Optic Security Australia 2 Pty Limited v YC Investments (NT) Pty Ltd - [2023] FCA 495

FEDERAL COURT OF AUSTRALIA
Optic Security Australia 2 Pty Limited v YC Investments (NT) Pty Ltd [2023] FCA 495

File number: NTD 23 of 2020

Judgment of: CHARLESWORTH J

Date of judgment: 19 May 2023

Catchwords:
CONTRACTS – agreement providing for the sale of shares in multiple entities following a due diligence process – agreement containing contractual warranties concerning the truth and accuracy of representations made in the due diligence process – whether a claim founded in breach of the warranties is precluded from enforcement by time bar provisions in the agreement – claim barred from enforcement – applicant failing to prove breach to requisite standard in any event

CONTRACTS – cross-claim for sum of money payable under a contract – cross-respondent seeking set-off of judgments – cross-respondent not securing any judgment – cross-respondent failed to otherwise put forward a substantive defence to the allegation of non-payment – payment owing by the cross-respondent to be made forthwith

CONSUMER LAW – action for damages and other remedies founded on alleged contraventions of s 18 of the Australian Consumer Law – whether representations made by the respondent in a due diligence process culminating in the sale of shares were misleading and deceptive or likely to mislead or deceive – whether representations were with respect to future matters within the meaning of s 4 of the Australian Consumer Law – whether representations deemed to be misleading and deceptive because of the operation of s 4 – applicant founding its case on an allegation that a gross profit margin forecast for a commercial contract was overstated – applicant advancing a positive case that the methodology for calculating the gross profit margin was erroneous – applicant failing to establish the erroneous methodology was employed in fact – applicant otherwise failing to establish that the forecast gross profit margin was inaccurate or otherwise misleading – applicant alleging an alternate transaction would have been entered into had the alleged contraventions not occurred – no evidence the alternate transaction would have been entered into by both the buyer and seller of the shares – insufficient evidence to quantify claims for damages

Legislation:
Competition and Consumer Act 2010 (Cth) ss 131, 139B

Evidence Act 1995 (Cth) ss 136, 144

Federal Court of Australia Act 1976 (Cth) s 51A

Trade Practices Act 1974 (Cth) s 51A

Cases cited:
Australian Competition and Consumer Commission v Woolworths Group Ltd (2020) 281 FCR 108

Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485

Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd (2019) 56 VR 557

Jones v Dunkel (1959) 101 CLR 298

McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230

Mewett v Commonwealth of Australia [2000] FCA 1045

North East Equity Pty Ltd (ACN 009 248 819) v Proud Nominees Pty Ltd (ACN 074 270 938) [2012] FCAFC 1; 285 ALR 217

Sykes v Reserve Bank (1998) 88 FCR 511

Ting v Blanche [1993] FCA 781; 118 ALR 543

Young v Queensland Trustees Ltd (1956) 99 CLR 560

Division: General Division

Registry: Northern Territory

National Practice Area: Commercial and Corporations

Sub-area: Commercial Contracts, Banking, Finance and Insurance

Number of paragraphs: 308

Date of last submission/s: Applicant: 25 February 2022
Respondent: 28 February 2022

Date of hearing: 16, 17, 18, 21, 22, 24 and 25 February 2022

Counsel for the Applicant: Mr M McKenna

Solicitor for the Applicant: Gilbert + Tobin

Counsel for the Respondent: Mr A Wyvill SC with Ms M Yates

Solicitor for the Respondent: Ward Keller Lawyers

ORDERS

NTD 23 of 2020

BETWEEN:
OPTIC SECURITY AUSTRALIA 2 PTY LIMITED

Applicant

AND:
YC INVESTMENTS (NT) PTY LTD

Respondent

ORDER MADE BY:

CHARLESWORTH J

DATE OF ORDER:

19 MAY 2023

THE COURT DECLARES THAT:
1.The cross-respondent was and remains bound by paragraph 3(d)(ii) of the Side Letter dated 1 February 2019 to pay the amount of $1,350,000.00 into the account nominated by the Sellers’ Representative in accordance with the Side Letter.

THE COURT ORDERS THAT:
1.The originating application is dismissed.
2.Subject to these orders, the applicant is to pay the respondent’s costs of and incidental to the originating application on a party-party basis.
3.The cross-claim filed on 20 May 2021 by YC Investments (NT) Pty Ltd is to be treated for all purposes as an originating application commencing a cross-claim and YC Investments (NT) Pty Ltd shall pay the filing fee payable for the commencement of a cross-claim as at 20 May 2021.
4.The cross-claim is allowed.
5.The cross-respondent is to forthwith pay the cross-claimant the sum of $1,350.000.00.
6.On or before 2 June 2023 the cross-respondent is to pay the cross-claimant:
(a)pre-judgment interest in the amount of $160,150.74 calculated to 24 February 2022; and
(b)a further sum of pre-judgment interest for the period 25 February 2022 to 19 May 2023 (further interest) determined in accordance with these orders.

7.The further interest be determined as follows:
(a)on or before 23 May 2023 the cross-claimant is to notify the cross-respondent of the amount of further interest sought and the method of its calculation;
(b)on or before 29 May 2023 the cross-respondent is to notify the cross-claimant of any dispute with the sum proposed and the basis for the dispute;
(c)if there be no dispute with respect to the further interest, on or before 31 May 2023 the cross-claimant is to provide to the Court a minute of order fixing the further interest in that amount;
(d)otherwise, on or before 31 May 2023 the cross-respondent is to notify the Court of a dispute with the proposed sum and, in that event, there be a hearing for the determination of the further interest at 10.00am (ACST) on 2 June 2023.

8.The amounts referred to in paragraphs 5 and 6 are to be paid into the account nominated by the cross-claimant in its capacity as the Sellers’ Representative for the purposes of the Side Letter dated 1 February 2019.
9.Subject to these orders, the cross-respondent is to pay the cross-claimant’s costs of the cross-claim on a party-party basis.
10.Any application for costs to be awarded other than on a party-party basis (costs application) is to be supported by an affidavit filed and served on or before 9 June 2023.
11.In the event that a costs application is filed in accordance with paragraph 10:
(a)assessment of costs be deferred until the costs application is decided;
(b)on or before 23 June 2023 the applicant and cross-respondent is to file and serve any affidavit material upon which it relies in opposition;
(c)the costs application be set down for hearing on a date to be fixed by the Court.

12.The relief granted on the cross-claim is not conditional upon the payment by the cross-claimant of the filing fee referred to in paragraph 3 of these orders.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT
CHARLESWORTH J
INTRODUCTION

This action concerns the purchase of shares in Security & Technology Services (NT) Pty Ltd (STS-NT) and five related entities together known as the STS Group. The applicant, Optic Security Australia 2 Pty Limited (Optic2), acquired all of the shares in the STS Group from the respondent, YC Investments (NT) Pty Ltd and other entities pursuant to a contract completed on 29 November 2018 (Transaction). The Transaction formed part of a large and complex acquisition project by which Optic2 and related entities acquired all of the shares in multiple companies operating security businesses in Australia and New Zealand. The project (named Project Malibu) was intended to create a large consolidated enterprise for the provision of physical and digital security services in both countries.
Optic2 is wholly owned by Optic Finance Limited which in turn is wholly owned by Optic Security Group Limited (OS Group), a New Zealand entity. It is one of a number of corporate entities brought into existence as a purchasing vehicle for all of the entities in the STS Group as one aspect of Project Malibu, all having OS Group as the ultimate parent company.
The purchase price for the shares in the STS Group was made up of 52% cash and 48% scrip. The scrip component involved the issue of shares in OS Group to individuals and entities who previously had an interest in the relevant sellers of the shares.
From 2 June 2017, and at the time of the Transaction, STS-NT was party to a subcontract with LendLease Building Pty Ltd for the construction of security-related communications facilities at the Royal Australian Air Force Base Tindal situated in the Northern Territory (Tindal Subcontract).
The consideration paid by Optic2 in the Transaction was the product of a calculation that depended upon a forecast of STS-NT’s earnings before interest, tax, depreciation and amortisation (EBITDA) for the financial year ending 30 June 2019 (FY19). Optic2’s claims are founded on an allegation that the forecast EBITDA was incorrect because it was based (in part) on an incorrect forecast of the “gross profit margin” of the Tindal Subcontract. It alleges that YC Investments made representations about the gross profit margin that were inaccurate, and that those representations in turn had the effect of overstating the forecast EBITDA thus inflating the purchase price. It alleges that YC Investments breached contractual warranties relating to the EBITDA and that it engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the Australian Consumer Law (ACL). It seeks:
(1)a declaration that it is entitled to be indemnified by YC Investments for breach of contractual warranties;
(2)damages for breach of contract;
(3)alternatively, damages pursuant to s 236 of the ACL; and
(4)alternatively, compensation pursuant to s 237 of the ACL.
YC Investments counterclaims for an amount alleged to be owed to it by Optic2 as part of the purchase price for the shares.
Outcome
Optic2 bears the onus of establishing its claims for relief to the civil standard of proof. For the reasons given below, it has not discharged its burden in connection with any of the causes of action relied upon. If I am wrong in that conclusion, I would in any event conclude that Optic2 has failed to prove the entitlement or measure of any award of damages or compensation to which it would otherwise have been entitled had liability been proven, including because on the ACL claim I am not satisfied that there is a causal connection between the conduct alleged against YC Investments and the particular loss and damage pleaded.
I have also concluded that Optic2’s claims founded in breach of contractual warranties are answered completely by an agreed time limit which operates as a bar to the action. My findings with respect to the time limitation are set out at the conclusion of these reasons. If my conclusion concerning the time bar is wrong, I would dismiss the claim founded in contract on the merits in any event.
The cross-claim should be allowed. There will be orders for the payment of the sum owing by Optic2 to YC Investments, together with pre-judgment interest and costs.
It is convenient to begin with some terminology and background facts so that the issues arising on the pleadings can be better understood.
TERMINOLOGY
Neither party called any expert witness to explain the meaning of accounting terms employed by them in their evidence and submissions. The limited meanings I give below are derived from uncontroversial aspects of the evidence or otherwise are used consistently by the parties in their written submissions.
Expressed in dollar terms, gross profit is the contract price minus direct costs for materials (ie: goods) and resources (ie: labour).
Net profit is the contract price minus direct and indirect costs and is therefore lower in dollar terms than gross profit. Indirect costs may include a portion of fixed overheads incurred in the conduct of a business generally that are not specifically related to the performance of a contract.
Profit margin is the profit expressed as a percentage of the contract price. Put simply, a $100.00 contract having actual costs of $70.00 may be said to have a profit of $30.00 and a profit margin of 30% over its life.
Consistent with those general meanings, the phrase gross profit margin was used in evidence as referring to a percentage figure to describe the proportion of the value of the Tindal Subcontract (that is, the price LendLease had contracted to pay) after deduction of actual direct costs incurred in its performance. Necessarily, a gross profit margin for the life of the Tindal Subcontract could not be known until performance of the contract was complete and all known costs and savings were known. A net profit margin is calculated on the basis of additional indirect costs and overheads and will therefore be lower than a gross profit margin. On the uncontroversial evidence the difference between gross and net profit margins is ordinarily about 3% – 4%.
The expressions forecast gross profit margin and forecast net profit margin refer to calculations performed at a point in time to predict what the gross or net profit margin will be over the life of a contract based on known information about past events and assumptions about future events. Prior to the commencement of work on a contract, a forecast gross profit margin must necessarily be based, at least in part, on an estimate of costs that have not yet been incurred and assumptions that revenue will in fact be received.
As stated above, EBITDA is an acronym for earnings before interest, tax, depreciation and amortisation. So much is uncontroversial. However, the word “earnings” and the appropriate method by which earnings or EBITDA may be calculated was not the subject of express agreement, nor was there evidence or agreement as to the proper method for making a forecast of EBITDA with respect to a financial year that is not complete at the time of the calculation. The appropriate method for predicting revenue with an ETITDA forecast has not been explained. It is Optic2’s case that the calculation of the correct EBITDA in this case is a mere matter of arithmetic. Later in these reasons I will explain why that submission cannot be wholly accepted. It was also asserted by Optic2’s witness, Mr Todd Stewart Strathdee, that “earnings are a proxy for revenue”. I am not satisfied that that broad statement may be accepted at face value although, as will become apparent, the outcome of Optic2’s case does not turn upon it.
WITNESSES AND EVIDENCE
The following affidavits were read, subject to rulings:
(1)on Optic2’s case:
(a)affidavits of Mr Stuart John Norton-Baker affirmed 19 October 2021 and 8 February 2022;
(b)affidavit of Mr Mark David Ranyard affirmed on 21 October 2021; and
(c)affidavits of Mr Strathdee affirmed on 22 October 2021, 8 February 2022 and 16 February 2022;
(2)on YC Investments’ case:
(a)affidavit of Mr Mark Brian Hurley affirmed on 10 January 2022;
(b)affidavit of Mr Gregory Keith Ireland affirmed on 7 January 2022; and
(c)affidavit of Mr George Rakkas affirmed on 3 January 2022.
Mr Norton-Baker was formerly employed as the Operations Manager for STS-NT. He remained an employee following the Transaction and is presently the Group Quality, Health, Safety and Environment Manager of OS Group. He was principally responsible for the project management of the Tindal Subcontract, including the ongoing monitoring of its budget and profitability.
Mr Ranyard is an accountant. He was the Chief Financial Officer of OS Group (including Optic2) from 19 February 2019 until 31 August 2021.
Mr Strathdee became a director of Optic Finance and OS Group shortly after completion of the Transaction. Prior to that time, Mr Strathdee was engaged by Arena Investors LP as an advisor. In his first affidavit Mr Strathdee states that “Arena is a registered investment advisor that originates investments (generally, on a single-case basis, below US$50 million) with borrowers and other counterparties who need access to financing and are otherwise not able to access conventional sources”. As discussed below, Arena extended finance to entities representing the interests of the proponents of Project Malibu pursuant to an agreement referred to as the “Terms Sheet”. At the time of a due diligence process leading up to the Transaction, Mr Strathdee was representing the interests of Arena vis a vis the purchasers with respect to the terms on which the finance would be provided to Optic2 as the purchasing vehicle or OS Group as the case may be. Arena was not a party to the Transaction.
Mr Ireland founded STS Group with Mr Rakkas in or around 2004. He was a director of YC Investments at the time of the Transaction and at all relevant times preceding it. He remained employed by STS-NT following the Transaction until the termination of his employment in April 2020, following a period of “gardening leave”.
Mr Rakkas was also a director of YC Investments at all relevant times before the Transaction. Following the Transaction, he too remained employed by STS-NT until the termination of his employment in mid 2020, also following a period of “gardening leave”.
Mr Hurley was employed as the Chief Financial Officer of the STS Group from 2013 until 31 October 2019. He holds a Bachelor of Business (Accounting) and a Graduate Diploma in Business. He has been a Fellow of CPA Australia since 1998. He was previously employed as the Financial Controller for Territory Insurance Office and has held senior accounting roles for private entities in Melbourne since 1983.
The documentary evidence is comprised of thousands of pages of documents, including the material garnered during a due diligence process in the months preceding the Transaction. Optic2’s case focused on select parts of select documents, reflecting the confined focus of its pleaded case on the forecast gross profit margin of the Tindal Subcontract and its implications for forecast EBITDA. The Tindal Subcontract was one of hundreds of contracts performed by numerous entities acquired under Project Malibu.
All of the witnesses gave their evidence by video link from places situated in Australia and overseas. Conducting the trial in that way did not impede the Court’s ability to form impressions based on seeing and hearing their testimony. To the extent that it is necessary, I will comment on those impressions in the course of summarising their evidence on particular issues.
In setting out my findings it is unnecessary to recite at length the full narrative of evidence given by each of the witnesses. Many of the objective facts are either admitted on the pleadings, if not in the course of closing submissions. The controversy is in large part one concerning the inferences that could or should be drawn from those facts especially regarding the critical question as to how the figure of 31% came to be included in the material provided in the due diligence process, the method by which it was calculated and the use to which it was put in calculating the forecast EBITDA for FY19.
BACKGROUND AND FACTS
Unless otherwise apparent, the narratives of fact contained in these reasons are based on admitted pleadings contained in the Further Amended Statement of Claim filed 25 February 2022 (FASOC) and the Third Amended Defence filed 24 February 2022 (AD) and on that part of the evidence that was not controversial (including affidavit evidence that was not subject to challenge).

