
Australian Financial Services Licence
13
Misleading or deceptive conduct
14
Accessorial liability of Messrs McNamara and Breen
15
Woodlawn's claim for its fees
15
Woodlawn's claim for damages or injurious falsehood
15
The IMAs
15
The Mandate
21
The AMA
22
The Trust Deed
23
Section 46B of the IPBC Act
25
Section 7 of the FCAL Act
26
What is the consequence of no ministerial approval under s 46B?
29
Was the Minister's approval in fact obtained?
30
Is MVIL estopped from denying it had power to enter the First and Second IMAs, the AMA and the Trust Deed?
34
Conclusion as to s 46B issues
39
Termination of the agreements
39
The proper construction of cll 8.2, 8.3 and 8.4
41
The date of termination of the AMA
44
The Shepherd v Felt & Textiles of Australia Ltd point
45
Commingling of funds
48
The Proper construction of the Mandate
52
Woodlawn's trading strategy - was there a breach of the Dual Object Term?
57
(a) Performance of the Portfolio to 30 June 2011
58
(b) A change of strategy
59
Absence of risk management and acting without "care and vigilance"
64
What is the consequence of the breach of the Dual Object Term?
64
Damage
64
The exclusion of liability in cl 5
76
Does cl 5 have the effect that a breach of the IMAs or the Mandate is not an Event of Default?
77
Is cl 5 effective to release Woodlawn from liability to compensate MVIL for any damage suffered by reason of the breach of the Dual Object Term?
78
Was Woodlawn required to have an AFSL?
82
Provision of "financial services"
84
Did Woodlawn provide "financial product advice" to MVIL?
84
Did Woodlawn "deal in a financial product"?
86
Subregulation 7.1.35(1)
88
Did Woodlawn provide any services "in this jurisdiction"?
93
Is Woodlawn immune from application of Pt 7 of the Act by reason of derivative Crown immunity?
94
Conclusion as to whether Woodlawn was obliged to have an AFSL
96
Consequences of Woodlawn not having an AFSL until 29 July 2011
96
Event of Default
96
MVIL's statutory right of rescission under s 925A of the Act
96
Delay and affirmation
97
Did MVIL give a s 925A notice to terminate the IMAs and AMA within a "reasonable period" for the purposes of s 925A(2)?
102
Did MVIL affirm the IMAs and AMA for the purpose s of s 925A(3) of the Act?
105
Contractual right to terminate
106
Misleading or deceptive conduct
106
The warranty in cl 9.1(c) of the IMAs and cl 9.1(b) of the AMA
107
The letter of 6 July 2011
114
Was GST payable on Woodlawn's fees?
116
Was Woodlawn entitled to calculate fees on previously earned but unpaid fees?
119
Woodlawn's cross claim for injurious falsehood
122
Further issues
124
Judgment
Introduction
This is a dispute over funds managed by the first defendant, Woodlawn Capital Pty Ltd, on behalf of the plaintiff, Motor Vehicles Insurance Ltd ("MVIL").
MVIL is a company incorporated in Papua New Guinea ("PNG") under the Companies Act 1997 (PNG) and is a "Majority State-Owned Enterprise" for the purposes of the Independent Public Business Corporation of Papua New Guinea Act 2002 (PNG) (the "IPBC Act").
The sole shareholder in MVIL is the Independent Public Business Corporation of PNG ("the IPBC"). The IPBC is a statutory corporation that is wholly owned by the state of PNG.
MVIL is responsible for compulsory third party motor vehicle insurance in PNG.
Woodlawn describes itself as an "investment manager" and, at the relevant time, carried on a business providing investment management and investment advice.
The second and third defendants, Messrs Breen and McNamara, are directors of Woodlawn. Each of them had experience in the financial services industry prior to the incorporation of Woodlawn on 26 May 2009.
At all relevant times, MVIL was Woodlawn's only client.
On 22 July 2009, MVIL and Woodlawn executed a document called "Investment Management Agreement" ("the First IMA"). The First IMA was expressed to have a minimum term of two years. Pursuant to the First IMA, Woodlawn agreed to invest MVIL's funds in accordance with a nominated "Investment Mandate".
On 24 July 2009, MVIL paid to Woodlawn Papua New Guinea Kina ("K") K96,479,986 ("the Sum") to hold and invest pursuant to the First IMA.
The Sum was in turn borrowed by MVIL from another PNG corporation pursuant to what was described as an Equity Monetisation Contract.
The Sum was, on 24 July 2009, equivalent to something in the order of $A43.7 million.
On 6 May 2010, MVIL and Woodlawn executed three further documents. The first was a second Investment Management Agreement ("the Second IMA") which, whilst expressed not to be retrospective, was expressed "to replace" the First IMA. The Second IMA also provided that investments were to be made in accordance with a nominated "Investment Mandate". There is no material difference between the Investment Mandates referred to in the First IMA and the Second IMA. I shall simply refer to "the Mandate".
The First IMA thus subsisted only between 24 July 2009 and 6 May 2010. As I explain below, no complaint is now made by MVIL as to the manner in which Woodlawn dealt with MVIL's funds during this period. As the case was developed, MVIL's complaint ultimately focused on Woodlawn's dealings with MVIL's funds in July and August 2011, at which time the Second IMA was in place. The Second IMA is in some respects different from the First IMA. Accordingly, I will conduct my analysis of the parties' competing contentions by reference to the terms of the Second IMA. I will only refer separately to the "First" IMA and the "Second" IMA when it is necessary to distinguish between them. Otherwise, I will simply refer to "the IMA" or "the IMAs".
On 6 May 2010, the parties also executed an "Asset Management Agreement" ("the AMA") and a document called "MVIL Trust" ("the Trust Deed"). Under the AMA, Woodlawn agreed to provide "asset management services" in relation to all of MVIL's "cash or investment" assets, wherever located (including the funds the subject of the IMAs). The AMA does not loom large in the proceedings, and I will refer to it only as necessary.
Mr McNamara (rather than Mr Breen) made all decisions concerning the manner in which MVIL's funds were to be invested. He agreed he had "nothing else to do professionally" and that the management of MVIL's investment portfolio had his "complete attention".
It is common ground that, at all relevant times, Woodlawn held the Sum, and the investments into which the Sum was converted (described in the IMAs as the "Portfolio"), on trust for MVIL.
On 17 November 2011, MVIL sent Woodlawn a letter which, it is common ground, terminated all the agreements except the AMA. Woodlawn contends MVIL did not terminate the AMA until its solicitor sent a further letter on 13 February 2012.
By then, the value of the Portfolio had reduced from the amount of the Sum to something in the order of $A30.5 million. This loss is primarily the product of Woodlawn's dealings with the Portfolio in the quarter ended 30 September 2011 and, particularly, in the first two weeks of August 2011. MVIL claims that Woodlawn is obliged to compensate it for this loss on various bases, discussed below.
From that remaining sum of $A30.5 million Woodlawn has repaid MVIL something in the order of $A4.2 million.
Woodlawn holds the balance (in the order of $A26.3 million) pending the outcome of these proceedings and claims that it is owed something in the order of $A23 million for various fees said to be payable under the Second IMA and the AMA.
I have been greatly assisted by the written and oral submissions I have received from Mr Finch SC, who appeared with Mr Giles for MVIL, and Mr Kelly SC, who appeared with Mr O'Connor for Woodlawn. Much of what follows, especially concerning background matters, is taken with gratitude from those submissions.
The proceedings were conducted with admirable economy, and many issues alive on the pleadings were, during the course of the hearing, either resolved or not pressed.
Nonetheless, a large number of issues between the parties remain for determination. During argument it was agreed that I should determine the critical matters dividing the parties but leave some issues to be reconsidered and, if necessary, further argued, in the light of these reasons. After the parties have had an opportunity to consider these reasons, I will then give them an opportunity to make further submissions as to such other matters as require resolution.
The issues requiring resolution and my conclusions concerning those issues
Because of the diverse range of issues presented for determination, I will summarise, at this stage of the judgment, the issues and the substance of my decisions concerning those issues. This summary, however, should not be treated as a substitute for, or a qualification of, the detailed reasons set out in what follows.
Section 46B of the IPBC Act
MVIL contended that, by reason of s 7 of the Foreign Corporations (Applications of Laws) Act 1989 (Cth) ("the FCAL Act") it is necessary to determine the question of MVIL's legal capacity and powers to enter the IMAs and the AMA under PNG law and that, as the PNG Minister for Treasury and Finance did not approve MVIL's entry into the IMAs and the AMA under s 46B of the IPBC Act, those agreements are void ab initio and of no effect.
My conclusions are that, for a number of reasons, the FCAL Act is not engaged and that, in any event, and as a matter of fact, MVIL has not established that ministerial approval was not given. Alternatively, I have concluded that, in all the circumstances, MVIL is estopped from contending that ministerial approval was not given.
Breach of contract
MVIL alleged that Woodlawn has acted in breach of contract in a number of respects.
In that regard a number of issues arise as to the proper construction of the provisions in the IMAs and the AMA concerning termination. I have concluded that I should resolve those issues in MVIL's favour and that, in substance, MVIL terminated all agreements on 17 November 2011 and that such termination has effect under the IMAs and the AMA as a termination for an "Event of Default". I have concluded that it follows, on the proper construction of the relevant clauses of the IMAs and AMA (cll 8.2, 8.3 and 8.4), that Woodlawn has no entitlement to fees beyond those which were "accrued" to the date of termination.
The most significant breach of contract alleged by MVIL is that, by investing MVIL's Portfolio in particular derivatives in July and August 2011, Woodlawn acted in breach of the Mandate. I have accepted this submission but found that MVIL has not proved what damage it has suffered as a result of such breach and that, in any event, Woodlawn is not liable for such damages by reason of an exclusion clause (cl 5) in each of the IMAs and the AMA.
An issue also arose as to whether that exclusion clause not only releases Woodlawn from the financial consequences of a breach of the IMAs or the AMA but also has the effect of depriving MVIL of the right to terminate the agreements by reason of that breach. I have concluded that cl 5 does not have this effect.
MVIL also contended that Woodlawn acted in breach of an implied term of the IMAs and the AMA by commingling its funds with those of MVIL. I have concluded that any such breach was "remediable" for the purpose of the relevant provision in the IMAs and AMA (cl 8.4(b)) and thus not an Event of Default.
As Woodlawn held the relevant funds on trust for MVIL, MVIL contended that the conduct of Woodlawn said to constitute a breach of the Mandate also constituted a breach of trust and a breach of its fiduciary duty. MVIL contended that the same conduct constituted a breach by Woodlawn of its duty of care to MVIL. MVIL did not suggest these breaches have any additional consequences to the alleged breach of Mandate. Accordingly, in these reasons, I have not dealt separately with these alternative claims.
On the pleadings, MVIL also alleged that the First IMA was partly in writing and partly oral. The oral component was particularised as follows:
"To the extent that the First IMA was oral it comprised an express term that at all times during which Woodlawn was engaged to act on MVIL's behalf, MVIL's funds were to be held as to 80% in cash call accounts as to 20% invested in shares (Overarching Investment Limitation). The Overarching Investment Limitation was oral and was agreed during a conversation between Dr Mua for and on behalf of MVIL and Mr Breen for and on behalf of Woodlawn on 22 July 2009 at the time of signing of the First IMA."