YC Investments (formerly named Security & Technology Services Group Pty Ltd) owned all of the shares in STS-NT in its capacity as trustee of a trust known as the STS Unit Trust. The unit holders were entities representing the interests of individuals including Mr Ireland and Mr Rakkas.
Mr Rakkas and Mr Ireland were each directors of the various entities in the STS Group from time to time. As mentioned above, both were directors of YC Investments at the time of the Transaction.
The Tindal Subcontract and SimPRO
STS-NT entered into the Tindal Subcontract with LendLease on 2 June 2017. It originally defined the “subcontract price” as $6,996,490.00, although the contract price increased with later variations. In terms of both contract price and anticipated profit, it was the most valuable contract secured by any company in the STS Group between July 2017 and October 2018. Its terms included the description of stages of work as separately priced “Work Elements” and ascribed commencement and completion dates to each of them. It made provision for the payment of liquidated damages by one party to the other in specified events. In particular, it made provision for STS-NT to issue notices of delay to LendLease in the event that commencement dates were delayed through no fault of STS-NT, and for STS-NT to make monetary claims against LendLease for expenses associated with those delays. Such expenses might include the cost of accommodating personnel on the remote site for periods when work could not be undertaken.
STS-NT secured the Tindal Subcontract after submitting two tenders in January 2017. The tender price was the product of costings and estimates prepared by personnel within STS-NT’s business development team using a software platform known as SimPRO. The SimPRO software was described in the evidence as a budget and field management tool. It was used within the STS Group to perform calculations for the purpose of pricing and tendering for work. If a contract was secured on the basis of a tender, the tender information would be converted into a “job” within SimPRO. The software would then be utilised as a field management and budget tool to track the performance of works, and to record expenses and revenue as incurred and received over the life of the contract.
Subject to what is said below, within SimPRO, the work yet to be performed under a contract had both a “sell price” and a “cost price” ascribed to it: the sell price being the price to be invoiced to the client under the terms of the contract and the cost price being an estimate or budget of the direct costs and expenses expected to be incurred in performing the work, including direct labour costs.
SimPRO was not intended to be used as sophisticated accounting software and it was not in fact utilised by STS-NT to perform any complex analytics. The financial accounting and reporting within the STS Group was undertaken in accounting software known as Xero. The two software programs were not fully integrated. However, information contained within SimPRO could be (and was) extracted for the purpose of undertaking analyses of matters relevant to the financial position of the STS Group and the preparation of its management accounts, including estimates of the “cost to complete” the performance of a contract at different points in time. Expenses and revenue recorded in SimPRO were separately recorded in Xero and invoices generated in SimPRO were also dealt with in Xero in the management of trade creditors and cash flow.
As I have mentioned, the tender for the Tindal Subcontract was broadly based on estimates of the direct costs of labour and materials attributable to each Work Element. That amount was recorded as a price (here used in the sense of a cost price) in a column bearing that title within each Work Element. A sell price was then ascribed against the same item, representing a rateable portion of the whole of the tendered contract price.
Subject to what is said below, the expected gross profit for the life of the Tindal Subcontract at the time of tender was the difference between the cost price and the sell price or, to put it another way, the difference between the cost to STS-NT for performing the contract and the price to be paid by LendLease for that performance. Whether the projected profit would in fact be achieved depended on a multitude of factors, including whether each Work Element was delivered under or over budget. Budget overruns relating to a Work Element may be offset by savings in other areas, such that actual profit could not be identified with certainty until the contract was complete.
It was common ground that forecasts prepared after work on the Tindal Subcontract commenced should properly include consideration of costs that had actually been incurred or were actually the subject of invoices as yet unpaid at the time of the calculation, rather than purely on budgeted figures. Unsurprisingly, the actual costs of performing works may be more or less than that originally budgeted for. Forecasts will also be based on any variations to the sell price and the actual or expected cost of performing the additional work subject to those variations.
Completion of the works did not in fact occur until 2020 and the Tindal Subcontract therefore remained on foot at the time of completion of the Transaction and at the closure of FY19. The gross profit and gross profit margin in fact achieved over the course of the life of the Tindal Subcontract was not the subject of evidence and, of course, could not be known at the time of the events referred to in these reasons.
Optic2’s evidence and submissions refer repeatedly to a forecast gross profit margin for FY19. As discussed below, the concept of there being a gross profit margin in respect of a particular financial year when a contract remains only partly performed (and the appropriate method for calculating such a forecast) has not been adequately explained on Optic2’s case. The difficulty arises in part because Optic2 did not call any witness to give expert evidence concerning accounting terms and their meanings or concerning the methods that could or were employed to forecast the revenue expected from the Tindal Subcontract for a defined period such as a financial year. In the absence of express agreement or obvious consensus between the parties as to the meaning of accounting terms or methodology, the Court cannot, and has not, made assumptions about those topics for the purpose of making findings of fact or drawing inferences from those facts. They are not matters upon which a court may take notice in accordance with s 144 of the Evidence Act 1995 (Cth) and there is an obvious danger in the Court imparting its own understanding of accounting methods in the resolution of the dispute unmoored from the evidence adduced by the parties.
Contingencies
The tender for the Tindal Subcontract was principally prepared by STS-NT’s business development team led by Mr Hagen Bahnemann. The pricing was prepared in Excel spreadsheets which included “captured costs” and “labour costs”, as well as a sell price and a margin. The pricing process included a brief technical review by the operations team which Mr Norton-Baker described as being more in the nature of a “scan”.
At the time that STS-NT prepared the tender for the Tindal Subcontract, allowance was made for two contingencies.
The first contingency related to liquidated damages in an amount of $300,000.00. That contingency was entered into SimPRO with a “price” and an equivalent “sell price” and so did not affect the difference between the sell price and cost price for the project as a whole.
The second contingency was aptly referred to within STS-NT as the “Cover Your Arse” contingency. The Cover Your Arse contingency was a sum of $770,000.00, referred to at trial as the “Additional Amount”. I will reluctantly employ the more dignified term when referring to this contingency.
In January 2017 Mr Norton-Baker attended a meeting where the need to allow for a “general contingency” to the tender price was discussed. He described the purpose of the contingency as being for those components of the project that “could not accurately [be costed] at the time of preparing the tender response”. However, he had no recollection of how the amount of $770,000.00 was arrived at and could not say whether it was a percentage of the overall contract price or based on some other dollar calculation. He frankly acknowledged that the content of the quotation and the costing decisions made by others in respect of it were above his “pay grade”. In the circumstances just described I place little weight on the evidence of Mr Norton-Baker as to the purpose of the Additional Amount. On the evidence before me I find that it was considered prudent by others to quote for the contract at a price that provided STS-NT with a sufficient overall profit to guard against margin eroding events. That is consistent with Mr Norton-Baker’s evidence that it was a usual practice when pricing a tender to include a provision for unexpected events that are not otherwise expressly budgeted for.
The Additional Amount was applied across Work Elements in the “sell price” column rateably in proportion to the direct labour costs. The adjacent “price” column in each instance did not contain an equivalent amount. Mr Norton-Baker could not say why the Additional Amount was entered into SimPRO without a cost entry beside it.
Mr Rakkas, Mr Hurley and Mr Norton-Baker told the Court (and I accept) that it was common practice within the STS Group to incorporate a general contingency into each tender price and to enter the contingency into SimPRO without a cost price. Mr Rakkas’ evidence was to the effect that it was usual practice to “quarantine” the contingency by not ascribing any costs to it so that operations personnel would not assume that it was there to be spent. He said that it was “always treated as a profit reserve which could only be spent with the approval of directors or the executive management team”. I accept that evidence.
No witness expressed the view that at the time of the preparation of the tender it was known that the Additional Amount would certainly be spent to meet any known expense omitted from the budget at the time of tender.
In evidence is an email from Mr Bahnemann to Mr Norton-Baker (copied to others) dated 15 June 2017 in which Mr Bahnemann said he was providing a “breakdown of contingency”. The email was sent about two weeks after the Tindal Subcontract was awarded to STS-NT. An attached spreadsheet allocates all but $210,000.00 of the Additional Amount to specific line items including “training”, “seismic” and “local travel costs”. The remaining amount of $210,000.00 is described as “General Contingency” and has the words “Margin protection” beside it. Mr Ireland was copied in the email. He told the Court he had no recollection of opening or reading it but it was likely that he did so.
Mr Bahnemann was not called to give evidence. It may be inferred that he would not have given evidence to assist Optic2’s case in relation to the meaning of his email and the use to which he intended it to be put. In particular, I decline to draw the inference that Mr Bahnemann anticipated with any degree of certainty that the Additional Amount would or should be spent in the manner set out in his spreadsheet at the time of tender or shortly afterward. I prefer the direct evidence of Mr Rakkas concerning the purpose of the Additional Amount as at the time of the tender and the time that the tender was converted to a “job” in SimPRO. As discussed below, I have also accepted that Mr Norton-Baker identified other predicted costs that had not been budgeted for in the tender process, which he described as “estimated missed costs”. Mr Norton-Baker’s list of estimated missed costs is not the same as the list contained in the spreadsheet attached to Mr Bahnemann’s email of June 2018, reinforcing my view that little weight should be afforded to the attached spreadsheet in the absence of direct evidence of Mr Bahnemann as to his knowledge and intentions relating to it.
The Transaction
The documents defining the Transaction comprise a share purchase agreement dated 22 November 2018 (Final SPA) and a document referred to as a Side Letter dated 1 February 2019.
The Final SPA was preceded by earlier agreements that were varied, superseded then partially re-enlivened. It is largely unnecessary to refer to earlier iterations other than to say that there existed a prior agreement between the entities defined as the “Sellers” of the shares and a different “Buyer”, AIH No 2 Limited Partnership, otherwise known as Ascentro. As discussed below, the human proponents behind the Buyer in that agreement are the same as those behind Optic2 as the ultimate Buyer under the Final SPA.
On 13 October 2017, OS Group engaged the advisory firm KPMG to undertake financial due diligence relating to the earlier agreement with Ascentro.
The purchase price of the earlier iteration of the agreement was based on the actual financial performance of the STS Group at the end of 30 June 2018. Re-forecasts were later undertaken for the purposes of the due diligence process culminating in the Final SPA.
The Final SPA defines the word “Sellers” to include YC Investments and other entities that owned shares in the companies forming the STS Group. The “Buyer” is Optic2. Eight individuals are defined as “Guarantors” including Mr Ireland and Mr Rakkas.
YC Investments is the only respondent in this proceeding. The other Sellers are not joined, nor are any of the Guarantors.
The Final SPA contained contractual definitions for the expression “Data Room” and “Due Diligence Questionnaire”. The contractual expression “Disclosure Material” is defined (in Schedule 1, clause 1) to mean the written information in relation to the companies in the STS Group provided by the Sellers to the Buyer or their advisors as at a specified date in the Data Room and the Due Diligence Questionnaire.
By Schedule 5 to the Final SPA, the Sellers gave warranties to Optic2 relating to the accuracy of the “Disclosure Material” as that expression is defined in the Final SPA (Seller Warranties). They are set out in full later in these reasons. For present purposes it is enough to state that they include a warranty broadly to the effect that the information contained in the Disclosure Material was accurate.
The Final SPA provided for the transfer of all of the shares of all of the entities in the STS Group to Optic2 for a defined “Purchase Price” on the completion date. It was comprised of a “Cash Consideration Amount”, a “Loan Amount” and “Consideration Shares”. There was provision for an “Earn-out Payment” to be made following completion of the Final SPA.
The Consideration Shares were shares in OS Group to the value of $17,141,025.00 that were issued to the Sellers. The Loan Amount was $25,000,000.00. The Cash Consideration was defined as a sum to be determined in accordance with Schedule 13 of the Final SPA.
The total value of the Purchase Price was calculated by a formula providing for the re-forecast EBITDA for the whole of the STS Group to the end of FY19 to be multiplied by 5.5.
The Earn-out Payment was calculated by a formula explained later in these reasons. It was a means of withholding part of the Purchase Price until the actual trading figures for FY19 became known.
In addition to the Purchase Price incorporating the Earn-out figure, the Side Letter provided for the payment of an “Adjustment Amount” of $2,575,000.00 in two instalments. The first instalment has been paid. The second was due on 30 June 2019. It has not been paid and now forms the subject of the cross-claim.
Due diligence process
In the months prior to the Transaction, Optic2 in fact maintained an online Data Room containing information about the STS Group, and it made that information available to its representatives and its advisers. The documents contained in the Data Room include those listed at [12] of the FASOC, defined as the “Respondent’s Disclosure Materials”. It is not disputed that the Respondent’s Disclosure Materials were included in the Data Room for the purposes of informing Optic2 about the financial position of the STS Group, although there is some dispute on the pleadings about the dates on which some documents were provided.
As the various iterations of a share sale agreement evolved, KPMG prepared a spreadsheet referred to as KPMG Financial Databooks and two reports dated 19 September 2018 (KPMG September Report) and 31 October 2018 (KPMG October Report). The KPMG Financial Databooks and the KPMG October Report are referred to in the FASOC as “the KPMG Materials”.
The KPMG Materials were prepared on the basis of material provided by YC Investments, but YC Investments is not the author of them, nor did it have access to them before the Transaction. Optic2 did not call the author of the KPMG Materials to give evidence concerning the calculations and qualifications contained in them or otherwise concerning their content.
Some documents contained in the Respondent’s Disclosure Materials and the KPMG Materials contain representations about the forecast gross profit margin of the Tindal Subcontract. Subject to some qualifications, YC Investments admits that the representations were to the general effect that the total gross profit margin of the Tindal Subcontract was 31%. The qualifications include:
(1)the gross profit margin was a statement only of YC Investments’ opinion as to what it expected the end of contract result of trading to be at the time that the representation was made; and
(2)the representation as to the gross profit margin was known by Optic2 to be subject to qualifications set out in the KPMG September Report.
ALLEGED CONTRAVENTION OF THE ACL
Against that background, it is convenient to deal first with Optic2’s claims founded in contravention of s 18 of the ACL, contained in Ch 2 of Sch 2 to the Competition and Consumer Act 2010 (Cth) (CC Act).
Section 18 of the ACL provides that a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or that is likely to mislead or deceive. It applies to corporations by virtue of s 131 of the CC Act.
There is no dispute that the conduct referred to in the FASOC occurred in trade or commerce.
Section 4 of the ACL concerns misrepresentations with respect to future matters. It provides:
(1) If:
(a)a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and
(b)the person does not have reasonable grounds for making the representation;
the representation is taken, for the purposes of this Schedule, to be misleading.
(2)For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:
(a)a party to the proceeding; or
(b)any other person;
the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.
(3) To avoid doubt, subsection (2) does not:
(a)have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or
(b)have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.
(4)Subsection (1) does not limit by implication the meaning of a reference in this Schedule to:
(a)a misleading representation; or
(b)a representation that is misleading in a material particular; or
(c)conduct that is misleading or is likely or liable to mislead;
and, in particular, does not imply that a representation that a person makes with respect to any future matter is not misleading merely because the person has reasonable grounds for making the representation.