Dr Mua was then the managing director of MVIL. The only evidence that MVIL adduced concerning the "Overarching Investment Limitation" was from Mr Danny Poponawa, who was then the Chief Executive Officer of MVIL. Mr Poponawa died before the hearing. MVIL did not serve any affidavits sworn by Dr Mua. In fact Woodlawn served an affidavit by Dr Mua although, ultimately, it was not read and Dr Mua was not called. In his first affidavit Mr Poponawa deposed to the conversation between Dr Mua and Mr Breen said to have given rise to the "Overarching Investment Limitation". In later affidavits Mr Poponawa gave differing accounts of the events said to give rise to that agreement. In opening submissions Mr Finch informed me that the "80:20" case was not pressed "on a contractual basis". In fact it was not mentioned again and was, in effect, abandoned.
Australian Financial Services Licence
An issue also arose as to whether Woodlawn was obliged, at relevant times, to hold an Australian Financial Services License ("AFSL") for the purposes of s 911A of the Corporations Act 2001 (Cth) ("the Act").
I have concluded that Woodlawn was at all relevant times providing "financial services" for the purposes of s 911A of the Act in that it was providing "financial product advice" for the purpose s 766B(1) of the Act and dealing in a "financial product" for the purposes of s 766C of the Act.
Woodlawn contended that it was not required to have an AFSL because it did not provide financial services in the jurisdiction, or alternatively because it was entitled to derivative crown immunity. I have rejected both of those submissions.
An issue also arose as to whether, assuming Woodlawn was required to have an AFSL, MVIL was entitled to rescind the IMAs and the AMA under s 925A of the Act (one effect of which would be to deprive Woodlawn of any entitlement to recover fees: s 925F of the Act) and as to whether MVIL has lost any such right by reason of not exercising it within a reasonable period for the purpose of s 925A(2) or because of having affirmed the agreements for the purpose of s 925A(3) of the Act. I have concluded that MVIL lost its right to rescind under s 925A on both bases.
By reason of not having an AFSL, Woodlawn committed a further Event of Default of the IMAs and the AMA (as it was in breach of a warranty that it held all relevant licenses and authorities).
Misleading or deceptive conduct
A further issue arose as to whether Woodlawn had engaged in misleading or deceptive conduct by reason of having falsely warranted it held all necessary "licenses and authorities". MVIL contended that, but for such conduct, it would not have entered the IMAs and the AMA and that it has suffered damage as a result. I have concluded that as Woodlawn warranted it had all requisite licences and authorities, but did not have an AFSL, it did engage in misleading or deceptive conduct, but that MVIL has not made out a "no transaction" case.
MVIL also contended that Woodlawn had engaged in misleading or deceptive conduct arising out of a letter it wrote on 6 July 2011. I have concluded that this aspect of the case did not advance MVIL's position in any substantive way.
Accessorial liability of Messrs McNamara and Breen
MVIL also brought claims against Mr McNamara and Mr Breen for accessorial liability. I have decided to defer these issues until the parties have had an opportunity to consider these reasons.
Woodlawn's claim for its fees
Woodlawn claims fees it contends are owing under the IMAs and the AMA.
As I have determined that Woodlawn has acted in breach of the IMAs and the AMA, and that MVIL was entitled to terminate those agreements on that basis it follows that, as I have said, Woodlawn is not entitled to any fees beyond those "accrued" at the date of termination.
Two further issues arose in relation to Woodlawn's fees. One was whether it was obliged and entitled to charge GST on the fees under the IMAs. I have concluded that it was not. A further issue of construction arose in relation to what the parties described as the "fees on fees" issue. I have decided that issue in favour of MVIL.
Woodlawn's claim for damages for injurious falsehood
Finally, Woodlawn brought a claim against MVIL for damages for injurious falsehood arising out of a press release by the PNG Minister for Public Enterprises. I have concluded that Woodlawn's claim fails.
I will now set out the terms of the relevant agreements.
The IMAs
As I have mentioned, by the Second IMA, MVIL and Woodlawn agreed to "replace" the First IMA.
By cl 2, MVIL appointed Woodlawn "to manage the Portfolio". "Portfolio" was defined to mean:
"...all the funds held on trust by [Woodlawn] on behalf of MVIL and Investments managed by [Woodlawn] under the [Mandate] on behalf of MVIL together with all income and accretions in respect of them or any part thereof."
"Investments" was, in turn, defined to mean:
"...assets, which may include, securities, derivatives, or other property selected and purchased by [Woodlawn] using the funds and/or realised profits or income generated within the Portfolio,"
Clause 3.1(a) provided that Woodlawn's duties were:
"(1) to execute transactions that effect the investment and reinvestment of the cash, securities and other property comprising the Portfolio with power at their discretion to purchase or otherwise acquire investments and to sell, exchange, vary or transpose the same, provided that all transactions, advice and recommendations given by [Woodlawn] in relation to the Portfolio...be consistent with...the [Mandate]...;
(2) keep the Portfolio under review;
(3) keep proper books of account in relation to the Portfolio recording transactions made by [Woodlawn];
(4) exercise care and vigilance in carrying out its functions, powers and duties under this deed...".
Clause 3.1(b) stated (inconsistently with the definition of "Portfolio" and with the acknowledgement in cl 9.3 set out below) that Woodlawn was not required to hold any assets "on behalf of MVIL". As I have said, despite this clause, it is common ground that at all relevant times Woodlawn held the Portfolio on trust for MVIL.
Clause 3.1(c) obliged Woodlawn to:
"...carry out its obligations under this deed to the standard that could reasonably be expected of a competent investment management professional."
Clause 4 dealt with Woodlawn's "powers" and provided:
"Powers and Limitations
4.1 For the purpose of carrying out its duties under this deed and without any further limitation, MVIL confers on [Woodlawn] all the powers necessary to transact using the assets that comprise the Portfolio. With these powers, [Woodlawn] may execute any documents as necessary and/or give instructions to any person to effect transactions within the Portfolio without further authority from MVIL.
Non-exclusivity
4.2 [Woodlawn] may perform similar investment services to the services performed for MVIL under this deed for itself and/or other persons. MVIL acknowledges that [Woodlawn] may give advice and take action in the performance of its duties for other clients which may differ from advice given and action taken in relation to the Portfolio."
Clause 5 provided an "Indemnity" as follows:
"[Woodlawn] seeks to assist [MVIL] in the manner set out in this deed. However, MVIL agrees that [Woodlawn] is not liable for any claims, actions, proceedings, demands, liabilities, losses, damages, costs and expenses suffered by MVIL arising out of, or in connection with, this deed or any other matter or activity referred to or contemplated by the deed, including but not limited to loss suffered by MVIL as a result of [Woodlawn's] negligence or a breach of this deed. [Woodlawn] does not warrant, represent or guarantee that any of the investment objectives stated in the [Mandate] will be achieved. MVIL agrees with [Woodlawn] (for itself and on trust for each of the related entities, affiliates, directors, officers, employees and agents of [Woodlawn] ("Indemnified Persons")) that:
(a) MVIL will indemnify and hold harmless the Indemnified Persons from and against all claims actions, proceedings, demands, liabilities, losses, damages, costs and expenses arising out of, or in connection with, this deed or any other matter or activity referred to or contemplated by the deed, in which any Indemnified Person may suffer or incur loss in any jurisdiction;
(b) all costs and expenses incurred by any Indemnified Person are to be reimbursed by MVIL promptly on demand, including those incurred in connection with the investigation of, preparation for or defence of, any pending or threatened litigation or claim within the terms of this Indemnity or any matter incidental thereto; and
(c) no Indemnified Person will have any liability whatsoever to MVIL for or in connection with things done or omitted to be done pursuant to the deed;
other than in respect of any liabilities, losses, damages, costs or expenses which are determined by a judgment of a Court of competent jurisdiction to have resulted from the wilful default or negligence on the part of the Indemnified Person. Sums already paid by MVIL under this Indemnity but which fall within this proviso will be reimbursed in full.
MVIL will notify the Investment Manger if MVIL becomes aware of any claim which may give rise to a liability under this indemnity.
Without prejudice to any claim MVIL may have against [Woodlawn], no proceedings may be taken against any director, officer, employee or agent of [Woodlawn] in respect of any claim MVIL may have against [Woodlawn].
This Indemnity will continue after the termination of this deed."
Clause 6 provided that Woodlawn was entitled to be paid fees in accordance with the Mandate.
Clause 8 provided for termination as follows:
"8.1 Term
(a) This deed commences as of and from the date of its execution and, subject to clause 8.3, continues at least until 27 July 2016 (Initial Term).
(b) Unless either of the parties elects to terminate the deed, in accordance with clause 8, prior to expiry of the Initial Term, this deed will renew for a further 5 years after the Initial Term (Further Term) on the terms set out in this deed.
(c) In the event that this deed is renewed under clause 8.1(b), all references to the 'Initial Term' in the deed will mean the 'Further Term', unless the context requires otherwise.
8.2 Right to terminate
Subject to clauses 8.3 and 5, this deed remains in force until terminated by MVIL giving to [Woodlawn] not less than 28 Business Days' written notice of termination or by [Woodlawn] giving to MVIL not less than 28 Business Days' written notice of termination or such lesser period of notice as the parties agree. Neither party may invoke termination without reasonable cause.
8.3. Early termination
If MVIL terminates this deed in accordance with clause 8.2, any outstanding fees payable under the [Mandate] up to the termination date, plus investment management, administration and foreign exchange hedging fees calculated for the period commencing on the termination date up until expiry of the Initial Term based upon the value of the Portfolio on the termination date will be payable to [Woodlawn] by MVIL within 14 days of termination.
If at any time, MVIL withdraws any Investment from the Portfolio prior to expiry of the Initial Term, [Woodlawn] will be entitled to include the value of the withdrawn Investment (as at the date of withdraw) when calculating the value of the Portfolio for the purposes of determining the investment management, administration and foreign exchange hedging fees payable by MVIL in any period.
8.4 Event of Default
Either party (Non-defaulting Party) may terminate this deed at any time by written notice to the other party (Defaulting Party) if:
(a) the Defaulting Party fails to pay any money payable under this deed within 28 Business Days after receiving a written demand for money due but unpaid;
(b) the Defaulting Party fails to perform or observe any other undertaking, obligation or agreement expressed or implied in this deed and that failure is material in the context of this deed and is not, in the opinion of Non-defaulting Party, remediable; or
(c) the failure described in clause 8.4(b) is, in the opinion of the Non-defaulting party, remediable, and the Defaulting Party does not remedy the failure within 28 business days (or a longer period determined by the Non-defaulting party) after receipt by the Defaulting Party of a notice from Non-defaulting party specifying the failure
...or
(k) any of the warranties given by the Defaulting Party in this deed are or become untrue.
8.5 Claims and Transactions
Termination of this deed does not affect any:
a) transaction properly entered into prior to termination;
b) claim by [Woodlawn] in respect of accrued fees incurred in respect of the period to termination;
c) other claim which either party may have against the other; or
d) the indemnity given to [Woodlawn] in this deed." (emphasis in original)
By cl 9.1(c) Woodlawn warranted that, amongst other things:
"...that it will, at all times during the term of this deed, be the holder of all licences and other authorities required to be held under all applicable legislation governing the activities of [Woodlawn]...".
By cl 9.3 MVIL acknowledged that:
"...the Portfolio is held on trust by [Woodlawn] in accordance with the Trust Deed."
Clause 11 provided that:
"No failure to exercise and no delay in exercising any right, power or remedy under this deed will operate as a waiver."
Clause 14 provided that the IMA was governed by the laws of New South Wales and that the parties submitted to the non-exclusive jurisdiction of the courts of NSW.
The Mandate
Clause 1 of the Mandate set out the "strategies" that Woodlawn "will use as a guide in pursuit of the Investment Aims" and that:
"[Woodlawn] and MVIL...recognise that in [sic] terms defining a strategy this document may only be used as a reference to the strategy at the time of signature as the nature of investing in capital markets is such that the strategy may, from time to time have to change. A strategy may also change is [sic: if] the objectives of [MVIL] change."
The Mandate provided for the following "Investment Aims":
"The aim of [MVIL] in requesting [Woodlawn] to manage the Portfolio is that [MVIL] wishes to
...
(b) Receive a regular income stream from Investments with a yield greater than the S&P/ ASX200 Index;
(c) Benefit from capital growth;
(c) Benefit from a lower volatility than the S&P/ASX200 Index".
The "Investment Strategy" was stated to be:
"In order to achieve the Investment Aims, [Woodlawn] implements a multi strategy approach, investing and trading securities on a range of local and at times global financial markets.
The strategy aims to build a core of long term value positions creating the potential for long term capital growth. These are overlaid with related derivatives; to both hedge market volatility, and enhance returns. Additionally, related and non related special situations, and derivatives are utilized [sic] to further enhance Portfolio returns whilst aiming to further decrease volatility.
[Woodlawn] will employ a semi-quantitative approach looking at 'bottom up', global macro and statistical models. Differing approaches are applied to different markets, with methods ranging from fully discretionary to using a hybrid systematic approach.
Achieving the objectives of capital growth, with enhanced income, and incremental wealth creation through consistent returns, whilst preserving capital with strict risk management, are the cornerstones of the strategy.
Strict management controls and systems ensure all investments are subject to the vigorous risk management ideology that minimises and avoids unnecessary risk.
[Woodlawn] reserves the right to change or alter the investment strategy from time to time. If the investment strategy varies considerably in any way [Woodlawn] will notify [MVIL] in writing within 7 days of this occurring."
The Mandate provided for a "Performance fee", an "Investment Management Fee", an "Administration Fee" and a "Foreign Exchange Hedging Fee". As I discuss below, during the course of the hearing, the parties resolved all but three issues concerning these fees.
The AMA
Pursuant to cl 2(a) of the AMA, MVIL appointed Woodlawn to "advise on and where appropriate manage" the "Portfolio" which, in this agreement was defined to mean all of MVIL's assets "which would be regarded as either cash or investments". The AMA "Portfolio" thus included the funds the subject of the IMAs together with all of MVIL's other cash or investment assets (wherever located).
Clause 3.1 of the AMA defined Woodlawn's duties as including:
"(1) performing, or supervising the performance of, the day to day investment and administration of the Portfolio;
(2) advising MVIL on the management of its Portfolio".
Clause 5 of the AMA provided for an "indemnity" in the same terms as that found in the Second IMA.
Clause 8 of the AMA contained a termination clause in the same terms as that in the Second IMA and was thus stated to continue until "at least" 27 July 2016 (called the "Initial Term").
Clause 9.1(b) contained the same warranty as to "licences" and "other authorities" as is contained in cl 9.1(c) of the IMA (see [58]).
There was annexed to the AMA an "Asset Management Mandate" to which it is not necessary to refer separately.
The Trust Deed
The Trust Deed was executed on 6 May 2010 but was expressed to have a "commencement date" of 27 July 2009.
Clause 2 provided that:
"(a) On and from the Commencement Date, [Woodlawn] has held and continues to hold the Trust Property as bare trustee on trust for [MVIL] and the beneficial owner of [MVIL] to the Trust Property shall be vested in [MVIL] absolutely.
(b) [Woodlawn] must at the request and cost of [MVIL] transfer the Trust Property to [MVIL] for its sole and absolute benefit or otherwise deal with the Trust Property as the Beneficiary directs."
"Trust Property" was defined to include the "Portfolio" (which was defined to have the same meaning as in the Second IMA) together with:
"(b) any other money or any property that any person gifts, transfers, assigns, or vests to [Woodlawn] to be held upon the trust created by this document;
(c) any other property acquired by [Woodlawn] arising out of holding the Trust Property;
(d) all income or distributions which are received in respect of the Trust Property; and
(e) if the Trust Property is sold, the net proceeds of sale of the Trust Property".
Clause 3.1 provided that Woodlawn's obligations were to:
"(a) hold the Trust Property on behalf of [MVIL] absolutely;
(b) exercise voting rights and any other right attaching to the Trust Property; and
(c) deal with or transfer the Trust Property,
as [Woodlawn] considers appropriate or where directed by [MVIL]."
Clause 5.2(b) provided that Woodlawn could:
"[I]nvest in any form of investment, whether authorised by law or not, which [Woodlawn] decides."
Clause 5.3(a) provided that:
"The Trustee may...apply...any monies available for investment to or in any form of investment as the Trustee decides, to the intent that the Trustee has the same powers in all respects as it were the beneficial owner, including the power to vary or transpose investments."
Clause 5.3(b) provided that:
"The Trustee may...make any investment in the name or under the control of the Trustee...jointly or in common with other persons...including the Trustee (or any one or more of them) in its personal capacity or any other capacity."
Clause 5.50 was headed "Trustee's power not affected by its own involvement" and provided:
"Despite any rule of law or equity to the contrary, the Trustee has the fullest power to exercise...all of the powers and discretions contained in this document or otherwise conferred by law, even if:
(a) the Trustee, or any director or shareholder of the Trustee:
(i) has or may have a direct or personal interest (whether as trustee of any other trust, in its personal capacity, as a director or shareholder of any company, or otherwise) in the mode or result of exercising that power or discretion; or
(ii) may benefit either directly or indirectly as the result of the exercise of that power or discretion; or
(b) the Trustee is the sole trustee".
Clause 5.11(a) provided that in the "execution of the trusts and powers contained in this document" Woodlawn could:
"[A]ct personally and charge and be paid from the Trust Property a reasonable remuneration for so acting".
Section 46B of the IPBC Act
Section 46B of the IPBC Act is in the following terms:
"A Majority State Owned Enterprise shall not, except with the approval of the Minister...upon the recommendation of the Managing Director, enter into any contract involving the payment or receipt of an amount, or of property to a value, (or both) exceeding K1,000,000".
The "Minister" referred to in s 46B is the PNG Minister for Treasury and Finance.
MVIL claimed that the Minister did not approve its entry into the IMAs and AMA and that, accordingly those purported agreements were void ab initio.
Issues arise as to whether, in light of the provisions in s 7 of the FCAL Act, it is necessary to consider PNG law at all (and thus to consider whether s 46B approval was given), whether such approval was in fact given, and whether MVIL is estopped from contending it was not.
The "Managing Director" referred to in s 46B is the managing director of the IPBC (see ss 2 and 23 of the IPBC Act).
I infer from an affidavit sworn by Mr Erastus Kamburi, the Chief Legal Officer of IPBC since 23 January 2012, that Mr Masket Iangalio was the managing director of IPBC at the time that the First IMA was executed and that Mr Glen Blake was the managing director of IPBC at the time that the Second IMA and the AMA were executed. As will emerge below, Mr Blake was certainly the managing director of IPBC in May 2011. Neither Mr Iangalio nor Mr Blake was called to give evidence. Their absence was not explained.
Section 7 of the FCAL Act
MVIL submitted that, by reason of the choice of law rules set out in s 7 of the FCAL Act, consideration must be given to PNG law to determine whether MVIL had the "legal capacity and powers" to enter the IMAs and AMA.
I do not accept that submission for the following reasons.
Section 7 of the FCAL Act is, relevantly, in the following terms:
"(1) The section applies in relation to the determination of a question arising under Australian law (including a question arising in a proceeding in an Australian court) where it is necessary to determine the question by reference to a system of law other than Australian law.
...
(3) Any question relating to:
(a) the status of a foreign corporation (including its identity as a legal entity and its legal capacity and powers); or
....
(h) the validity of a foreign corporation's dealings otherwise than with outsiders;
is to be determined by reference to the law applied by the people in the place in which the foreign corporation was incorporated."
MVIL is a "foreign corporation" for the purpose of the FCAL Act.
MVIL contended that s 7 of the FCAL Act is engaged and that, accordingly, "any question relating to" its "status" (including its "legal capacity and powers") is governed by PNG law, including s 46B of the IPBC Act which MVIL contends, is to be characterised as a law affecting its "legal capacity and powers".
Section 7 of the FCAL Act is only engaged where "a question arises" under Australian law and where "it is necessary" to determine that question "by reference to a system of law other than Australian law" (see s 7(1)).
The relevant question is whether MVIL had a "legal capacity" or "power" to enter the IMAs and the AMA. That question is to be determined by the proper law of the contract (see M Davies, A S Bell and P L G Brereton, Nygh's Conflict of Laws in Australia, (9th ed 2014, Lexis Nexis Butterworths) at [19.50]).
Each of the IMAs and the AMA provided that it was governed by the law of NSW. The parties thus agreed that the proper law of the agreement is NSW.
In those circumstances, I accept Woodlawn's submission that it is not "necessary to determine any question concerning the agreements by reference to a system of law other than" that of NSW (cf Nicholls v Michael Wilson & Partners Ltd [2010] NSWCA 222; 243 FLR 177 per Lindgren AJA (with whom Basten and Young JJA agreed) at [357] and [359]; overturned by the High Court without criticism of this aspect: see Michael Wilson & Partners Limited v Nicholls [2011] HCA 48; 244 CLR 427).
For that reason alone, the choice of law provision in s 7 of the FCAL Act is not engaged.
In any event, even if s 7 of the FCAL Act is engaged, I do not accept that s 46B of the IPBC Act relates to any of the "questions" referred to in s 7(3) of the FCAL Act. Only two of those questions were the subject of submissions before me; those in ss 7(3)(a) and (h) set out above.
Section 7(3)(a) is directed to questions relating to a foreign corporation's "status" and the parenthetical reference in s 7(3)(a) to a foreign corporation's "legal capacity and powers" must be seen in that context. In those circumstances, although my attention was not drawn to any authorities dealing with this, my opinion is that s 7(3)(a) is directed to, relevantly, those aspects of a foreign corporation's "legal capacity and powers" that touch on its "status" as a corporation; that is the source of that "legal capacity" and those "powers". I do not see s 7(3)(a) as being concerned with the manner in which that capacity or those powers may be exercised.