Section 236 of the ACL relevantly provides that if a claimant suffers loss or damage because of the conduct of another person, and the conduct contravenes (relevantly) s 18, the claimant may recover the amount of the loss or damage by an action against that other person.
Section 237 of the ACL relevantly provides:
(1) A court may:
(a)on application of a person (the injured person) who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that:
(i)was engaged in a contravention of a provision of Chapter 2, 3 or 4; or
…
make such order or orders as the court thinks appropriate against the person who engaged in the conduct, or a person involved in that conduct.
The orders the Court may make under s 237 include orders declaring the whole or part of any contract to be void, or orders varying the contract: ACL, s 243.
The pleaded case
The allegations of misleading and deceptive conduct are based on representations made during the due diligence process culminating in the Transaction.
Three categories of representations are pleaded. They are referred to as Warranty Representations (FASOC, [73]), Disclosure Material Representations (FASOC, [31(a)], [31(b)], [31(i)]) and [31(j)]) and Financial Due Diligence Representations (FASOC, [32(a)], [32(d)] and [32(e)]). Each category of representation is alleged to have been misleading or deceptive or likely to mislead or deceive (FASOC, [84] – [86]). The Warranty Representations will be discussed later. The representations concerning profits and EBITDA are pleaded as follows:
31The Respondent’s Disclosure Material conveyed the following representations:
(a)       the total gross profit margin of the Tindal Subcontract was 31%;
Particulars
This representation is express and is contained in the statement set out in Paragraph 26(a) of Schedule A to this statement of claim.
(b)the total gross profit margin of all of STS NT’s work in progress projects was 30%;
Particulars
This representation is express and is contained in the statement set out in Paragraph 26(b) of Schedule A to this statement of claim.
(i)        for FY19:
(i)        STS NT’s gross profit would be $11,610,197;
Particulars
This representation is express and is contained in the statement set out in paragraph 12(b)(i) of Schedule A to this statement of claim.
(ii)       STS NT’s EBITDA would be $2,900,022;
Particulars
This representation is express and is contained in the statement set out in paragraphs 12(b)(ii) of Schedule A to this statement of claim.
(iii)      the STS Group’s gross profit would be $20,296,049;
Particulars
This representation is express and is contained in the statement set out in paragraphs 12(b)(iii) of Schedule A to this statement of claim.
(iv)      the STS Group’s EBITDA would be $6,006,897; and
Particulars
This representation is express and is contained in the statement set out in paragraphs 12(b)(iv) of Schedule A to this statement of claim.
(j)the Sellers, including the respondent, and the Guarantors knew of no material matters concerning:
(i)the profitability, performance or deliverability of the Tindal Subcontract;
(ii)the profitability, operations or financial condition of the STS Group; or
(iii)the profitability, operations or financial condition of STS NT,
which were not Disclosed in the Disclosure Material,
(the Disclosure Material Representations).
Particulars
As to the representations in sub-paragraph (j), the applicant further says that those representations were:
(A)partly express by reason of Warranty 6(b)(i); and
(B)partly implied by reason of:
(1)Warranty 7.1(a);
(2)the statements in paragraph 4 of Schedule A to this statement of claim; and
(3)the matters referred to in paragraph 9.
Schedule A to the FASOC is titled “Information and statements contained in the Respondent’s Disclosure Material”. Paragraph 26 states:
26The following statements were made in the First WIP & Forecast Model and the Second WIP & Forecast Models:
(a)the gross profit margin of the Tindal Subcontract was 31% (‘NT’ Sheet, column I row 16); and
(b)STS NT’s gross profit margin for all its work in progress projects was 30% (‘NT’ Sheet, column H row 156; ‘Consolidated’ Sheet, column I row 16).
Paragraph 12 of Schedule A to the FASOC states:
12The STS Group Management Accounts – FY18 and FY19 Summary included the following statements:
(a) for FY18:
(i)STS NT’s gross profit was approximately $9,767,715;
(ii)STS NT’s EBITDA was approximately $2,168,503;
(iii)the STS Group’s gross profit was approximately $18,178,880; and
(iv)the STS Group’s EBITDA was approximately $5,158,439; and
(b) for FY19:
(i)STS NT’s gross profit would be approximately $11,610,197;
(ii)STS NT’s EBITDA would be approximately $2,900,022;
(iii)the STS Group’s gross profit would be approximately $20,296,049; and
(iv)the STS Group’s EBITDA would be approximately $6,006,897.
Paragraph 89 of the FASOC makes the following allegation:
89Further, to the extent that the Disclosure Material Representations or the Financial Due Diligence Representations were representations as to future matters, those representations were:
(a) made without reasonable basis; and
(b) misleading or deceptive, or likely to mislead or deceive.
Particulars
The applicant relies on section 4 of the Australian Consumer Law.
The “extent” to which Optic2 says that the representations were as to future matters is not pleaded.
As can be seen, alleged representations relate to the predicted gross profit margin of the Tindal Subcontract and other works in progress, the predicted gross profit and EBITDA for STS-NT and the predicted gross profit and EBITDA of the STS Group.
In addition, it is alleged that YC Investments failed to make disclosure of matters referred to as “Undisclosed Margin Matters” (FASOC, [58A] – [58K]), which failure is alleged to have been a separate instance of misleading and deceptive conduct (FASOC, [87]). The pleadings at FASOC [58A] – [58K] particularise the reasons why the representation as to the gross profit margin of the Tindal Subcontract are said to be misleading or deceptive.
Part I.4 of the FASOC is titled “Reliance”. It alternatively pleads that Optic2 relied on the Warranty Representations, Disclosure Material Representations and the Financial Due Diligence Representations when it entered into the Final SPA, paid the Purchase Price and otherwise completed the purchase of shares in the entities comprising the STS Group. Alternatively it is alleged that had the Undisclosed Margin Matters been disclosed, then Optic2 “would have offered to pay less and would have paid less” than the Purchase Price or (alternatively) would not have entered into the Final SPA.
The pleading as to loss and damage founded on contravention of the ACL is expressed as follows:
J.2 Misleading or deceptive conduct
93By the contraventions of section 18 of the Australian Consumer Law referred to in paragraph 90 above, the applicant has suffered loss and damage.
Particulars
The loss suffered is:
(A)the difference between the Purchase Price and the true value of the STS Business; or
(B)alternatively to (A), the difference between the Purchase Price and the price that the applicant would have paid under the Final Share Purchase Agreement if the respondent:
(1)had not breached the Warranties;
(2)further or alternatively, had disclosed one ~~some~~ or both ~~all~~ of the Undisclosed Margin Matters;
(3)further or alternatively, had not made the Warranty Representations ~~and engaged in the Warranty Conduct~~;
(4)further or alternatively, had not made the Disclosure Material Representations; and
(5)further or alternatively, had not made the Financial Due Diligence Representations,
alternatively the loss of opportunity paying that price.
The calculation of the applicant’s loss and damage will be the subject of expert evidence.
Issues arising at the trial
A number of observations may be made as to the manner in which Optic2 presented its case based on s 18 of the ACL.
The first is that it did not rely on any independent expert report for the purpose of assessing the quantum of the loss or damage pleaded at FASOC [93], notwithstanding the closing words of the plea.
The second is that Optic2 did not call any witnesses to make good the plea that if the various instances of misleading and deceptive conduct had not occurred, there would have been no agreement at all for the purchase of all of the shares in the STS Group. In closing submissions, Counsel for Optic2 confirmed that this is not a “no-transaction” case. In the absence of evidence to support such a plea I take it to have been abandoned.
Third, a good part of the evidence consisted of spreadsheets prepared in Excel. Whilst the formulas employed in the software could be viewed by the Court, any accounting methodology behind those formulae are not matters in relation to which a judge may take judicial notice. The Court may of course comprehend arithmetic formulas embedded in the spreadsheets. However, contrary to Optic2’s submissions, the manner in which figures may then be employed to identify or forecast the financial position of STS-NT and the STS Group at the end of a particular financial year is not a mere matter of arithmetic.
The final preliminary observation relates to the manner in which Optic2 set out to prove that the 31% represented gross profit margin forecast was misleading or deceptive or likely to mislead or deceive. Its case in that respect depended upon a finding that the figure of 31% was “taken from SimPRO”, “drawn from SimPRO” or “derived from SimPRO”. It is important to explain what Optic2 meant by those phrases.
Optic2 alleged that a person (unidentified in its evidence) had rounded down a 31.42% original budgeted gross profit margin figure contained in SimPRO (or at least calculable by reference to data contained in it) as it stood in June 2017, being the percentage of the contract price expected to be achieved as profit after costs and expenses budgeted for in the system at that time. It is alleged that the person then manually entered the rounded down figure of 31% in spreadsheets included among the Respondent’s Disclosure Materials. It was alleged that the figure “taken from SimPRO” in that way was erroneous because it treated the whole of the Additional Amount as revenue without allowing for any costs attached to it. It was alleged that some of the contingencies that the Additional Amount was intended to cover, as well as other unbudgeted expenses, had in fact occurred by the time of the due diligence deadline, resulting in expenses defined as “Additional Costs” and “Margin Eroding Costs”, which had not been allowed for as “costs” when the 31.42% gross profit margin was first calculated in SimPRO. Accordingly, it was submitted, the 31% figure as “taken from SimPRO” was false because it wrongly inflated the profit by the Additional Amount of $770,000.00 by treating it as “100% revenue”.
YC Investments accepts that at the time of the due diligence process in mid-late 2018 it would have been wrong to forecast the gross profit margin of the Tindal Subcontract for FY19 based only on information contained in SimPRO at the time that the Tindal Subcontract was awarded and converted into a “job” within the software in June 2017. It accepts that in mid 2018 it would also have been wrong to forecast the gross profit margin without having regard to costs known to have been incurred at that time. However, it denies that the figure of 31% was “taken from SimPRO” in the manner alleged. The question of whether the 31% was taken from SimPRO in the alleged manner therefore assumes critical importance.
Spreadsheets
The manner in which spreadsheets created in Excel operate is not disputed. A single Excel file may contain a number of spreadsheets divided under “Tabs”. Each spreadsheet takes the form of a grid of cells arranged in rows and columns. A cell within the spreadsheet may be located by the coordinates of one or more letters (identifying a column) and a number (identifying a row).
Information may be entered into a cell in different ways. The author may “hard code” the content by entering a figure or words into the cell. A cell may also be populated as an automatically generated answer to a formula embedded in the cell. The formula may include factors drawn from any number of other cells which in turn may be populated with formulas. Changing the information in one or more of those other cells will change the information in the cell populated by the formula.
A whole number may appear in a spreadsheet as a result of an embedded formula rounding another number up or down. Whether a number has been rounded in that way can be identified by clicking on the cell. A whole number may also be hard coded into the cell after manual rounding by the author.
The witnesses referred to a number of documents forming a small fraction of the totality of the information contained in the Respondent’s Disclosure Materials. The figure of 31% appears in two spreadsheets referred to in the evidence as follows:
(1)First WIP & Forecast Model (being a spreadsheet within a workbook named “2AU.4.8.01 Forecast STS – 20180705”) (NT Sheet, I, 16)
(2)Second WIP & Forecast Model (being a spreadsheet within a workbook named “2AU.4.8.02 Forecast STS – 20180706 with Probability”) (NT Sheet, I, 16).
I will refer to those two documents together as the WIP Forecasts. They were included in the Data Room and formed part of the Disclosure Material as defined in the Final SPA. They were created on 5 July 2018 and 6 July 2018 respectively and are two versions of the same thing. In each of them, the figure 31% appears in a Tab titled “NT Sheet” under a heading “Revenue” and a subheading “Work in progress”. It is a hard coded figure in the sense described above; that is, it is not the product of a formula embedded in the spreadsheets themselves but has been entered manually as a whole number, 31. The precise figure 31.42 is not otherwise contained in the spreadsheet.
The relevant table contains a list of all of the contracts then in progress by STS-NT, with columns identifying the Client, Site, Product, Project Value and Gross Margin, in each case represented by a hard coded whole number.
There is no statement on the face of the document as to whether the expression “gross margin” (abbreviated as GM) is intended to refer to the expected gross profit margin over the whole of the life of the Tindal Subcontract, rather than the expected profit to be achieved in a particular period of time. From column P onward (in the same row) there is a distribution of the whole of the revenue by small percentages on a monthly spanning beyond any particular financial year (namely from July 2017 to November 2019). The small percentage numbers vary, suggesting that income earned under the Tindal Subcontract had not previously been regular and was not forecast to be so in the future. That appears to be confirmed by a note reading “Revenue is based on the % of completion approach”, although the meaning of that phrase was not explained in the evidence. In row 158 there appear amounts representing the relevant percentage of the contract price in dollar terms allocated on a monthly basis apparently for the life of the contract.
Another sheet titled “Consolidated” deals with “COGS” at lines 54 to 74. It is common ground that COGS is an abbreviation for “costs of goods sold”. It therefore appears that the actual and/or anticipated costs of performing the Tindal Subcontract may be the subject of discrete calculations within the workbook, however, at the conclusion of the trial it remained unclear how (if at all) the COGS impacted on any other formula or figure contained in the spreadsheets. The consequences of these ambiguities will be discussed elsewhere in these reasons.
Practical operation of SimPRO
It is not disputed that a calculation of a forecast gross profit margin performed in June 2017 based only upon the cost price and sell price contained in SimPRO at that time would result in a figure of 31.42%. Relevantly:
(1)the estimated cost of materials was $4,169,784.04;
(2)the estimated cost of resources (being the combination of estimated labour costs with an added overhead) was $879,830.00;
(3)the estimated total of revenue (excluding GST) was $6,996,490.08; and
(4)the estimated gross profit was $2,198,256.04.
Based on those figures, I accept that the estimated gross profit expressed as a percentage of the revenue is 31.42% and that 31.42 rounded to the nearest whole number is 31.
However, whether the figure appearing in the WIP Forecasts is in fact a carrying forward of 31.42 after rounding is a question to be resolved having regard to the totality of the evidence. In that regard, it is important to remain focussed on the particular inference the Court is invited to draw. The inference is that at the time that the WIP Forecasts were prepared, a figure of 31% was taken from SimPRO as the gross profit margin that would be reported by the software at the time that the Tindal Subcontract was converted to a “job” more than 12 months earlier. It is by that means that Optic2 seeks to establish that the Additional Amount was wrongly treated as 100% revenue.
The evidence of Mr Hurley and Mr Norton-Baker was to the effect that as a contract is performed, new information concerning actual costs, actual savings and actual variations is contemporaneously entered into the software. That evidence was not subject to effective challenge and I accept it. Mr Norton-Baker told the Court that by November 2017 there had been an increase in the contract price from about $6.9m to about $7.4m. That change was entered into SimPRO at the time that the variation was agreed.
The Court was not taken to an operational version of SimPRO to explain how a gross profit margin figure could be “derived” or “taken from” the system in a practical sense, based on information that might previously have been contained in it at an earlier point in time.
Mr Norton-Baker frankly acknowledged that at various points in time during the life of a contract, the forecast profit margin will change as anticipated costs become actual costs (or not as the case may be) and as assumptions as to future events giving rise to additional costs or additional savings change.
In the absence of evidence to the contrary, I consider it more likely that any calculation of a projected gross profit margin performed in mid 2018 based only on information contained in SimPRO would be the product of information contained in the system as updated to that point in time: it would be a product of the total updated cost price subtracted from the updated sell price, expressed as a percentage.
That is consistent with the evidence about the purpose that SimPRO was intended to serve in Optic2’s business as confirmed by Mr Norton-Baker, namely to assist in monitoring the performance of contracts in real time, specifically to track their profitability.
As at July 2018, the calculation of a gross profit margin based on information then contained in SimPRO would not have yielded the answer 31.42% other than by startling coincidence. I am satisfied that the information contained in SimPRO by that time had changed to record costs that had actually been incurred as at that date, as well as the increased contract price. It has not been shown that in mid 2018 SimPRO could practically operate so as to produce the figure of 31.42%.
As explained in the next section of these reasons, there were in fact calculations actually performed by personnel within the STS Group relating to the forecast gross profit margin of the Tindal Subcontract with different results depending on the time at which the calculations were performed and the information that was taken into account. The information extracted from SimPRO (particularly concerning the actual costs of performance to date) formed the starting point for those calculations, but not the end point. The very fact that the calculations were performed outside of SimPRO tells against an inference that the 31% figure was arrived at using the crude method of taking a 31.42% figure that would have been yielded by SimPRO in June 2017 when the actual costs for the year to come were not known.