Section 46B provides that a MSOE, such as MVIL, "shall not" without Ministerial approval "enter into" certain contracts; those involving more than K1 million. The section says nothing of MVIL's ability to enter contracts involving a smaller sum. The language of s 46B is that of statutory prohibition, not of the grant of a statutory right. It does not provide the source of MVIL's power or legal capacity to contract. MVIL is a company incorporated under the PNG Companies Act 1997 and its power to enter contracts derives from s 155 of that Act, and from its own Constitution.
The effect of s 46B is merely to regulate the manner in which MVIL's power and capacity to contract may be exercised (see Australian Broadcasting Corporation v Redmore Pty Ltd (1989) 166 CLR 454 where the High Court came to such conclusion in relation to a similarly worded provision in the Australian Broadcasting Corporation Act 1983 (Cth); per Mason CJ, Deane and Gaudron JJ at 457 and Brennan and Dawson JJ at 461).
For that reason, in my opinion, s 7(3)(a) is not engaged.
Section 7(3)(h) is clearly not engaged as MVIL's dealings in this case were with an "outsider".
What is the consequence of no ministerial approval under s 46B?
Further, even if s 46B does relate to MVIL's "legal capacity and powers", it is by no means clear to me that the effect of s 46B is that, absent ministerial approval, the relevant agreements are void.
MVIL drew attention to a decision of the PNG Supreme Court of Justice in Associated Plumbing Installation Ltd v Air Niugini Ltd [2011] PGSC 31 per Cannings, Makail and Kawi JJ. The issue in that case was whether a contract for the sale by Air Niugini of land in Port Moresby to Associated Plumbing was void by reason of the fact that Air Niugini had not obtained ministerial approval under s 46B, but also under s 46F of the IPBC Act.
The Court concluded (at [17]) that:
"Therefore, it was important that the parties had to comply with the requirements of sections 46B and 46F of the IPBC Act, because a failure to do so would render the contract null and void."
However, their Honours did not advert to what appears to me to be an important distinction between s 46B and s 46F of the IPBC Act.
Section 46B requires that a Majority State Owned Enterprise, or MSOE (such as MVIL or Air Niugini) obtain ministerial approval for "any contract" involving payment or receipt of an amount exceeding K1 million. Section 46F requires that a MSOE obtain approval from IPBC itself for the sale of lease of any land or plant for a consideration exceeding K1 million. Further, s 46G of the Act requires that a MSOE obtain IPBC's approval for capital expenditure exceeding K1 million. Significantly, each of ss 46F and 46G provide, in terms, that contracts or arrangements entered without the requisite approval are "void". Section 46B contains no such provision.
The Court in Associated Plumbing did not advert that distinction, no doubt for the reason that approval under s 46F was called for; absent that approval the contract was plainly void by operation of the express provisions of s 46F.
It is by no means clear to me that the same conclusion would follow, as a matter of PNG law, by reason of want of ministerial approval under s 46B.
Was the Minister's approval in fact obtained?
MVIL's case was that no ministerial approval was given, and that its entry into the IMAs and the AMA was ultra vires, with the consequence that each of those agreements was void ab initio.
MVIL accepted that it carried the onus of making out this startling proposition.
The possible consequences of there being no ministerial approval to the agreements are serious indeed. MVIL is the party best placed to prove whether approval was given. In those circumstances, Woodlawn submitted that I would require "clear and convincing proof" before reaching the conclusion for which MVIL contended. That may overstate matters a little, but I would certainly be reluctant to draw such a conclusion by inference from equivocal material.
MVIL adduced affidavit evidence from Mr Kamburi to the effect that he had searched IPBC's records and that, having made that search "I know that IPBC does not possess any records" of any recommendations made by either Mr Iangalio or Mr Blake to the Minister, or any approvals by the Minister in respect of the IMAs or the AMA.
In his oral evidence, Mr Kamburi said that, at the relevant time, there was no "formal register" of ministerial approvals at IPBC and that he had searched the "running files" of IPBC, together with the records kept by the Chief Operating Officer of IPBC, but had found no record of any request for, or a grant of s 46 approval for the IMAs or the AMA. Mr Kamburi said that he did not have access to the books and records of the Minister.
MVIL also adduced evidence on this topic from Mr Poponawa.
In one of his affidavits, Mr Poponawa asserted that, as at March 2011 "IPBC Approval had not been obtained in respect of the...First IMA, Second IMA and AMA". In the same affidavit Mr Poponawa also said that he did not recall being informed that MVIL had sought, or was waiting for "IPBC Approval to either the Second IMA or the AMA". As I have mentioned, Mr Poponawa died before the hearing.
This evidence points, albeit by no means decisively, to the conclusion that no ministerial approval was given (although, of course, Mr Poponawa's evidence could not be tested).
On the other hand, on 3 May 2011 Mr Blake, by then the managing director of IPBC, wrote a letter to Woodlawn which points strongly in the other direction.
Mr Blake's letter was in these terms:
"I refer to the above and advise that the Motor Vehicle Insurance Ltd (MVIL) is a Majority State Owned Enterprise (MSOE) in which the State or the Independent Public Business Corporation (IPBC) or both of them together, hold interests in assets or share capital exceeding 50%.
...
Section 46B provides as follows:
'A majority state owned enterprise shall not, except with the approval of the Minister referred to in Section 61 of the Public Finance (Management) Act 1975 upon the recommendation of the Managing Director, enter into any contract involving the payment or receipt of an amount, or of property to a value (or both) exceeding K1,000,000.00'.
Thus, it is our view that IPBC has been given the legal mandate to approve any transaction involving the payment or receipt of an amount, or property to value (or both) exceeding K1,000,000.00. It is also a requirement that the approval of the Minister for Treasury must be given. This legal mandate is in line with the stated aims and objectives of IPBC and also provides for the achievement of fiscal responsibility and forms part of the regulatory duties and powers of IPBC.
Therefore as a shareholder of MVIL, I am requesting that Woodlawn Capital Ltd provide for the benefit of IPBC, all details of the transactions that Woodlawn Capital Ltd has made in respect of the K96,479,986.00 that MVIL had been deposited into Woodlawn Capital Ltd's account on the date of inception.
In addition, it would also be appropriate if these details contain all investment management agreement between MVIL and Woodlawn Capital Ltd or any other documentation relating to the [Mandate]; Investment Report to 31 December 2010 and any returns received on the underlying investments and the degree of leverage to end of April 2011.
Please note that we require full disclosure of all these activities by close of business tomorrow, 4th of May 2011."
This letter was written almost two years after MVIL and Woodlawn had executed the First IMA and a year after MVIL and Woodlawn executed the Second IMA and the AMA. Mr Blake did not assert, in this letter, that ministerial approval had not been obtained. On the contrary, he recited that IPBC "has been given the legal mandate to approve" transactions such as the IMAs and the AMA and demanded "details of the transactions" that Woodlawn had made in respect of the Sum.
IPBC would only have an interest in demanding these "details" if it had exercised that "legal mandate". It appears to me improbable in the extreme that Mr Blake would have expressed himself this way if either he (or perhaps his predecessor) had not recommended that ministerial approval be given to the relevant transactions.
Thus, Mr Blake's letter suggests, strongly, in my opinion, that ministerial approval was given.
It seems likely that Mr Blake was well aware of the requirements of s 46B. A minute of a meeting of the board of directors of MVIL held on 20 August 2009 (shortly after execution of the First IMA) recorded that:
"With regard to the Equity Monetisation Contract, the Managing Director advised that he had met with Glen [sic] Blake of IPBC regarding the ratifying of the EMC. The Managing Director informed the Board that Glen [sic] Blake had informed him that he had accepted the commercial nature of the transaction and that the directors were exercising their fiduciary responsibilities to protect the Company's financial position but expressed concern at the need for compliance with approval requirements...".
The Equity Monetisation Contract, or EMC, referred to in this minute is the transaction pursuant to which MVIL borrowed the Sum entrusted to Woodlawn (see [10] above). Evidently, the IPBC had to "ratify" the EMC and Mr Blake was closely connected to that process. It seems unlikely in the extreme that, in those circumstances, he was not aware of the requirements of s 46B.
As Woodlawn point out, there is nothing in s 46B which requires the recommendation of IPBC's managing director, or the approval of the Minister, to be in writing. MVIL submitted that it was improbable that there was an oral recommendation and approval, of which there is no written record, let alone that such oral recommendations and approvals occurred twice (for the First, and then the Second IMA). That may be so. But I am left in a position where I am simply unable reach a conclusion either way.
Certainly, in the face of Mr Blake's letter, and absent any other evidence on the topic, particularly from Mr Blake himself or his predecessor Mr Iangalio (see [86] above), I am not prepared to conclude that approval was not given.
In my opinion, MVIL has not shown, on the balance of probabilities, that ministerial approval was not obtained. For that reason alone, I do not accept MVIL's contention that it lacked power to enter into the relevant agreements.
Is MVIL estopped from denying it had power to enter the First and Second IMAs, the AMA and the Trust Deed?
In final submissions, Mr Finch accepted that:
(a) at all material times it represented to Woodlawn that it did have, or would have, the power to enter into the IMAs and the AMA and that each of those documents would be or was valid and binding;
(b) at no time did it inform Woodlawn that s 46B approval was required for the IMAs or the AMA; and
(c) Woodlawn would have acted differently had it been told of the need to obtain s 46B approval.
Both Mr Breen and Mr McNamara gave evidence, not challenged in cross-examination, and in any event inherently probable, that they assumed that MVIL had all necessary authority to enter into the IMAs and the AMA and would not have caused Woodlawn to enter into the agreements had they known that ministerial approval was outstanding.
If it is a fact that ministerial approval was not obtained, then, as Woodlawn has submitted, MVIL entered into each of the agreements and enjoyed the services provided by Woodlawn well knowing it did not have the requisite ministerial approval.
In those circumstances, Woodlawn contends for an estoppel by encouragement or expectation of the kind referred to by Brennan J in Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7; 164 CLR 387 at 428-29.
Such an estoppel will arise where:
(a) one party (here Woodlawn) assumed or expected that a particular legal relationship would exist with another party (here MVIL) and that other party would not be free to withdraw from that relationship;
(d) the second party induced the first to adopt the assumption or expectation;
(e) the first party acted, or abstained from acting, in reliance on the assumption or expectation;
(f) the other party knew or intended that the first party do so;
(g) the first party's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and
(h) the second party has failed to avoid that detriment.
In my opinion, each of those elements is present in this case.
Woodlawn has assumed, or expected, that MVIL had obtained all necessary approvals and that it was entering into valid and binding contracts with MVIL. MVIL has induced Woodlawn to adopt that assumption or expectation (by not informing Woodlawn that any necessary consent was outstanding). Woodlawn has acted in reliance on that assumption or expectation (by rendering services under the agreements which it would not have done had it been informed that it would not be paid for those services in accordance with the terms of the agreements). MVIL knew or intended that Woodlawn would so act. Woodlawn has suffered or will suffer detriment if the assumption or expectation is not fulfilled. MVIL has failed to avoid that detriment.
MVIL raises two points in response to this submission.