Moreover, on the basis of the evidence of Mr Norton-Baker and Mr Hurley, I conclude that there existed a more sophisticated methodology for estimating the costs to compete the Tindal Subcontract at any particular point in time, and that those calculations were in fact performed by Mr Hurley for the purposes of calculating “work in progress” (WIP) for incorporating into the management accounts for the STS Group. Other calculations were performed by Mr Norton-Baker in response to requests during the due diligence period and otherwise for operational purposes. Whilst those types of calculations served different purposes from the WIP Forecasts, the fact and nature of that work, and the role played by Mr Norton-Baker in it, tells against an inference that a person within STS-NT turned to information contained in SimPRO in June 2017 as the basis for forecasting a gross profit margin for the Tindal Subcontract in mid 2018.
Costs and savings associated with “the ABR dispute”
Sometime after September 2017 a dispute arose between STS-NT and one of its subcontractors ABR Group Pty Ltd when STS-NT expressed concerns that ABR was over claiming on its invoices. STS-NT terminated the subcontract resulting in a claim by ABR against it. That claim was the subject of litigation and alternative dispute resolution. In the period before the dispute was resolved, the preparation of forecasts concerning the gross profit margin depended on (among other things) whether STS-NT would be required to pay any sum in liquidated damages to ABR. I have previously mentioned that the tender price for the Tindal Subcontract included a contingency of $300,000.00 to allow for such an expense. The question was whether it might become necessary to spend it.
The ABR dispute also made it necessary to engage a replacement subcontractor for the works ABR had originally been contracted to perform, giving rise to additional costs relating to the mobilisation of the new subcontractor and the remediation of some of the works previously performed.
However, the ABR contract was also one that generated savings against the budget (as entered into SimPRO in 2017) because the quote for the job originally included the price of an alternate subcontractor. The work was subcontracted to ABR at a significant saving on the original budgeted price.
Calculations performed by Mr Norton-Baker
In November 2017 Mr Norton-Baker performed some calculations to estimate the gross profit margin of the Tindal Subcontract based on information contained in SimPRO or otherwise known or assumed by him at that time (November 2017 calculations). That information included $881,716.00 of costs Mr Norton-Baker considered had been missed at the time of the tender. The calculations are contained in a worksheet and are conveniently summarised in YC Investments’ closing submissions as follows:
80.The [cost to complete] worksheet contained information of anticipated missed costs in relation to the project of $881,716 and also factored into the various calculations contained in the worksheet, some initial savings which had already been identified in relation to the project, along with the contingency and [liquidated damages] contingency allowance.
81.The first series of calculations entitled ‘On Target Total’ undertaken by Mr Norton-Baker as at November 2017 merely calculated the gross and net profit applicable to the project based purely on information contained in SimPRO without adjustment. They indicate that at November 2017, the unadjusted gross profit margin (inclusive of variations) was estimated in SimPRO to be 28.05%.
82.The second series of calculations entitled ‘Estimated Errors’ adjusted the SimPRO figures by reducing the profit to take into account the estimated missed costs amount of $881,716. This has the effect of reducing the estimated gross profit margin (inclusive of variations) to 16.13%. This series of calculations did not, however, take into account any estimated project savings or contingency amounts.
83.The third series of calculations entitled ‘Estimated Forecast’ reduced the gross profit margin from SimPRO by an amount equal to the estimated missed costs of $881,716 and then added back into gross profit an amount equal to the identified savings (being Civil Costs of $342,735.63 and Nurse Call of $100,000) and the contingency allowance of $772,646.52. The liquidated damages contingency, however, was not taken into account when making these estimates. A gross profit margin percentage of 32.56% was calculated.
In cross-examination, Mr Norton-Baker acknowledged that the methodology employed in the second series of calculations was incorrect because it did not factor in the Additional Amount “sell price”. The third series of calculations illustrates how unbudgeted costs may be offset against actual savings in the performance of the Tindal Subcontract so as to modify the gross profit margin over time. The figures show that even if the original budget did not provide for the costs Mr Norton-Baker later identified as “missed”, the costs could be offset by savings resulting in an estimated gross profit of 32.56%.
More fundamentally, the November 2017 calculations show that when Mr Norton-Baker sought to obtain an estimate of the gross profit margin for the Tindal Subcontract at that point in time, he did not assume that the figure would be the same as that contained in SimPRO at the time that the job was created some six months earlier. Rather, he factored in actual or predicted events as at the time of his own calculations, including the “missed” costs he considered should be included.
In May 2018, Mr Norton-Baker prepared a further spreadsheet (May 2018 spreadsheet) based on different information contained in SimPRO at that time. That calculation contained no forecast savings or costs. He described it as a “snapshot” in time to benchmark what the project looked like and the ultimate outcome if the works had continued on their current trajectory. Based on up-to-date information taken directly from SimPRO, the spreadsheet prepared by Mr Norton-Baker at that time produced a net margin of 28.05%. Mr Norton-Baker accepted that figure could be extrapolated as a gross profit of between 31% and 32%. The May 2018 spreadsheet is not a “cost to complete” of the kind discussed below and there is no direct evidence that the spreadsheet was provided to anyone else within the STS Group. However, it does demonstrate the knowledge and practices of Mr Norton-Baker as at May 2018 relating to the continued monitoring of the forecast gross profit margin. The May 2018 spreadsheet reinforces the point that the gross profit margin figure is a product of ever-changing information and may be a product of (among other things) unbudgeted actual costs that may be offset by unbudgeted actual savings. Those swings and roundabouts produced similar gross profit margin figures on Mr Norton-Baker’s calculations in November 2017 and May 2018, notwithstanding that the costs and revenue components might have differed in each analysis, and notwithstanding the factoring of the “missed costs”.
This aspect of the evidence shows that Mr Norton-Baker continued to monitor the profitability of the Tindal Subcontract and that when he did so he did not merely adopt the original gross profit margin figure of 31.42% that might have been calculated on the basis of information contained in SimPRO about a year earlier. His processes were more considered and conscientious than that. The evidence shows that as at May 2018, SimPRO was capable of reporting a gross profit margin of between 31% and 32% based on different information to that originally entered into the system at the time that the Tindal Subcontract was awarded. That evidence shows that there exists an alternate reason why the 31% appears in the WIP Forecasts to that pleaded by Optic2. It tends against an inference that the 31% was “taken from SimPRO” in the erroneous way Optic2 contends for.
Alleged “Margin Eroding Costs”
It is generally not disputed that around the time of the due diligence process STS-NT incurred higher costs for material, labour and overheads than it had estimated in relation to some Work Elements at the time of preparing the tender. They are the alleged Margin Eroding Costs and are particularised at [58F(B)] of the FASOC as follows:
(1)$81,617.70 (excluding GST) more than what was expected for ducting material and associated labour, which costs were incurred between June 2017 and around June 2018;
(2)$150,000.00 (excluding GST) more than what was expected for ducting ceiling supports, which costs were incurred between June 2017 and around June 2018;
(3)$100,098.00 (excluding GST) more than what was expected for acoustic seals material and associated labour, which costs were incurred between June 2017 and around June 2018;
(4)$12,945.26 (excluding GST) more than what was expected for seismic rack footings and associated labour, which costs were incurred between June 2017 and around June 2018;
(5)$159,318.72 more than what was expected to store materials and to accommodate its employees due to delays in commencing each Stage of the Subcontract Works and progressing the Subcontract Works;
(6)$199,200.00 for additional labour hire services as a result of delays in commencing each Stage of the Subcontract Works and progressing the Subcontract Works, which costs were incurred since June 2017;
(7)$215,500.00 (excluding GST) for unexpected demobilisation and remobilisation of STS NT’s workforce due to delays in commencing each Stage of the Subcontract Works and progressing the Subcontract Works, which costs were incurred between December 2017 and February 2018; and
(8)$388,449.99 for works required after the termination of a subcontractor (ABR Group Pty Ltd), including surveying the works completed by that subcontractor and engaging another subcontractor to complete those works, which costs were incurred since 7 March 2018.
The specific amount of the costs and the factual events giving rise to them are the subject of a dispute that is largely unnecessary to resolve.
Optic2’s case originally involved an allegation that the Margin Eroding Costs had not been included in the preparation of STS-NT’s management accounts. That significant plea was later withdrawn, as were claims for damages in respect of it. As expressly confirmed in Optic2’s closing submissions (and consistent with the evidence of Mr Norton-Baker) the Margin Eroding Costs were largely incurred before June 2018, save for some of the costs attributable to securing an alternative subcontractor to remediate and perform the works previously commenced by ABR. The closing submissions confirm that it is no longer in issue that the Margin Eroding Costs were brought to account and inputted into Xero for the purposes of STS-NT’s financial accounts as and when they were incurred.
Importantly, Optic2 also accepts that the Margin Eroding Costs were entered into SimPRO as and when they were incurred. That, too, is consistent with evidence given by Mr Norton-Baker on that topic. Optic2 has not identified any cost actually incurred that was not entered into SimPRO and/or Xero at or around the time of the actual expenditure.
Optic2 nonetheless maintains its allegation that there was a failure on YC Investments’ part to identify that the gross profit margin of 31% “did not reflect any margin erosion that had occurred because of the incurring of the margin erosion costs”. That allegation could only proceed from an assumption that the 31% figure was “taken from SimPRO” in the sense that it was based on information that had been entered into the software in June 2017 but not afterward.
Such a finding is not supported by the evidence, considered as a whole. As to that part of the Margin Eroding Costs that were yet to be incurred at the time of the due diligence process relating to the remediation and performance of the ABR works by a new subcontractor, Optic2 did not articulate what portion of the Margin Eroding Costs was attributable to that particular event or base an alternative case founded only on a portion of the Margin Eroding Costs incurred after the due diligence reports were prepared. The “costs to complete” analyses referred to below included calculations based on costs associated with the re-contracting of the ABR works, and it is not disputed that the “cost to complete” analyses were performed to value the WIP relating to the Tindal Subcontract for the purposes of preparing the management accounts informing the due diligence process.
Margin Review Paper
The pleaded Margin Eroding Costs are set out in an internal Optic2 document titled “Margin Review Paper” first drafted in May 2019, completed on 27 June 2019 (some six months after completion of the Transaction) and later revised in November 2019. The Margin Review Paper was prepared by Mr Norton-Baker on instructions from Optic2’s then board of directors. Neither Mr Ireland nor Mr Rakkas were substantively involved in its preparation. Its purpose was to analyse the cost to complete the Tindal Subcontract on the information known at the time in 2019, and to compare that analysis with the budgeted costs contained in SimPRO at the time of the tender.
Other issues raised in the Margin Review Paper are related to the costs of the delayed commencement or continuation of works on the site that were not the fault of STS-NT. They are evidenced by multiple notices of delay issued under the Tindal Subcontract. The uncontested evidence is that costs associated with delays that were not the fault of STS-NT could be the subject of claims by STS-NT against LendLease. Whilst the Margin Review Paper makes reference to costs associated with delays, it does not make reference to amounts that might be received on claims made against LendLease, nor does it indicate whether any such claims had already been made, and if so when. Mr Norton-Baker acknowledged that about 70% of the notices of delay was issued in 2019, after the due diligence for the Transaction was complete.
Mr Hurley prepared accounts for the period 1 July 2018 to 30 September 2018 (that is, for the first quarter of FY19) based on actual income and actual expenditure. Those accounts were included in the due diligence material. Again, it has not been suggested that those accounts do not give proper treatment to the so called Margin Eroding Costs or any other cost referred to in the Margin Review Paper that may have been incurred at the time that those accounts were prepared. An earlier pleaded allegation to that effect was withdrawn.
Mr Hurley gave unchallenged evidence to the effect that when he performed calculations to be provided in the due diligence process he relied on information provided to him by Mr Norton-Baker concerning the actual costs of performing the works which he understood had been entered into SimPRO as and when they were in fact incurred. His understanding in that regard has not been shown to be wrong. The Court was not taken to iterations of SimPRO to show its actual content at any point in time and it has not been demonstrated that costs in fact incurred were not properly entered into the software.
All of that is important context when examining the work performed by Mr Hurley for the purpose of providing information to Optic2 during the due diligence process and the information upon which his calculations were based. It also explains why I do not consider it necessary to make findings as to whether, how and why all or some of the alleged Margin Eroding Costs were incurred.
It will be necessary to return to the Margin Review Paper when addressing Optic2’s submissions as to what the forecast gross profit margin ought to have been.
The WIP Forecasts
I have mentioned that the WIP Forecasts were prepared on 4 July 2018 and 5 July 2018. They are contained in different iterations of the same Excel workbook. They are the only iterations of that workbook provided to KPMG in the due diligence process. However, they are not the only iterations in evidence. The first iteration in evidence is dated 8 June 2018, and the last is dated 16 August 2018. The 8 June 2018 spreadsheet is already heavily populated with figures. It may reasonably be inferred that work on its preparation commenced some time prior to that day. It is proximate in time to the May 2018 calculations done by Mr Norton-Baker and to calculations undertaken in July 2018, discussed below.
In relation to the Tindal Subcontract, all iterations of the workbook contain the same contract price of $7.4m and the same gross profit margin of 31%. It was submitted by Optic2 that the persistence of those figures throughout the iterations requires an inference to be drawn that the 31% figure was based on information taken from SimPRO as it stood in 2017. I decline to draw that inference for multiple reasons.
First, I repeat what I said about the paucity of evidence as to how SimPRO worked at a practical level and its ability to produce the 31.42% figure as at mid 2018.
Second, the contract price of $7.4m was not the contract price in June 2017. It should not readily be supposed that the person responsible for the relevant entries took care to extract from SimPRO an updated contract price of $7.4m, whilst at the same time extracting from SimPRO outdated information about estimated costs or gross profit margin (assuming that could be done).
Third, as I have mentioned, Mr Norton-Baker continually monitored the progress and profitability of the Tindal Subcontract as work on the project proceeded. I have already observed that he produced figures in May 2018 that yielded a projected gross profit margin of 31% based on updated information then contained in SimPRO, including information about actual costs that had by that time been incurred as well as savings that were known to have been achieved at that point in time.
Fourth, considering the evidence as a whole, I find that when senior personnel and officers of STS-NT sought information about the progress and profitability of the Tindal Subcontract they did not personally and directly use SimPRO as their source. Rather, they sought the information from Mr Norton-Baker. Mr Norton-Baker did not have a complete recollection of all of the calculations he performed and all of the information he provided. I am satisfied that he was nonetheless a conscientious employee who understood the importance of preparing calculations based on up-to-date information and reasonable assumptions available at the time that the calculations are made. The evidence is such that if any person extracted information from SimPRO to prepare or assist in preparing a forecast of the gross profit margin, that person was Mr Norton-Baker. At the time when all of the iterations of the workbooks came into existence in mid 2018, it is unlikely that Mr Norton-Baker would have responded to requests for information by giving the 31.42% figure based on figures in SimPRO as they existed in June 2017.
Furthermore, the email correspondence accompanying the various iterations of the workbook show that Mr Bahnemann was responsible for inputting data into the iterations of the WIP Forecasts. The first iteration is attached to an email from Mr Bahnemann to Mr Norton-Baker on 8 June 2018 by which Mr Bahnemann requested Mr Norton-Baker’s assistance for additional information. However, Mr Bahnemann was not called to give evidence. To the extent that Optic2 invited the Court to speculate that he personally calculated the 31% by the faulty method specified in the pleading, I decline to do so. Mr Bahnemann was the addressee of a subpoena but a decision was made by Optic2 not to call him to give evidence. It may reasonably be inferred that if called, his evidence would not have supported this or any other aspect of Optic2’s case about how the 31% figure came to be included in the WIP Forecasts.

The plea for loss and damage states:
91By reason of the breach of the Warranties referred to in paragraphs 70 and 72 above, the, the applicant has suffered loss and damage.
Particulars
The loss suffered is:
(A)the difference between the Purchase Price and the true value of the STS Business; or
(B)alternatively to (A), the difference between the Purchase Price and the price that the applicant would have paid under the Final Share Purchase Agreement if the respondent had not breached the Warranties, or any of them, alternatively the loss of opportunity of paying that price.
The calculation of the applicant’s loss and damage will be the subject of expert evidence.
Alternatively, it is alleged that YC Investments is liable to indemnify Optic2 in relation to that loss: FASOC, [92].
YC Investments’ case is that the claim founded in breach of warranties cannot be enforced because of the operation of a time bar in clause 13.5 of the Final SPA. It relevantly provides:
13.5 Notice and time limits on Claims
(a)The Buyer must notify the Sellers’ Representative in writing of any Claim it has against the Sellers under this agreement (including any breach of any Seller Warranty of Claim under an indemnity), setting out reasonable details of the facts, matters or circumstances giving rise to the breach and the nature of the breach as soon as practicable after it becomes aware of it.
(b)The Buyer may not make any Claim for a breach of a Seller Warranty or under an indemnity unless reasonable details of the Claim have been notified to the Seller.
(i)in the case of the Seller Warranties … within 18 months after the Completion Date; and
…
(c)A Claim … will not be enforceable against the Sellers and is to be taken for all purposes to have been withdrawn unless legal proceedings in connection with the Claim are commenced within 6 months after written notice of the Claim is served on the Sellers in accordance with clause 13.5(a).
The word “Claim” is defined in Schedule 1 to the Final SPA to mean “any allegation, debt, cause of action, Liability, claim, proceeding, suit or demand of any nature whether present or future, fixed or unascertained, actual or contingent, whether at law, in equity, under statute or otherwise”.
The time bar
The onus is on YC Investments to prove, on the balance of probabilities, that the claim has not been validly brought: Young v Queensland Trustees Ltd (1956) 99 CLR 560 (at 562); Mewett v Commonwealth of Australia [2000] FCA 1045 (at [25]).
On 17 May 2020, Optic2 gave YC Investments notice by way of a letter setting out details of the facts, matters and circumstances giving rise to those breaches now pleaded in the FASOC that are pressed (the Notice Letter). That is the earliest notice given of the alleged breach now sued upon. The Notice Letter was served within 18 months of the defined completion date and therefore within the time specified in clause 13.3(b)(i). For the purposes of clause 13.5(c), this proceeding was commenced on 27 November 2020, within six months of the service of the Notice Letter.
The issue is whether the Notice Letter gave notice of each breach now pleaded in the FASOC “as soon as practicable” after Optic2 “became aware of it” within the meaning of clause 13.5(a). If that obligation has not been fulfilled, then notice will not have been given “in accordance with cl 13.5(a)” and the time bar in clause 13.5(c) will operate to preclude the enforcement of the claim.
Findings
Mr Ranyard said that he “became aware of the increased costs and the inflated profit margin” (emphasis added) associated with the Tindal Subcontract in around April 2019. He said that in June 2019 he was asked by the board of OS Group to investigate what was happening with the Tindal Subcontract. He said that he reviewed materials that included the WIP Forecasts in which the forecast gross profit margin of 31% appeared. He said (and I accept):
On reviewing those materials over a period of months from around mid-2019 to early 2020 and after consultation with Stuart Norton-Baker and Hagen Bahnemann, I was confused as to why the contingency allowances were not loaded in SimPRO with a cost price. I considered that the failure to do so would have negatively impacted the estimated gross profit margin for the Tindal Project. I considered that by excluding the estimated costs for the contingency allowance but including the revenue, the gross profit margin for the whole Tindal Project was artificially increased.
The Margin Review Paper was prepared under the instructions of Mr Ranyard. Mr Ranyard received an iteration of it on 27 June 2019 and he read it in detail shortly afterward. It contains a statement to the effect that the predicted gross profit margin “for the whole job” was 20.90%.
Mr Strathdee’s affidavit evidence was to the effect that in November 2019 he was provided with a final iteration of the Margin Review Paper. He listed the matters that “became apparent” to him as a result of reading it, and the enquiries that he made around that time. The matters that “became apparent” to him are discussed at [107] – [109] of his first affidavit. They include Mr Strathdee’s beliefs that the Additional Amount had wrongly been treated as revenue and his belief that Margin Eroding Costs (including costs associated with the termination of the ABR subcontract) had not been disclosed. He said that when “contingency costs” and the Margin Eroding Costs were taken into account, the gross profit margin from the Tindal Subcontract “was much lower, and likely to be below 20%”. That is broadly consistent with Mr Ranyard’s stated beliefs. On the basis of that evidence and the evidence discussed below I find that as early as November 2019 both Mr Strathdee and Mr Ranyard had formed the view that the earlier forecast gross profit margin had been wrongly “inflated”.
It is necessary to extract a good portion of the cross-examination on that part of Mr Strathdee’s affidavit so as to assess it as a whole. It is as follows:
Counsel:        And you set out at 107 and 108 the matters you rely upon, in your opinion, to support what you then say in 109 and 110; is that correct?
Mr Strathdee:   ---Yes.
Counsel:        And that’s, in very short form, the nature of the breach of warranty claim that you brought against the respondent?
Mr Strathdee:   ---Yes.
Counsel:        And we can see from paragraph 106 – and correct if I’m wrong, but those matters were apparent to you as a result of the margin review paper:
...and the inquiries that I made around this time.
Counsel:        And that’s a reference to in around November 2019 in paragraph 105; is that correct?
Mr Strathdee:   ---Yes.
Counsel:        And so you were aware that you had a warranty claim against the respondent in November 2019, certainly no later than December two thousand and - - -?
Mr Strathdee:   ---I’m not quite sure I follow your question. Aware that a warranty claim existed or aware that we had a warranty regime in place? Are you asking whether I had an evidentiary basis upon which to view that there was a warranty claim available?
Counsel:        You had a basis for complaining of breach of warranty that was clear to you in November – in around November 2019?
Mr Strathdee:   ---I don’t particularly recall the timing of when I formed the view that we had a basis for a warranty claim. We saw the facts. We then put it to our counsel to look at the documents to see whether the facts met with the warranties, and I think it was later that we formed the view that we had a claim. That would be the way that I would represent that to you.
Counsel:        Well, that’s not what you’ve said, though, is it? What you’ve said there is that you were aware of the following matters as a result of the margin review papers and the inquiries that you made in November 2019. You agreed with me that that gave you a basis for complaining of breach of warranty?
Mr Strathdee:   ---Well, that’s not quite the words that I used. You asked me a specific question as whether that’s when I believed we were aware that we had the basis for the warranty claim. I’m very clear that in November ’19, I discovered the facts that I’ve affirmed I discovered. We then through [sic] went through a process of speaking with our lawyers about it to determine whether we had a warranty claim. I’m just trying to be precise in answering your question.
Counsel:        Mr Strathdee, you’re more experienced than your lawyers are in this industry, aren’t you?
Mr Strathdee:   ---In which industry are you talking?
Counsel:        Well, the one in which we’re operating at the moment and you are operating at the moment and we’re having a case about?
Mr Strathdee:   ---The security – the ..... security sector?
Counsel:        No, I mean private equity financing of business transactions like the sale and purchase of businesses?
Mr Strathdee:   ---Well, I guess that’s my business, and I guess my lawyer’s business is my lawyer’s business, but it’s a legal matter to make a warranty claim, so that’s why we sought the advices we typically would of our lawyers.
Counsel:        It went to your lawyers because you believed you had a warranty claim?
Mr Strathdee:   ---I believed I had a warranty claim well before November 2019.
Counsel:        Thank you. If you could turn up page 1405 of the bundle?
Mr Strathdee:   ---I’m looking at that.
…
Counsel:        Now, when did you first attempt to satisfy clause 13.5(a)?
Mr Strathdee:   ---Well, I think after we had the margin review paper presented to us and we made the other inquiries I referred to around that time, we then provided the information to our lawyers Simpson Grierson to determine whether, on the basis of the documents, there is a warranty claim. We thought there was a breach. Because it wasn’t a question of whether we knew the facts at that time. We had to work out whether the documents afforded us an entitlement to act ..... warranties as provided.
Counsel:        So you believed you had a claim of breach of warranty, but you just wanted to make sure that you could prove it, there wasn’t some technical problem?