First it submitted that Woodlawn has not suffered detriment because it is entitled to a quantum meruit if the IMAs and AMA are unenforceable or void and will therefore be paid reasonable remuneration for the work performed.
In my opinion, there are two answers to this submission. First, the fact that Woodlawn would have to resort to a quantum meruit if, as is necessary to assume for purpose of dealing with this submission, the IMAs and AMA are ineffective, and void ab initio, is itself a detriment. MVIL represented that it had power to enter into the agreements and that they were valid and binding. In that event, Woodlawn would be entitled to fees in accordance with its contractual entitlements. That may well be more than such amount as Woodlawn is entitled to under a quantum meruit. Indeed that is precisely MVIL's contention; MVIL contends that Woodlawn's fees are excessive. Further, Woodlawn would have to go to the trouble and expense of establishing the factual basis of a quantum meruit.
Second, and more fundamentally, the detriment that Woodlawn has suffered as a result of its reliance on the representation made by MVIL is entering into the agreements in the first place. The unchallenged evidence of Mr McNamara and Mr Breen is that, but for the representation, they would not have caused Woodlawn to enter the agreements. That, in my opinion, is a sufficient detriment. Woodlawn has entered the agreements, incurred operating expenses and carried out work for which it will receive either nothing if the agreements are void and Woodlawn is obliged to repay the fee it has been paid, or such amount as is recoverable on a quantum meruit (in which event, on MVIL's own case, Woodlawn would recover less, indeed far less than its contractual entitlements).
MVIL also contends that an estoppel cannot run in the face of the statutory proscription in s 46B of the IPBC Act.
The general principles are summarised in Young, Croft and Smith, On Equity, (2009, Lawbook Co) at [12.130]:
"Generally speaking, the operation of statute cannot be negated or constricted by estoppel. This means that, ordinarily, it is not possible for an estoppel to give validity to a transaction or state of affairs rendered invalid by statute. However, the application of this rule is premised on the statute conferring a public right or being otherwise in the public interest, and the principle that 'an individual cannot waive a matter in which the public have an interest', Graham v Ingleby (1848) 1 Ex 651 at 657; 154 ER 277 at 279; cited in Commonwealth v Verwayen (1990) 170 CLR 394 at 486)". (citations otherwise omitted)
As I have said (at [94] above), the IMAs and the AMA are governed by the law of NSW. I very much doubt that the doctrine described the preceding paragraph has any application in relation to foreign statutes such as the IPBC Act.
In any event, the learned authors continue:
"If the authority is entering into a contract, transferring property or otherwise conducting itself in dealings that would ordinarily be governed by private law, the authority is said to be acting in a 'proprietary', 'private' or 'operational' capacity and an estoppel may arise."
The authority cited from the latter proposition is Gummow J in Minister for Immigration and Ethnic Affairs v Kurtovic (1990) 21 FCR 193 at 214 where his Honour said that where a public body enters into contracts it will, "in general, be subject to the ordinary private law rules dealing with contract, tort and property".
As Dr Seddon states in Government Contracts: Federal, State and Local, (5th ed, 2013, The Federation Press) at [5.25]:
"There is no reason why estoppel should not be argued against a government or government instrumentality when it engages in ordinary commercial or other conduct." (citing Australian Crime Commission v Gray [2003] NSWCA 318; Commonwealth v Verwayen (1990) 170 CLR 394; Metropolitan Transit Authority v Waverley Transit Pty Ltd [1991] 1 VR 181; Attorney-General (NSW) v Quin (1990) 170 CLR 1 at 18 (Mason CJ); Laker Airways Ltd v Dept of Trade [1977] QB 643 at 707 (Lord Denning MR); Plimmer v City of Wellington Corp (1884) 9 App Cas 699; Attorney-General v Collom [1916] 2 KB 193 at 204)
Furthermore, in Keboki Business Group Inc and Morobe Provinseal Gavman v Papua New Guinea [1985] PNGLR 369 it was found that the government could not argue it was not bound to a contract due to irregularities in the delegation of authority. Pratt J noted, in obiter, the comments of Lord Denning in Wells v Minister of Housing and Local Government [1967] 2 All ER 1041 at 1044:
"[A] public authority cannot be stopped from doing its...duty, but I do think it can be estopped from relying on technicalities."
In this case my opinion is that MVIL was acting in a "proprietary" or "private" or "operational" capacity. It entered into the IMAs and the AMA with Woodlawn as part of its commercial operations. Thus, in my opinion, it is subject to the operation of "ordinary private laws" which, in this case, includes estoppel.
Conclusion as to s 46B issues
For those reasons, my conclusions as to the s 46B issues are as set out at [26] above; namely that the FCAL Act is not engaged, and that in any event MVIL has not established that ministerial approval was not given. Alternatively, MVIL is estopped from contending that ministerial approval was not given.
Termination of the agreements
On 17 November 2011, MVIL sent a letter to Woodlawn headed:
"Repatriation of MVIL Funds under Management and Termination of Investment Mandate [sic] Agreement".
The letter was written by Mr Moses Koiri, the Acting Chief Executive Officer of MVIL and stated:
"I advise the new Board of Directors appointed by the shareholder of MVIL, the Independent Public Business Corporation...met on 12 November 2011 and resolved that the funds under management by your firm be repatriated within 14 days of receipt of this letter. The funds should be transferred to the MVIL Bank Account [details of which were provided].
As this will also bring the Investment Mandate [sic] Agreement to an end, I would ask you to advise if there are any outstanding fees to be settled so this matter can be amicably finalized [sic]."
The letter did not give any reason for the termination of the "Investment Mandate Agreement". MVIL now asserts an entitlement to rescind the IMAs and AMA under cl 8.4 by reason of an Event of Default and pursuant to s 925A of the Act in the circumstances set out below.
The letter referred to "the" "Investment Mandate Agreement". Later correspondence shows that Mr Koiri was only aware of the First IMA, and not of the Second IMA nor, apparently, the AMA. Nonetheless, Woodlawn does not dispute that the letter was effective to terminate the Second IMA. Woodlawn does dispute that the letter was effective to terminate the AMA.
Woodlawn replied on 29 November 2011. In that letter Mr Breen wrote that:
"Woodlawn currently has two agreements in place with MVIL;
▪ Investment Management Agreement, with a term that concludes on 27 July 2016; and
▪ Asset Management Agreement, with a term that concludes on 27 July 2016
(together the Agreements). For present purposes, each Agreement is substantially the same in the way it deals with termination and the consequences of termination. We have assumed that it is your intention to terminate both Agreements."
Woodlawn then made various assertions about the formal requirements for termination (none of which are now relevant) and stated:
"Once we have received the completed termination notice and redemption request and all additional documentation detailed above, we will redeem the balance of funds, net outstanding fees (see below), to the designated bank account(s) within 28 days as is detailed in the terms of the Agreements".
Mr Breen then estimated the outstanding Investment Management Fee and Asset Management Fee under the IMA as being $A5,981,672 and $A10,554,456 (excluding GST) respectively and the fees due under the AMA as $A2,278,964 (including GST).
MVIL responded on 6 January 2012 with a further letter signed by Mr Koiri. That letter made clear Mr Koiri's ignorance of the Second IMA when he wrote:
"In the second paragraph of your letter you say that the term of Woodlawn's investment agreements with MVIL conclude on 27 July 2016. That is wrong. The term of the agreement, described in clause 8.1 as the Initial Term, ended on 22 July 2011, two years after the agreement was signed."
Mr Koiri's letter of 6 January 2012 continued by asserting that "there are no termination fees payable" and demanding that "the total sums in MVIL's investments with Woodlawn are to be transferred, without any deduction, to MVIL's bank account...".
On 13 February 2013, MVIL's solicitors wrote a letter which referred, in terms, to the Second IMA and the AMA. It is common ground that, on any view, this letter had the effect of terminating the AMA.
In these circumstances, a number of issues arise concerning termination. The first is the proper construction of cll 8.2, 8.3 and 8.4 of the Second IMA and the AMA. The issue of construction is whether a termination under cl 8.4 for cause (that is, relying on an Event of Default), as opposed to a termination under cl 8.2 (an "Early Termination") prevents Woodlawn from claiming fees beyond the termination date. The second issue is whether the effect of MVIL's letter of 17 November 2011 was to terminate the AMA, as well as the IMAs. The third is whether the operation of the doctrine in Shepherd v Felt & Textiles of Australia Limited (1931) 45 CLR 359 has the effect that, assuming the existence of an Event of Default on 17 November 2011, the absence of reference to it in MVIL's letter prevents MVIL from characterising the termination as an Event of Default termination under cl 8.4, as opposed to an Early Termination under cl 8.2.
The proper construction of cll 8.2, 8.3 and 8.4
Clauses 8.2 and 8.3 deal with Early Termination. Clause 8.2 gives MVIL a right to terminate by giving not less than 28 business days' notice. Although cl 8.2 appears only to give MVIL a "right to terminate", the last sentence of cl 8.2 states that "neither party may invoke termination without reasonable cause". Clause 8.3 provides that if MVIL terminates pursuant to cl 8.2 then MVIL must pay Woodlawn not only "any outstanding fees payable...up to the termination date" but also investment management, administration and foreign exchange hedging fees (but not a performance fee) "up until expiry of the Initial Term".
Clause 8.4 provides for termination on the occurrence of an Event of Default but is silent as to the fees that are payable to Woodlawn in that event.
MVIL accepted that, upon termination by MVIL under cl 8.2 or 8.4, Woodlawn would be entitled to retain fees already paid by MVIL to it, as any such termination would not be a termination ab initio. In my opinion, the concession is well made. I would go further and hold that, upon a termination by MVIL under either cl 8.2 or 8.4, Woodlawn would be entitled to retain fees payable to it up to the date of termination. This conclusion is compelled, in my opinion, by the provision in cl 8.5(b) that termination of the IMAs or AMA did not affect any claim by Woodlawn for "accrued fees".
The issue that divided the parties was whether, upon a termination under cl 8.4, Woodlawn would also be entitled to its investment management, administration and foreign exchange hedging fees up to the expiry of the Initial Term (as is the case under an "Earlier termination" under cll 8.2 and 8.3).
The matter is, of course, to be determined objectively by reference to what a reasonable person would have understood the terms to mean; see for example, most recently Newey v Westpac Banking Corporation [2014] NSWCA 319 at [84] per Gleeson JA (with whose conclusions Basten and Meagher JJA agreed) citing the familiar cases of Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; 218 CLR 451 at [22]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; 219 CLR 165 at [40].
The most recent statement by the High Court on the question is in Electricity Generation Corp v Woodside Energy Ltd [2014] HCA 7; 88 ALJR 44 where French CJ, Hayne, Crennan, Kiefel JJ said at [35]:
"...this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties ... intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'." (citations omitted)
Clause 8.3 provided, in terms, that if MVlL effected an Early Termination (that is, one with "reasonable cause" but not arising out of an Event of Default by Woodlawn) then Woodlawn was not only entitled to "outstanding fees", but also to investment management, administration and foreign exchange hedging fees, calculated to the expiry of the Initial Term (that is to 27 July 2016).
However, in dealing with termination for an Event of Default, the parties have made no provision for the payment to Woodlawn of any fees (in the event that it is the party in default) beyond what is provided in cl 8.5(b) for "accrued fees".