Mr Strathdee:   ---Well, when I say ‘believe’, I mean there’s enough here for me to make an inquiry. Then we have fact, upon which we make the claim, and then we determine whether the facts fit the document. Because if the facts didn’t fit the terminology of the warranty, we had no claim. So to me, it’s a process of suspecting something is up, reviewing the facts as to whether something is up, and then having our lawyers tell us whether, in fact, that fact pattern complies with the structure of the warranties given.
Counsel:        Mr Strathdee, you’re avoiding telling the truth so that you don’t give her Honour - - -?
Mr Strathdee:   ---I’m not – I’m sorry, I - - -
Counsel:        ..... that will show that you’ve breached this clause, aren’t you?
Mr Strathdee:   ---I - - -
Counsel:        You know full-well - - -?
Mr Strathdee:   ---I - - -
Counsel:        - - - Mr Strathdee, that this – that you knew this was a breach of warranty claim, if it was any claim at all, in November/December 2019?
Mr Strathdee:   ---I refute your allegation that I am being untruthful. I repeat what I said. It was my view that we needed to properly assess the situation with our lawyers, which we did, after we discovered the facts. I don’t believe, in my view, that we did anything other than comply with the documents that were signed in which the warranties were contained.
Counsel:        Are you - - -?
Mr Strathdee:   ---I made a proper inquiry to determine whether, in fact, we had a breach of ..... situation on the ..... to us.
Counsel:        How long did those inquiries take?
Mr Strathdee:   ---I don’t immediately recall. It was near the end of the year, and so I am presuming – I would have to go back and look at the specifics as to when we made inquiry of Simpson Grierson and when they provided us with advice.
Counsel:        You don’t remember now how long it took you to work out whether it was - - -?
Mr Strathdee:   ---I remember it taking some time because Simpson Grierson did a review. They then had to refer it to Australian counsel. That took time. I recall that fact pattern. But I don’t remember the specific dates, I’m sorry.
(emphasis added)
The cross-examination continued:
Counsel: And you’ve said that you were aware that you had a breach of warranty claim from before November 2019, and we can see that - - -?
Mr Strathdee: ---No, I did not. No, I did not. I won’t have my words taken by you and twisted to match the argument. I said I believed, I had the hunch, I had the sense that earnings were not – and costs were not disclosed to us. We made inquiry to be sure that, as good corporate citizens, we were doing the right thing before laying a warranty claim out. We took advice from our lawyers. I’m not persuaded in any way by the fact that we submitted this two days before the 18 month period is up; we submitted it within the 18 month period to what we were entitled. We did our homework. We made sure that we were getting to the bottom of this because it was a serious matter.
(emphasis added)
YC Investments seizes upon Mr Strathdee’s statement that he “believed that he had a warranty claim well before November 2019”. As can be seen (particularly in the emphasised passages), Mr Strathdee later qualified that response by saying that his belief did not amount to an awareness, but was rather in the nature of a hunch, or a state of concern that had put him on inquiry. He claimed that he did not have an awareness of the existence of a warranty claim in the requisite sense until he received legal advice as to whether the underlying facts (as he understood them to be) constituted a breach.
It is necessary to consider that evidence against the requirements of clause 13.5(a), properly construed.
The word “Claim” appears in the clause, and is defined to include an allegation. The clause should accordingly be understood to refer to facts and circumstances that support an allegation that a warranty has been breached. In my view, the obligation to notify of a “Claim” does not arise when the Buyer forms the view that it would succeed in a suit for breach. Rather, the obligation to notify arises when the Buyer comes to believe (rightly or wrongly) in the existence of facts and circumstances that, if true, could properly found an allegation of breach. That construction is supported by the apparent purpose of the clause, namely to enable the affected Seller to have notice of the allegation at the earliest opportunity with a view to considering and resolving it before litigation commences. That is the more commercial construction, given that the clause appears in the context of an agreement which provides for the Sellers or their associates to take shares in OS Group and so have a continuing stake and continuing relationships in the enterprise.
There must also be an appreciation of the nature of the breach alleged, because that too must be articulated in the notice.
The clause anticipates that the Buyer is aware of the content of the warranties and is in a position to articulate an allegation that a particular warranty has been breached in a particular way. On the basis of the evidence as a whole I am satisfied that Mr Strathdee was aware that Warranty 7.1(a) and Warranty 7.1(b) were contained in the Final SPA.
Against that context, my first observation of Mr Strathdee’s testimony is that he expressed himself in language that refers to a belief in the existence of a warranty claim. He did not express his evidence in terms of a belief in the existence of facts that caused him to wonder whether there existed a basis to make an allegation of breach. His reference to a “warranty claim” may be understood as a reference to a belief that the facts he believed (rightly or wrongly) to exist gave rise to a basis to allege a breach of warranties. The nature of the breach forming the subject of his belief may readily be inferred from the facts and circumstances asserted in his affidavit, all of them going obviously to the question of whether the forecast 31% gross profit margin was inaccurate, false or misleading because of the various omissions he specified at [107] – [109] of his affidavit. Mr Strathdee was a member of the board that instructed Mr Ranyard to gather information several months beforehand.
It is relevant that Mr Strathdee is legally qualified and a highly experienced businessman. I do not accept his evidence that he could not personally form a view that there existed a proper basis to allege a breach of the warranty claim without first seeking legal advice from Optic2’s lawyers. The principal warranty sued upon is Warranty 7.1(a). It is cast in plain terms. The facts and circumstances believed to exist were highly specific and clearly indicated a breach related to the earlier forecasts. I find that as early as November 2019 Mr Strathdee believed the forecasts were misleading because of the specific reasons now sued upon including the treatment of the Additional Amount as 100% revenue and the failure to disclose expenses such as those associated with the replacement of ABR with a new subcontractor.
In light of those circumstances I consider Mr Strathdee’s reference to the existence of a belief that “there was a warranty claim well before November 2019” should be taken at face value: he had formed a belief that the facts and circumstances supported a claim that there was a breach of warranties. That was sufficient to enable Optic2 to give notice of the claimed breach and its nature, together with the facts and circumstances said to give rise to it.
That conclusion aligns with other evidence.
In a letter to shareholders dated 31 October 2019, Mr Strathdee, then the Chairman of OS Group, wrote to shareholders concerning financial performance for the end of the June quarter. The letter called on shareholders to subscribe for a rights issue through the issuance of new ordinary shares to reduce OS Group’s debt and address a breach of its finance facilities. The letter contained statements to the effect that:
·forecasts for EBITDA for the financial year to 31 March 2020 represented 50% of the EBITDA performance forecast at the time of the Transaction; and
·the level of gross profit margin that the business was able to generate was well below what was forecast at the time of entering into the business.
The letter indicates that Mr Strathdee had compared EBITDA and gross profit margin figures with those earlier represented prior to the Transaction.
Mr Ireland gave evidence that in late 2019 or early 2020, Mr Cherrington arranged a telephone meeting at which he, Mr Cherrington and Mr Strathdee attended. He said that after some opening words, Mr Cherrington handed the meeting to Mr Strathdee. Mr Ireland told the Court that Mr Strathdee said words to the effect that if Mr Ireland was not prepared to put $1,000,000.00 of capital back into the company he would personally make Mr Ireland’s life “hell” and that he would take whatever means were necessary to “destroy” Mr Ireland’s future. According to Mr Ireland, Mr Strathdee said words to the effect that “STS had not generally traded at the forecast level” and his tone was aggressive. Mr Ireland said that he refused to continue the conversation and hung up. He said that Mr Strathdee later called Mr Ireland again and told him to pass the same threat to Mr Rakkas.
In his second affidavit, Mr Strathdee disputed the content of the telephone conversation in part. He acknowledged that he said words to the effect that STS Group had not traded at its forecast level. He said that he made specific reference to STS-NT and its poor performance with respect to the Tindal Subcontract. He also recalled saying that the financial information disclosed was not accurate “and that [Optic2] was considering whether it pursue the STS Sellers for breach of the warranties contained in the [Final SPA], unless Mr Ireland and Mr Rakkas were each prepared to inject further capital of about $1m into the business as part of a capital raising that would be put to all shareholders”. Mr Strathdee denied saying that he would make Mr Ireland’s life hell or destroy his future. He said that the telephone conversation took place on 20 February 2020.