That suggests to me that the parties did not intend that, in those circumstances, Woodlawn would be entitled to anything more. It would be a commercially curious, if not irrational result if Woodlawn could recover its investment management and like fees (all of which are calculated by reference to the value of the Portfolio) to the expiry of the Initial Term in the event that MVIL was entitled to terminate for breach. The result would be that Woodlawn could, with effective impunity, breach its obligations under the agreements secure in the knowledge that, nonetheless, its fees were recoverable as if there had been no breach; and no matter how far in the future may be the expiry of the Initial Term, nor how egregious the breach. I cannot accept that the parties intended this result. The language they have used suggests a contrary conclusion.
In my opinion, reasonable business people in the position of the parties would understand, from the absence of any such entitlement in cl 8.4, that if MVIL could terminate the IMAs or the AMA because of an Event of Default on the part of Woodlawn, Woodlawn would not be entitled to any fees beyond those "accrued" at the date of termination.
In my opinion, reasonable business people in the position of the parties would not expect, absent specific provision, that were MVIL entitled to terminate as a result of a default by Woodlawn, Woodlawn would be entitled to investment management and other like fees from termination until 27 July 2016.
Accordingly, my opinion is that, on the proper construction of the IMAs, if MVIL was entitled to terminate under cl 8.4 by reason of an Event of Default on the part of Woodlawn, Woodlawn has no entitlement to fees beyond those that have "accrued" at termination.
The date of termination of the AMA
MVIL's 17 November 2011 letter did not refer, in terms, to either the IMA or the AMA. Instead it referred to "the Investment Mandate Agreement".
The question which arises is whether the 17 November 2011 letter should be construed as being a notice by MVIL to terminate all of the agreements then on foot between it and Woodlawn.
Neither the IMA or the AMA prescribe any "indispensable condition" for the effective exercise of a notice of termination (to adopt the words of Lord Steyn in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 767) other than that the notice be in writing, and if under cl 8.2 be "not less than 28 Business Days". A notice under cl 8.2 could be given "at any time". In fact MVIL's letter of 17 November 2011 demanded "repatriation" of the funds within 14 days. Before me, Woodlawn did not seek to make anything of that aspect of the matter.
In my opinion, the question of construction of the letter should be approached objectively. As Lord Steyn said in Mannai Investment Co Ltd "the issue is how a reasonable recipient would have understood the notices" and in that regard "the notices must be construed taking into account the relevant objective contextual scene" (at 767); see also Lord Hoffmann at 780 and Lord Clyde at 782.
In my opinion, a reasonable business person in the position of Woodlawn would have read MVIL's letter of 17 November 2011 as purporting to terminate all of the agreements between them.
This is precisely how Woodlawn did read the letter. Thus Mr Breen stated in Woodlawn's letter of 29 November 2011 that "[w]e have assumed that it is your intention to terminate both Agreements". Mr Breen gave similar evidence in cross-examination.
In those circumstances my opinion is that MVIL's letter of 17 November 2011 was effective to terminate both the Second IMA and the AMA.
The Shepherd v Felt & Textiles of Australia Ltd point
As I have said, MVIL's letter of 17 November 2011 did not express any reason for the termination.
The letter did not assert that Woodlawn was in default. It also enquired as to whether there were "any outstanding fees to be settled so this matter can be amicably finalized [sic]".
Woodlawn submitted that the letter was a "notice which asserts a right of early termination without any allocation of default" and thus purported to be a notice under cl 8.2 (for "Early Termination) of the IMA, and not under cl 8.4 (for an Event of Default).
In those circumstances, Mr Kelly submitted:
"What MVIL now seeks to do is to not only assert an alternative basis for termination, but one which has the added characteristic that it is of a different type, and it would, if so, take the termination out of the category under which Woodlawn is entitled to its accrued rights, and treat the termination as a termination under cl 8.4. That's not justifiable in terms of the principle in Shepherd v Felt & Textiles. All Shepherd v Felt & Textiles tells us is [that] you can rely upon a reason to justify dismissal [sic; termination], even though you didn't know about it at the time. That's quite a different kettle of fish to one in which you seek to alter accrued rights after the event of termination by now purporting to terminate not only for different reasons but on a different legal basis."
Woodlawn thus submitted, in effect, that, on its proper construction, MVIL's letter of 17 November 2011 was an Early Termination notice under cl 8.2 of the IMAs and AMA, and not an Event of Default notice under cl 8.4 and that nothing which fell from the High Court in Shepherd v Felt & Textiles permitted MVIL to now rely on the existence of any Event of Default.
I do not accept this submission.
First, I see the enquiry in the letter as to "outstanding fees" as being neutral. The reference to "outstanding fees" is as apposite to "accrued fees" (to which Woodlawn is entitled in any event) as it is to investment management and other like fees to the end of the Initial Term (to which Woodlawn is, in my opinion, only entitled in the event of a termination otherwise than for default).
It is true that in Shepherd v Felt & Textile the Court's primary concern was to refute the argument that a party cannot, after specifying an invalid ground, rely on a valid ground of which it was unaware at the time of termination. Thus, Dixon J (at 378) cited with approval the observations of Greer J in Taylor v Oakes, Roncoroni & Co [1922] All ER 866 at 869:
"It is a long established rule of law that a contracting party, who, after he has become entitled to refuse performance of his contractual obligations, gives a wrong reason for his refusal, does not thereby deprive himself of a justification which in fact existed, whether he was aware of it or not".
However, other members of the Court expressed the principle more broadly. Thus Rich J said (at 371):
"The question is whether the defendant was entitled to do what it did, not whether the reason why it exercised the rights it in fact had was a good or bad one".
And Starke J (at 373):
"If there were, in fact, any circumstances in existence at the time of the termination of the agreement which could have justified the respondent in so terminating it, then it may justify the termination by subsequent proof of those circumstances". (citations omitted)
Here, if there was an Event of Default it would be open to MVIL to terminate under cl 8.2 of the IMAs or AMA (Early Termination for "reasonable cause") or, under cl 8.4.
However, as I have said, neither clause prescribes any condition to be satisfied for the exercise of the notice of, apart from the requirement in cl 8.2 that not less than 28 business days' notice be given. As I have said, Woodlawn did not seek to make anything of the fact that MVIL's letter of 17 November 2011 sought repatriation of the funds within 14 days, rather than 28 days. Indeed, if any suggestion of election could arise from MVIL's demand for repatriation of the funds in 14, rather than 28 days, it is that it was making demand under cl 8.4 (which specifies no time limit), rather than cl 8.2.
Such misapprehensions as the author of the letter may have had are, in my opinion, not relevant to the question of what legal consequences flow from the sending of the letter. MVIL is now entitled to rely upon whatever ground was available to it to terminate the agreements, including such Event of Default of Woodlawn as may have existed on 17 November 2011 (whether or not known to the author of the letter, or to MVIL as a corporation).
If, in fact, Woodlawn was in default under the IMAs or the AMA on 17 November 2011, MVIL was entitled, in my opinion, to such remedy as was available to it under the IMAs and AMA arising from such default. That is, in that event, MVIL was entitled to have terminated under cl 8.4 and is to be taken to have done so.
Commingling of funds
The evidence revealed two circumstances in which funds held by Woodlawn on trust for MVIL were commingled with Woodlawn's own funds.
The warranty in cl 9.1(c) of the IMAs and cl 9.1(b) of the AMA
As I have mentioned, by cl 9.1(c) of the IMAs and cl 9.1(b) of the AMA, Woodlawn warranted to MVIL that:
"...it will, at all times during the term of this deed, be the holder of all licences and other authorities required to be held under all applicable legalisation governing the activities of [Woodlawn]...".
I have held that, at all relevant times, Woodlawn was obliged to hold an AFSL. It did not do so until 29 July 2011.
It follows that at the time the warranties were given, they were false and that, by giving the warranties, Woodlawn engaged in misleading or deceptive conduct.
MVIL submitted that, had the warranties not been given, and had Woodlawn disclosed that it needed, but did not have, an AFSL (or, I assume, had MVIL otherwise become aware of these matters), it would not have entered any agreement with Woodlawn and would thus not have suffered the loss it attributes to Woodlawn's conduct in breach of the Dual Object Term, or at all.
I have referred to the letter that Mr Breen wrote to Mr Poponawa at MVIL on 6 July 2011 (see [413] above) and to the conversation which occurred between Mr Breen, Mr McNamara, Dr Mua and Mr Poponawa on 7 July 2011 (see [416] to [417] above).
In an affidavit Mr Poponawa deposed:
"Prior to the 6 July 2011 letter Woodlawn had not at any point during the management of Funds raised any issues in regard to its licensing obligations, nor did I know anything about Australia Financial Services Licences. Had I known Woodlawn required an Australia Financial Services Licence, but did not have the licence and was taking no steps to obtain the necessary licence when Woodlawn first proposed to provide its financial services to MVIL, I would have recommended to the MVIL board against engaging Woodlawn." (emphasis added)
Woodlawn submitted that:
"That piece of evidence is not evidence of what MVIL would have done. It is evidence of what Mr Poponawa would have done - and it leaves open the question of what MVIL, by its board of directors, or chief executive officer, Dr Mua, would have done. Would the board [have] not gone ahead at all or merely delayed commencement of the First IMA while the question of an AFSL was raised and Woodlawn took any steps that were acquired to obtain one? Mr Poponawa does not say [that he] would have recommended to the board against engaging MVIL had Woodlawn been 'taking steps' to obtain a licence - which is consistent with the unchallenged response of he and Dr Mua in the conversation of 7 July 2011."
On the other hand MVIL submitted that the conclusion that MVIL would not have entered into any agreement with Woodlawn at all, had Woodlawn revealed that it required but did not have an AFSL, was inherently probable and drew attention to the familiar observations of Wilson J in Gould v Vaggelas (1984) 157 CLR 215 at 236:
"If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation."
MVIL submitted:
"In this case the representation (a) is of a character which is likely to be relied on and (b) was included as one of few warranties in each agreement demonstrating the objective materiality of the representation. A Gould v Vaggelas type inference is available, and should be drawn consistent with Mr Poponawa's evidence."
The matter for consideration is what MVIL would have done had Woodlawn disclosed, prior to entry into the First IMA on 22 July 2009, that in order to carry out the services contemplated by the First IMA, it required, but did not have an AFSL; or had MVIL otherwise become aware of those matters.
The only evidence to which my attention was directed indicative of Mr McNamara's and Mr Breen's actual state of mind in 2009 concerning the need for Woodlawn to hold an AFSL emerges from an exchange of correspondence between Mr McNamara and ASIC in December 2009 (some six months after MVIL and Woodlawn entered the First IMA).
On 7 December 2009, ASIC wrote to Mr McNamara at Woodlawn:
"I am writing to you as sole director of Woodlawn, as it has come to the attention of ASIC that Woodlawn may be carrying on a financial services business without holding an Australian Financial Services Licence ("AFSL"). You should be aware by now that from 11 March 2004, the [Corporations] Act requires any person carrying on a financial services business to hold an AFSL or be an authorised representative of a person holding an AFSL."
Mr McNamara replied on 18 December 2009:
"Woodlawn is a privately owned and operated Australian company. Woodlawn was introduced to an offshore wholesale institutional investor on the basis Woodlawn would act as its agent and invest in the Australian financial markets on the investor's behalf. The majority of the funds were invested in cash, with the balance in equities and derivatives. All securities trading has been conducted through licensed brokers.
At the time of the engagement, I did obtain advice that as Woodlawn and I were only acting as the Australian agent for the investor, we were not likely to require an Australian Financial Services Licence.
On receipt of your letter, I sought fresh legal advice which indicated an AFSL may be required notwithstanding the activities were limited to acting as the agent of the one offshore institutional investor.
On receipt of this advice, I immediately arranged for myself to be appointed a representative of Australian Mutual Holdings Limited...("AMHL"). A copy of the appointment letter is attached. AMHL has also been provided with a copy of your letter and this response." (emphasis added)
The "appointment letter" referred to in the last paragraph of Mr McNamara's letter was not in evidence before me. I infer from the terms of Mr McNamara's letter that Australia Mutual Holdings Ltd was a company related in some way to Woodlawn that did hold an AFSL.
It was not suggested to Mr McNamara in cross-examination that he did not "at the time of the engagement" with the "offshore wholesale institutional investor" (obviously MVIL) obtain the "advice" referred to in the second paragraph quoted above, or that he did not "on receipt of your letter" obtain the "fresh legal advice" referred to in the third paragraph.
Several months later, on 15 February 2010, Mr McNamara wrote to Mr Sean Robertson, a partner of McCullough Robertson, solicitors of Brisbane, enclosing "agreements between Woodlawn Capital and Motor Vehicles Insurances Ltd" (which I assume to have been the First IMA and the Mandate).
Mr McNamara continued:
"Additionally regarding the AFSL licensing process, at your convenience, could you provide
● an estimate of initial set up costs and times,
● estimated ongoing costs,
● costs to close (if required).
At this stage we will be dealing with only wholesale clients and it is most likely they will all be domiciled offshore. I am unsure as to whether we require licenses to both advise and deal?"
On 17 February 2010 McCullough Robertson sent Woodlawn what appears to be a proforma letter setting out details of the process involved in the application for an AFSL and providing a fee estimate. There the matter appeared to rest until May 2011.
Email correspondence between Mr Breen and Mr Robertson in May 2011 reveals that a dispute arose as to whether or not Mr Robertson had earlier (I would infer in 2009 or 2010) advised Woodlawn of the need to obtain an AFSL. The evidence suggests that, in May 2011, Mr Robertson advised Messrs Breen and McNamara that Woodlawn "have always needed an AFSL". On the other hand, Mr Breen referred to "your revised opinion" and your "current opinion" which he said had come as a "great shock" to Mr McNamara and him. I am not able to reach any conclusion as to the rights or wrongs of that dispute. Evidently, it led Woodlawn to obtain the advice of Baker & McKenzie which, in turn, led to Woodlawn applying for an AFSL in June 2011.
Mr McNamara's correspondence with ASIC in December 2009, and his enquiry of Mr Robertson in February 2010 suggests to me that Mr McNamara was alive to the issue of whether Woodlawn required an AFSL. His letter to ASIC of 18 December 2009 suggests, indeed reveals, that he had sought advice about the matter "at the time of the engagement" with MVIL, and "on receipt" of ASIC's letter of 7 December 2009. In his email to Mr Robertson of 15 February 2010, Mr McNamara expressed uncertainty as to the need for an AFSL.
In those circumstances, I could not conclude that Mr McNamara would have knowingly committed Woodlawn to the provision of services to MVIL for which an AFSL was needed, without taking steps to ensure that Woodlawn had an AFSL. The contrary was not put to him in cross-examination.
In those circumstances, in order to consider the hypothetical question of what would have happened had the issue of the need for an AFSL arisen prior to entry by Woodlawn into the First IMA (whether by disclosure by Woodlawn or otherwise), it would not in my opinion be realistic to assume, as is implicit in Mr Poponawa's evidence, that not only was it revealed that Woodlawn needed an AFSL but that Woodlawn "was taking no steps to obtain the necessary licence" (see [461] above).
Further, it would be necessary to consider all the circumstances that led to MVIL considering Woodlawn's appointment as its investment manager, in order to understand what motivated MVIL to consider Woodlawn's appointment in the first place, and thus place in context the likely impact of the hypothetical revelation that Woodlawn needed, but did not currently have, an AFSL. I was not taken to any such evidence and no submissions were addressed to me on this topic. Obviously enough, for one reason or another, MVIL was persuaded that its best interests lay in appointing Woodlawn. In those circumstances I consider that I should assume that the parties were otherwise inclined to enter into the First IMA, that is to say that MVIL was otherwise content to appoint Woodlawn to manage its Portfolio.
Further, what am I to assume to be the circumstances in which the question arose? What am I to assume Mr McNamara or Mr Breen would have said about the need to obtain an AFSL? Presumably, Mr McNamara would have referred to the advice that, in his letter to ASIC of 18 December 2009, he stated that he had obtained "at the time of the engagement". I can only speculate what would have been said about that, and how that would have influenced MVIL's decision making process. These matters were not explored in cross-examination.
I am not able to conclude in these circumstances that, had the question of the necessity for Woodlawn to have an AFSL arisen prior to the execution of the First IMA, Mr Poponawa would simply have recommended to the Board of MVIL against appointing Woodlawn, or that the Board would have so decided.
It seems to me to be just as likely, indeed more probable that, had the question arisen, Woodlawn and MVIL would have acted as they did in July 2011; namely Woodlawn would have given an explanation of the advice it had received to date and, undertaken to seek an AFSL if necessary, and MVIL would have been content to proceed on that basis.
If that be wrong, and if revelation to MVIL that Woodlawn needed, but did not have, an AFSL would have led MVIL to decide not to engage Woodlawn (that is, if there had been "no transaction"), the question arises as to what position MVIL would now be in.
In that regard MVIL submitted:
"The alternative universe (what would have happened if the misleading or deceptive conduct had not happened) is that MVIL [would] not have dealt with Woodlawn, and would not have signed the IMAs and related agreements. It is acknowledged though that MVIL would have retained a competent manager which would have charged reasonable fees. It should also be assumed that [the] broker would have complied with MVIL's aims and constraints. Accordingly the alternative universe is one in which MVIL's funds invested with an aim to do a little better than the ASX200 whilst avoiding the sorts of derivate exposures in which Woodlawn engaged."
This submission invites me to engage in an exercise similar to that which arises in relation to MVIL's damages claim in respect of Woodlawn's breach of the Dual Object Term.
Mr Risk did express the opinion that Woodlawn's combined administration, investment management and foreign exchange administration fee of 4.5 per cent of the value of the Portfolio was "excessive". Mr Risk opined that these fees were considerably higher than industry practice in the period from 2009 to 2011; which are normally in the vicinity of 0.4 - 1.2 per cent per annum extending to 1.2 - 2.0 per cent per annum for more specialised funds (albeit in the context of his assumption that it was a term of the Mandate that 80 per cent of MVIL's funds be retained on cash deposit; a proposition now abandoned by MVIL - see [34] above).
Otherwise, this submission asks me to assume that any other "competent manager" would have caused MVIL's Portfolio to weather the storm in the financial markets of July and August 2011 without sustaining any loss greater than that suffered by the ASX200. For the reasons I have set out in relation to MVIL's damages claim for breach of the Dual Object Term, my conclusion is that the evidence is insufficient for me to reach such a conclusion.
The letter of 6 July 2011
MVIL alleges that Woodlawn's letter of 6 July 2011 (which I have set out at [413] above) was misleading as it "conveyed uncertainty about whether Woodlawn required an AFSL and the consequence of not having an AFSL".
MVIL made the same submission about the statements made by Mr Breen and Mr McNamara to Dr Mua and Mr Poponawa on 7 July 2011 (assuming, as I have found, that those conversations took place).
MVIL contends that Woodlawn's statement in the letter that "an ASIC review" had indicated that Woodlawn had "met its licensing requirements" and that Mr Breen's statement (at [416]) that "ASIC raised" with Woodlawn the need for an AFSL licence "and did not require us to have one" was misleading.
As I have said, on 7 December 2009, ASIC wrote to Woodlawn stating that "it is has come to the attention of ASIC that Woodlawn may be carrying on a financial services business without holding" an AFSL.
Mr McNamara replied by his letter of 18 December 2009. There is no evidence of any response from ASIC to this letter. In those circumstances it may not have been accurate for Mr Breen to say in Woodlawn's letter of 6 July 2011 that there had been "an ASIC review" the result of which was that Woodlawn had "met its licensing requirements" or that ASIC "did not require" Woodlawn to have an AFSL.
MVIL also alleged that it was misleading for Woodlawn to say, in its letter that its "initial legal advice" was that Woodlawn had met its licensing requirements. However, as I have said, McNamara was not challenged in cross-examination about his statement in his 18 December 2009 letter about taking advice "at the time of the engagement".
Woodlawn's reference in its letter of 6 July 2011 to having "subsequently" received "separate legal advice" was evidently a reference to advice it received from Baker & Mackenzie in or about June 2011.
The only significance that MVIL attached to this conduct was as follows:
"The significance of putting the misleading or deceptive conduct this way is only if MVIL is held to otherwise have lost its s 925A right because of delay. Accordingly if the Court has already rejected delay as a defence to the s 925A argument, this part of the case may be ignored. The real point of this exercise is that Woodlawn should not be permitted to rely on any alleged delay it caused or contributed to so as to defeat MVIL's claim. This is a concept the Court may already have grappled with in the context of s 925A as set out above. The second element of the misleading or deceptive conduct case simply gives statutory force to the conduct relied. Accordingly the consequence is not a claim for damages, but the source of power preventing Woodlawn from relying on its own conduct alleging delay".
I understood this submission, which was barely developed orally, to mean that assuming that I were to find that MVIL has lost its right to rescind under s 925A of the Act (as I have - see [447] and [451] above) then MVIL's delay in not terminating the agreements until 17 November 2011 could be explained or justified by reference to the matters I have set out above concerning the 6 July 2011 letter.
The question which arises is as to whether MVIL would have acted differently if, on 6 and 7 July 2011, Woodlawn had given a more fulsome account of the position; in particular whether MVIL would have terminated the agreements then, rather than on 17 November 2011.
I am not satisfied that revelation of the "true" position would have made any difference to MVIL's actions.
As I have discussed above, it is by no means clear what prompted MVIL to send its termination letter of 17 November 2011. I am not satisfied that a more complete statement by Woodlawn of its position so far as concerns its AFSL in July 2011 would have caused MVIL to terminate earlier.
Was GST payable on Woodlawn's fees?
This is the first of two discrete issues which arise concerning the calculation of the Woodlawn's fees (assuming they are recoverable). A number of other such issues were resolved by the parties during the course of the hearing. The question of the date of termination of the AMA (see [171] - [177] above) also touches on the question of calculation of fees.
Woodlawn included GST of $2,690,534 in its tax invoices for fees. It has remitted to the Australian Tax Office that part of the fees paid to it by MIVIL as represented GST.