Mr Strathdee’s acknowledgement about the content of the call relating specifically to the earlier forecasts, the Tindal Subcontract, the threatened litigation and the demand for injection of capital may be accepted as broadly consistent with Mr Ireland’s recollection. His evidence that the telephone call took place on 20 February 2020 may also be accepted as it roughly accords with Mr Ireland’s less precise recollection that it occurred in late 2019 or early 2020.
However, I do not accept Mr Strathdee’s denial with respect to the threat to make Mr Ireland’s life hell and destroy his future, given the adverse credit findings set out elsewhere in these reasons. I prefer Mr Ireland’s evidence in that respect.
Mr Strathdee went so far as to assert that the telephone call itself amounted to notice of the warranty claim for the purpose of clause 13.5(a) of the Final SPA. I do not accept that assertion. The telephone call cannot constitute notice “in writing” within the meaning of clause 13.5(a), nor was the telephone call pleaded by Optic2 as constituting notice for the purposes of the sub-clause, nor did Counsel for Optic2 embrace Mr Strathdee’s assertion in closing submissions. To the contrary, the submission (consistent with Optic2’s plea in reply) was that the Notice Letter of 17 May 2020 was the requisite written notice and that it was given as soon as practicable having regard to the need to undertake inquiries, obtain legal advice, wait for that advice and comply with governance requirements within OS Group with respect to contemplated litigation.
The content and tenor of the conversation confirms Mr Strathdee’s awareness of the facts now sued upon, the connection between those facts and the warranties, and the strength of Mr Strathdee’s convictions at the point in time that the warranties had been breached. It gives context to his evidence that he knew that there was a warranty claim well before November 2019. It was not suggested by Mr Strathdee that he came to learn of any critical fact, or that he received legal advice between November 2019 and February 2020. I infer that his state of mind as at the two dates was substantively same. Mr Cherrington was present and said nothing to alter or qualify the meaning of Mr Strathdee’s words.
It is apparent that Mr Strathdee did not believe he required legal advice before aggressively making the demands in late 2019 or early 2020 accompanied by threats of legal action specifically related to the warranties and the earlier forecasts. I do not accept his evidence that from November 2019 he was awaiting legal advice before he could form a view as to whether Optic2 had a warranty claim against YC Investments. I do not accept that demands of the kind made to Mr Ireland and Mr Rakkas would have been made on the basis of a mere hunch.
My rejection of Mr Strathdee’s attempts to qualify his “belief” statement is also informed by the poor impression he made in the course of his evidence on other topics. The impression was that his testimony was tailored to suit a case theory. An example is given earlier in these reasons at [162] – [164]. In that aspect of his evidence Mr Strathdee personally made allegations purportedly based on his own knowledge, the accuracy of which he had not checked against company records. When pressed to identify what documentary evidence there was to support his claims he could do little more than simply reassert them. I do not accept his assertion that the allegation that information had been withheld from STS-NT’s records (including its management accounts) could not be checked and demonstrated against the records themselves. An allegation that expenses incurred at a particular time were not recorded at that particular time may readily be established by a review of the records themselves. I have mentioned that Optic2 abandoned all allegations based on a failure to record expenses as and when they occurred. But it remains that Mr Strathdee’s attempts to give content to the claim in his evidence has contributed to my conclusion that he was an unimpressive witness.
I also consider Mr Strathdee to have been evasive in his responses to questions concerning the terms of his remuneration and whether he stood personally to gain from Optic2’s financial success and its success in this action more generally. The questioning proceeded as follows:
Counsel:        So Arena itself provided the 25 million. It wasn’t from investors going through Arena?
Mr Strathdee:   ---Arena represents its limited partner investors. Its funds made the investment.
Counsel:        But Arena invests itself and it also invests on behalf of others, doesn’t it? ---
Mr Strathdee:   Arena has funds. Investments are made from the funds. There are multiple investors in the funds.
Counsel:        And I take it, Mr Strathdee, that you were paid a salary by Arena?
Mr Strathdee:   ---I’m paid a consultancy fee by Arena.
Counsel:        And is the fee a – does the fee have a success element to it?
Mr Strathdee:   ---No.
Counsel:        So is it an hourly rate?
Mr Strathdee:   ---No.
Counsel:        So what is it?
Mr Strathdee:   ---A monthly stipend.
Counsel:        And it’s a fixed fee, is it?
Mr Strathdee:   ---Yes.
Counsel:        And so you had no, to the use expression, I think, from your industry, skin in the game in relation to this transaction?
Mr Strathdee:   ---No, I would not say that.
Counsel:        Well, what would you say? What – I will put it directly to you. Did you stand to make any money out of the success of this transaction?
Mr Strathdee:   ---At what point?
Counsel:        At any point?
Mr Strathdee:   ---If it is successful, yes.
Counsel:        And how much would that have been? Or would that be if it’s – if it is successful?
Mr Strathdee:   ---I have no idea. What – what – explain to me what success is and I can calculate for you an approximate number.
Counsel:        It’s not my agreement. It’s your agreement with Arena. Will you please - - -?
Mr Strathdee:   ---No, you’re interrogating me about my personal position in relation to this investment, so if you have that question for me, I would be grateful if you could tell me what success is, and then I can answer your question. If you can’t tell me what success is, I can’t answer your question because I can’t compute it.
Counsel:        I’m asking you tell me what the nature of the agreement is between you and Arena as to your remuneration, which is based on success?
Mr Strathdee:   ---May I speak with counsel, your Honour?
Her Honour:     No, there’s no objection made on the basis of relevance or any other basis. You’re required to answer the question?
Mr Strathdee:   ---Okay. So the performance of every single investment that we make as a firm – not just Optic but every single investment – forms a basis of incentives for Arena executives. But I can’t tell – I can’t tell you what quantifiable element might be, because it depends on the entire performance of the funds, not just - - -
Counsel:        I’m asking you – Mr – stop it, Mr Strathdee. I would like you to answer the question, please. What are the relevant terms of the agreement between you and Arena that will be engaged by this investment, or by the Optic investment, being in any respect successful? What are the terms of that agreement?
Mr Strathdee:   ---It would be a share - - -
At that point there was an unmeritorious objection by Optic2’s Counsel. The Court then received a frank answer:
Counsel: … Mr Strathdee, I will put the question again. Will you please tell her Honour what are the relevant terms of the agreement between you and Arena which will be engaged from any element of success in relation to their investment in Optic?
Mr Strathdee: ---There is no particular arrangement that specifies an incentive that relates to Optic and only to Optic. The incentive that I have with Arena relates to the entire performance of its funds. We have hundreds of millions of dollars invested in other investments for which I am responsible, and my performance is measured against those, of which Optic forms a part. So I cannot answer you what happens if it’s successful, even we define success. Because whatever I am paid is paid as a function of every single investment we make.
Mr Strathdee’s earlier questioning of Counsel’s use of the word “success” was peculiar, given that he had willingly embraced that word in an earlier response. Plainly he did not wish to disclose the personal terms of his remuneration. Whilst that is understandable, his failure to initially respond frankly in order to assist the Court to understand those terms conveyed the impression that his evidence was being given with an eye to the consequences for Optic2’s case, rather than with a view to providing a forthright response to the questions as posed. Whilst the subject matter of this questioning is peripheral, it did contribute to an impression that Mr Strathdee was at times evasive and carefully rehearsed.
Considering his testimony as a whole I am reinforced in my view that Mr Strathdee’s statement that he believed there was a warranty claim well before November 2019 should be understood as unguarded evidence that should be accepted for its truth in its ordinary meaning. I do not accept his attempt to convert the stated belief to a mere hunch. I consider the words “warranty claim” in his response to encompass a belief that the facts gave rise to a claim the nature of which was well understood by him. It was the difference between the earlier forecasts and the actual trading results that precipitated his aggressive threat of legal action made to Mr Ireland and Mr Rakkas late in 2019 or early 2020. He had sufficient legal knowledge and experience to make such threats and I find they were based on his genuine belief at that time that there was a basis to sue. There was enough awareness at that time to justify a demand of $1,000,000.00 from each of Mr Ireland and Mr Rakkas and enough to trigger clause 13.5(a).
Accordingly, I conclude that as early as November 2019 and for some time before, Mr Strathdee, was “aware” within the meaning of clause 13.5(a) of the Final SPA of the existence of facts and circumstances supporting a claim that there had been a breach of warranty involving the provision of inaccurate forecasts in the due diligence process, including facts and circumstances supporting his belief as to why the forecasts were inaccurate. As OS Group’s Chairman, his state of mind may be attributed to the relevant corporate entities and it was not suggested otherwise by Optic2. In my view, that is sufficient to consider that the time to fulfil the obligation under clause 13.5(a) commenced to run “well before” (and no later than) November 2019. I do not consider the provision of notice in May 2020 to fulfil the requirement that the notice of the claim be given as soon as practicable after the requisite awareness arose.
I have not overlooked Optic2’s submission that the timing of the notice under clause 13.5(a) was affected by limitations within the corporate structure relating to the need to obtain authorisation to sue. The submission should be rejected. The phrase “as soon as reasonably practicable” does not permit delays referable to Optic2 obtaining authorisation to sue or gathering sufficient evidence to form a view about prospects of success on such a suit or any other matter affecting the willingness or ability to commence legal action. In my view, clause 13.5(a) is not premised on the Buyer being presently willing and able to commence proceedings. The timing of any suit founded on allegations made under clause 13.5(a) is the subject of clause 13.5(b) and clause 13.5(c).
The consequence is that for the purposes of clause 13.5(c), notice was not given “in accordance with” clause 13.5(a) and the contractual claims brought in this proceeding cannot be enforced.
Alternative conclusion on the merits
If I am wrong in my conclusion that the time bar in clause 13.5(a) of the Final SPA applies, I would in that event reject the claims founded in breach of warranties on their substantive merits.
There is of course no evidentiary onus upon YC Investments in relation to the claim founded in contract of the kind that applies under s 4 of the ACL.
Optic2’s claim that the warranties were untrue or inaccurate was founded on substantially the same facts and circumstances as the ACL claims. They, too, were reliant on an assertion that the forecast 31% gross profit margin for the Tindal Subcontract was wrong because the figure had been taken from SimPRO in the particular manner described earlier in these reasons and because of the alleged Undisclosed Margin Matters. Optic 2 has failed to establish to the requisite standard that Warranty 7.1(a) or Warranty 7.1(b) were breached. Arguments concerning the meaning of the phrase “So far as the Seller is aware” do not arise. In the absence of proof that the forecast was inaccurate or misleading, there can be no right to a remedy. For reasons already given in connection with the ACL claim, the quantum of the particular financial remedies sought cannot be quantified on the paucity of evidence before me in any event.
The originating application must accordingly be dismissed.
THE CROSS-CLAIM
The Side Letter has contractual force. It takes the form of a letter from Optic2 to “Sellers’ Representative on behalf of the Sellers” and is marked to the attention of Mr Ireland and Mr Rakkas. By the Side Letter, the parties to the Final SPA resolved an issue arising under clause 6 concerning the calculation of an “Adjustment Amount”. It records an agreement that Optic2 pay an amount of $2,575,000.00 in two instalments into an account nominated by the Sellers’ Representative. The Side Letter is executed as a deed by each of the Sellers including YC Investments as trustee of the YC Investments (NT) Unit Trust.
The First Instalment of $1,225,000.00 was paid by Optic2 into a nominated account on 8 February 2019. The Second Instalment of $1,350,000.00 was due and payable on 30 June 2019. It has not been paid. Letters of demand were sent on 16 and 24 October 2019.
Optic2’s oral submissions with respect to the cross-claim went no further than to assert that there should be a set-off of awards. Counsel for Optic2 expressly confined his submissions to that issue and said that he had nothing more to say in response to the cross-claim other than to resist any submission YC Investments might make to the effect that Optic2’s claims constituted an abuse of process, commenced for the purpose of delaying the payment of the amount owing. I proceed on the basis that the remaining pleas in the defence to the cross-claim are abandoned. If I am wrong about that, I would reject all of the pleas on their substantive merits and now give brief reasons for doing so.
Optic2’s defence to the cross-claim originally included an allegation that no bank account had been nominated for the purposes of the payment of the Second Instalment. That part of the defence is abandoned in light of evidence in the form of correspondence nominating an account as early as January 2019.
Next, Optic2 asserted an entitlement to a remedy in the nature of a common law set-off, to the effect that it was entitled to have the Adjustment Amount reduced in accordance with the amount of damages to which it is entitled in its principal claim. There are no damages payable with respect to the principal claim. More fundamentally, I am not satisfied that Optic2 had any common law or equitable right (whether in the nature of a set-off or otherwise) to withhold payment of the Second Instalment on the basis of the asserted right to a remedy in its own action. The submissions did not identify how such a right arose at common law, whether by reference to the provisions of the Final SPA, the Side Letter or otherwise.
Next, Optic2 alleged that it was entitled to orders that the Side Letter be set aside on the ground of misrepresentation by YC Investments as to a substantial matter or alternatively on the basis of a “common mistake” as to a substantial matter. No entitlement to relief of that kind has been established on the evidence. The “common mistake” has not been articulated and the financial consequences of any actionable mistake in the quantification of any remedy has not been established. It is unclear how the law in relation to “common mistake” could apply on the facts in any event.
Finally, Optic2 pleaded that YC Investments is not authorised to bring the cross-claim on behalf of the Sellers. It is unclear why that is so. YC Investments is a party to the Final SPA and the agreement embodied in the Side Letter. It is entitled to commence a suit to enforce Optic2’s obligations under it. The declaratory relief that it seeks is to the effect that Optic2 is bound by the Side Letter to pay the Second Instalment into the nominated account. The Side Letter confers no right in Optic2 to cavil with how the money might then be distributed among the Sellers by the Sellers’ Representative. A declaration should be made in the terms sought.
I conclude that Optic2 has been in breach of its obligation to pay the Second Instalment as and from the date that it fell due. There will be judgment on the cross-claim compelling compliance with the agreement together with an award of pre-judgment interest pursuant to s 51A of the Federal Court of Australia Act 1976 (Cth). A calculation of pre-judgment interest to the date of the trial is included in YC Investments’ written closing submissions. I accept those calculations and will include their outcome in the final orders.

I certify that the preceding three hundred and eight (308) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Charlesworth.
Associate:
Dated: 19 May 2023

File number:	NTD 23 of 2020
Judgment of:	CHARLESWORTH J
Date of judgment:	19 May 2023
Catchwords:	CONTRACTS – agreement providing for the sale of shares in multiple entities following a due diligence process – agreement containing contractual warranties concerning the truth and accuracy of representations made in the due diligence process – whether a claim founded in breach of the warranties is precluded from enforcement by time bar provisions in the agreement – claim barred from enforcement – applicant failing to prove breach to requisite standard in any event CONTRACTS – cross-claim for sum of money payable under a contract – cross-respondent seeking set-off of judgments – cross-respondent not securing any judgment – cross-respondent failed to otherwise put forward a substantive defence to the allegation of non-payment – payment owing by the cross-respondent to be made forthwith CONSUMER LAW – action for damages and other remedies founded on alleged contraventions of s 18 of the Australian Consumer Law – whether representations made by the respondent in a due diligence process culminating in the sale of shares were misleading and deceptive or likely to mislead or deceive – whether representations were with respect to future matters within the meaning of s 4 of the Australian Consumer Law – whether representations deemed to be misleading and deceptive because of the operation of s 4 – applicant founding its case on an allegation that a gross profit margin forecast for a commercial contract was overstated – applicant advancing a positive case that the methodology for calculating the gross profit margin was erroneous – applicant failing to establish the erroneous methodology was employed in fact – applicant otherwise failing to establish that the forecast gross profit margin was inaccurate or otherwise misleading – applicant alleging an alternate transaction would have been entered into had the alleged contraventions not occurred – no evidence the alternate transaction would have been entered into by both the buyer and seller of the shares – insufficient evidence to quantify claims for damages
Legislation:	Competition and Consumer Act 2010 (Cth) ss 131, 139B Evidence Act 1995 (Cth) ss 136, 144 Federal Court of Australia Act 1976 (Cth) s 51A Trade Practices Act 1974 (Cth) s 51A
Cases cited:	Australian Competition and Consumer Commission v Woolworths Group Ltd (2020) 281 FCR 108 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 Brighton Australia Pty Ltd v Multiplex Constructions Pty Ltd (2019) 56 VR 557 Jones v Dunkel (1959) 101 CLR 298 McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230 Mewett v Commonwealth of Australia [2000] FCA 1045 North East Equity Pty Ltd (ACN 009 248 819) v Proud Nominees Pty Ltd (ACN 074 270 938) [2012] FCAFC 1; 285 ALR 217 Sykes v Reserve Bank (1998) 88 FCR 511 Ting v Blanche [1993] FCA 781; 118 ALR 543 Young v Queensland Trustees Ltd (1956) 99 CLR 560
Division:	General Division
Registry:	Northern Territory
National Practice Area:	Commercial and Corporations
Sub-area:	Commercial Contracts, Banking, Finance and Insurance
Number of paragraphs:	308
Date of last submission/s:	Applicant: 25 February 2022 Respondent: 28 February 2022
Date of hearing:	16, 17, 18, 21, 22, 24 and 25 February 2022
Counsel for the Applicant:	Mr M McKenna
Solicitor for the Applicant:	Gilbert + Tobin
Counsel for the Respondent:	Mr A Wyvill SC with Ms M Yates
Solicitor for the Respondent:	Ward Keller Lawyers

ORDER MADE BY:	CHARLESWORTH J
DATE OF ORDER:	19 MAY 2023