At all relevant times, Woodlawn acted as a trustee of MVIL's funds, and thus held the funds on trust for MVIL ("the Trust"). The Trust arose from the terms of the Trust Deed, the acknowledgment in cl 9.3 of the Second IMA that Woodlawn held the Portfolio on trust for MVIL, and the definition of Portfolio itself in the Second IMA (which referred to "all funds held on trust" by Woodlawn "on behalf of" MVIL).
So far as concerns the AMA, Woodlawn accepts that GST was not payable in respect of services rendered to MVIL outside Australia. The controversy between the parties was confined to the question of whether GST was payable for the services rendered by Woodlawn under the IMA.
The issue that divides the parties is whether the services supplied by Woodlawn pursuant to the IMAs and the AMA were made "to" MVIL, or "to" the Trust.
The "GST Act" (A New Tax System (Goods and Services) Act 1999 (Cth) provides:
(a) GST is payable on, relevantly, "taxable supplies" (s 7-1);
(b) a party makes a "taxable supply" if that party makes the supply "for consideration" unless such taxable supple is "GST-free" (s 9-5);
(c) "supply" is "any form of supply whatsoever" including the "provision of advice or information" and a "financial supply" (s 9-10); and
(d) a supply that is "made to a non-resident who is not in Australia when the thing supplied is done" is an example of a "GST-free supply" (s 38-190, and Item 2 of the table thereto).
If the supply was "to" MVIL, a "non-resident" for the purposes the GST Act, then the supply is "GST-free" for the purposes of the GST Act (see ss 7-1, 9-5, 9-10 and 39-190, and Item 2 of the table thereto).
In my opinion, examination of the IMAs reveals that Woodlawn "supplied" its "advice" and "financial supply" to MVIL.
Thus:
(a) by cl 2(a) MVIL appointed Woodlawn "to manage the Portfolio on the terms set out" in the IMAs;
(b) Woodlawn undertook the duties set forth in cl 3.1 of the IMAs, which duties were plainly owed to MVIL;
(c) clause 4.2 of the IMAs stated, in terms, that the services under the IMAs were "performed for MVIL";
(d) although Woodlawn was entitled to take its fees from the monies held by it on trust (cll 5.2, 5.3 and 5.4 of the Mandate which state the fees may be "withdrawn from the Portfolio" and cl 5.11 of the Trust Deed to which entitles Woodlawn to be paid "from the Trust Property"), MVIL (and not "the Trust") was the party obliged to pay those fees (for example, cl 6.1(a) of the IMA);
(e) the release and indemnity in cl 5 of the Second IMA is from MVIL; and
(f) the party entitled to terminate the Second IMA is MVIL.
The Mandate itself also demonstrates that the services were provided "to" MVIL. Thus, the "Investment Aims" were expressed to be those of MVIL, and "The Investment Strategy" was expressed to be one to be adopted by Woodlawn "in order to achieve" those "Investment Aims".
On 22 July 2014, Woodlawn received a private ruling from the ATO to the effect that GST was payable on the services it supplied to MVIL under the IMAs and the AMA.
It is common ground that the Private Ruling is not binding on Woodlawn or the Commissioner of Taxation. The form of the Private Ruling suggests that although the ATO was provided with a copy of the Mandate and the Trust Deed, it was not provided with a copy of the IMAs itself. Perhaps for that reason, the Private Ruling proceeds upon the assumption that the relevant supply was by Woodlawn "to the Trust". The Private Ruling thus proceeds on what I regard to be a false basis.
For these reasons, my conclusion is that GST was not payable in respect of the services rendered by Woodlawn under the IMAs. As I have mentioned, it is common ground that GST was not payable in respect of the services rendered by Woodlawn under the AMA to the extent that those services dealt with property beyond that the subject of the IMAs (that is to say property outside Australia).
I will invite submissions as to what consequences flow from this conclusion including as to whether the deduction by Woodlawn of GST was an Event of Default.
Was Woodlawn entitled to calculate fees on previously earned but unpaid fees?
Two questions of construction arise.
The first is in relation to the cll 5.3, 5.4 and 5.5 of the Mandate (which deal with the calculation of Woodlawn's Investment Management Fee, Administration Fee and Foreign Exchange Hedging Fee).
Each of those clauses is in the following terms:
"In consideration for [Woodlawn] providing the services specified in this deed, [Woodlawn] is entitled to [the relevant fee] at the rate of [the relevant amount] % per annum on the gross Portfolio value (before fees) determined on the last day of each month.
This fee accrues daily, is payable monthly and will be withdrawn from the Portfolio by [Woodlawn] within 7 days from the last day of the relevant month, or as otherwise determined by [Woodlawn] in its absolute discretion, in accordance with this deed."
It is common ground that, by reason of the second of the two paragraphs in these clauses, Woodlawn had a discretion as to whether or not to withdraw its fees from the Portfolio within seven days of the last day of the month in question.
What is contentious is the role played by the words "(before fees)" in the first paragraph.
The effect of the two paragraphs is that the relevant fee "accrues daily" but is "payable monthly" and is to be "determined on the last day of each month".
In my opinion, reasonable business people in the position of the parties (see Electricity Generation v Woodside referred to at [164] above) would understand the effect of the words "(before fees)" to be that the relevant fee was to be calculated on the last day of each month by reference to the "gross Portfolio value" on that day without deduction of the fee to be calculated for that month. That is not a surprising result, as the subparagraphs are directed to the question of how to calculate the relevant fee for that month.
I do not, however, consider that reasonable business people in the position of the parties would have intended that Woodlawn could increase the amount of fees payable to it by simply exercising its discretion not to withdraw its fees from the Portfolio for a particular month, and thereby inflate the value of the Portfolio for the purpose of calculation of its fees for the next month.
Accordingly, my opinion is that reasonable business people in the position of the parties would consider that although fees for the month in question should be calculated by reference to the "gross Portfolio value" without deduction of the fee to be calculated for that month, such fees would be calculated after deduction of fees paid, or payable, for earlier months (whether or not Woodlawn had actually withdrawn those fees from the Portfolio).
A second, and similar, question of construction arises in respect of Woodlawn's Performance fee.
Clause 5.2 of the Mandate provides that:
"[Woodlawn] is entitled to receive a performance fee from MVIL of 20% of the New Profit.
This fee accrues daily, its payable quarterly and will be withdrawn from the portfolio by [Woodlawn] within 7 days from the last day of the relevant quarter, or as otherwise determined by [Woodlawn] in its absolute discretion, in accordance with this deed."
One of the integers in the calculation of "New Profit" is "Return" which is defined as follows:
"Return means, in respect of the investment activities of the Portfolio and for a Quarter, the amount (which may be negative) of all realised and unrealised gains (including interest accrued on investments, and before deduction of Administration and Investment Management Fees) less [a number of matters]".
Again, the debate between the parties as to the role played by the words "before deduction of Administration and Investment Management Fees".
By parity of reasoning with my conclusions concerning the Investment Management and Administration Fees themselves, my conclusion is that reasonable business people in the position of the parties would have intended the words "before deduction of Administration and Investment Management Fees" to have the effect that Woodlawn's Performance Fee for the relevant quarter would be calculated by reference to the value of the Portfolio without deduction for the Administration and Investment Management Fees due to Woodlawn for the three months of that quarter; but after deduction of such fees paid, or payable, for earlier quarters.
In my opinion, cll 5.2 to 5.5 of the Mandate should be construed accordingly.
Woodlawn's cross claim for injurious falsehood
Woodlawn's claim for injurious falsehood arises from a "Public Statement" made by Sir Mekere Morauta, then the Minister for Public Enterprises, on 23 November 2011.
That public statement was in the following terms:
"The Minister for Public Enterprsies, Sir Mekere Morauta, said National Executive Council had endorsed changes to the board of MVIL Limited.
The new members are Mr Bonny Igime, Mr Steven Pim, Ms Veronica Waieng, Dr Bangi Kumdim and Mr John Tuka.
In announcing the appointments, Sir Mekere stressed that no Public Enterprise chairman would be an executive chairman.
'Reports that executive chairman have been appointed are wrong.
'These new appointments are part of the O'Neill-Namah Government's reforms of IPBC and its Public Enterprises, and I look forward to working with them.
'One of the new board's first jobs will be to recover about K96 million missing from MVIL.'
Sir Mekere said the money was the proceeds of the sale of 530,105,100 shares in Bank South Pacific which were owned by MVIL. The sale, to an Australian company called Nominees Niugini Limited, is now the subject of a police investigation.
MVIL sold the shares when under the control of the former Minister for Public Enterprises, Arthur Somare, and the former IPBC management.
Proper processes had not been followed, and the sale is in breach of Section 45B of the IPBC Act and Section 110 of the Companies Act.
The sale was not approved by the IPBC board, as required, and there was no shareholders' resolution approving the sale, as required.
The new IPBC board has instructed MVIL to rescind the sale contract, called an Equity Monetisation Contract Agreement. IPBC has begun legal proceedings against MVIL and Nominees Niugini.
The money is being held in an account owned by a company called Woodlawn Capital, at the Commonwealth Bank in Lismore, New South Wales.
Sire Mekere today called on the former managing director of MVIL, Dr John Mua, to help recover the money.
'Dr Mua could save the nation a lot of money by assisting us in the recovery of the K96 million and its return to IPBC.
'For the nation to recover the money through court proceedings would be expensive and time-consuming. I would like Dr Mua to help us avoid this'." (emphasis added)
It is common ground that the elements of the tort of injurious falsehood are as stated by Gummow J in Palmer Bruyn & Parker Pty Ltd v Parsons [2001] HCA 69; (2001) 208 CLR 388 at [52], namely:
"(1) a false statement of or concerning the plaintiff's goods or business; (2) publication of that statement by the defendant to a third person; (3) malice on the part of the defendant; and (4) proof by the plaintiff of actual damage (which may include a general loss of business) suffered as a result of the statement."
Woodlawn contends that the statement was made by MVIL because, first, MVIL is an instrumentality of the Crown in right of PNG, and second, that Sir Mekere was the Minister of State with responsibility for MVIL. Third, Woodlawn submitted that:
"The statement was published by MVIL. It is an instrumentality of the Crown in right of PNG. Sir Mekere Morauta was the Minister of State with responsibility for MVIL. The terms of the statement make it clear that the author is acting for an on behalf of MVIL in revealing that it had been the victim of corruption, denouncing the parties involved and demanding assistance on its behalf to recover the 'missing money'."
In my opinion there is no substance in this submission. MVIL did not publish the statement. The Minister did.
There is no evidence before me to suggest that MVIL played any part in the preparation, production and publication of the statement. The evidence does not enable me to conclude that Sir Mekere was "acting for and on behalf of MVIL". Assuming the Sir Mekere was the Minister of State responsible for MVIL, it does not follow that MVIL is responsible for statements made by him.
Further issues
After the parties have had an opportunity to consider these reasons, I will invite submissions as to the future course of the proceedings.
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Amendments
01 April 2015 - Quote at par 55: third last sentence of quote inserted
Decision last updated: 01 April 2015
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