PGA Group Pty Ltd v Idameneo (No. 789) Limited (formerly Symbion Health Limited);; Peter Gunn v Idameneo (No. 789) Limited (formerly Symbion Health Limited)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

COMMERCIAL COURT

LIST D
No. 10603 of 2006

PGA GROUP PTY LTD (ACN 005 265 921)	Plaintiff
v
IDAMENEO (NO. 789) LIMITED (ACN 004 073 410) (FORMERLY SYMBION HEALTH LIMITED)	Defendant

LIST D
No. 7791 of 2008

PETER GUNN	Plaintiff
v
IDAMENEO (NO. 789) LIMITED (ACN 004 073 410) (FORMERLY SYMBION HEALTH LIMITED)	Defendant

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JUDGE:	Davies J
WHERE HELD:	Melbourne
DATE OF HEARING:	2 – 5, 9 – 12, 16, 18 – 19, 23 and 24 May 2011
DATE OF JUDGMENT:	18 August 2011
CASE MAY BE CITED AS:	PGA Group Pty Ltd v Idameneo (No. 789) Limited (formerly Symbion Health Limited); Peter Gunn v Idameneo (No. 789) Limited (formerly Symbion Health Limited)
MEDIUM NEUTRAL CITATION:	[2011] VSC 382

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CONTRACT CONSTRUCTION – Meaning of “due” – Whether “presently payable” – Principles of construction – No express time for performance – Term to be implied – Reasonable time

Guarantee – Demand for payment – Whether deficiencies in the demand – Guarantor’s liability enlivened

Tender of payment – Principles to be applied – Tender invalid as payment not proffered unconditionally

Assignment – Whether effective assignment of claim against guarantor

Equitable set-off – Principles – Whether claim is so interrelated with the other claim that it would be unjust or inequitable for one claim to be met without bringing the other claim to account – Claims sufficiently interrelated

Waiver – Representation by conduct – Estoppel

Collateral contract – Principles – Consideration execution of main contract – No inconsistency between main contract and collateral contract

CONTRACT – Whether contract for consultancy services – No concluded agreement

EVIDENCE – Expert evidence – Whether evidence based wholly or substantially on specialised knowledge – Whether relevant to the issues for determination

Words and Phrases – “due”, “presently payable”; “cost”

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs and Defendants by Counterclaim	Mr E. N. Magee QC with Mr A. A. Monichino SC and Mr E. Gisonda	Gadens
For the Defendants and Plaintiffs by Counterclaim	Mr R. C. Macaw QC with Mr T. J. Walker	Freehills

TABLE OF CONTENTS

A. INTRODUCTION......................................................................................................................... 1

B. THE SOUTHCORP CLAIM........................................................................................................ 2

Background......................................................................................................................................... 2

The Dispute on the Southcorp Claim............................................................................................ 6

Issue 1: was there a default by PGA Logistics?............................................................................ 6

(i) The meaning of “due” in clause 20.2.......................................................................................... 7
(ii) Were the balance of the Southcorp proceeds “presently payable” by PGA Logistics to MPG under clause 9.1(d)(4)(B) at the set-off dates?................................................................................................ 7
(iii) Time for payment not extended by Collateral Contract......................................................... 11

Issue 2: Was PGA’s liability as guarantor enlivened under clause 20.2 of the PGA Sale Agreement?.............................................................................................................................................................. 11

Issue 3: Were PGA’s obligations as guarantor discharged by PGA Logistics’ tender of payment of $4,325,664?.......................................................................................................................................... 14

Issue 4: Were PGA’s obligations as guarantor discharged to the extent of $4,325,664 under clause 18.2 of the PGA Sale Agreement or by general law?................................................................. 16

(i) Clause 18.2 of PGA Agreement................................................................................................ 16
(ii) General law.............................................................................................................................. 17

Issue 5: Was there an effective assignment from MPG to Mayne of MPG’s claim against PGA as guarantor?.......................................................................................................................................... 17

Issue 6: Was there a valid set-off?................................................................................................. 18

(i) Equitable set-off......................................................................................................................... 20
(ii) Waiver...................................................................................................................................... 23

Issue 7: PGA Logistics’ “reasonable costs incurred”................................................................ 24

(i) The management fee.................................................................................................................. 24
(ii) Sundry debtor claims............................................................................................................... 28
(iii) C&S Howlett contract settlement........................................................................................... 29
(iv) Hemming termination settlement.......................................................................................... 29
(v) Conclusion................................................................................................................................ 30

C. DIVIDEND COLLATERAL AGREEMENT CLAIM........................................................... 30

Issues for determination................................................................................................................. 32

Was there a collateral contract?..................................................................................................... 32

(i) The private discussion............................................................................................................... 33
(ii) Findings................................................................................................................................... 36
(iii) Conclusion on the claim.......................................................................................................... 41

Loss and Damage............................................................................................................................. 42

(i) The reversal of the profit on the sale and lease-back transaction.............................................. 42
(ii) The Southcorp capitalised costs............................................................................................... 45
(iii) Downward revision of the reported profit.............................................................................. 48
(iv) Conclusion.............................................................................................................................. 49

D. CONSULTANCY CLAIM......................................................................................................... 49

The competing claims..................................................................................................................... 50

The evidence..................................................................................................................................... 50

The 53 Foot Container Project........................................................................................................ 61

Expert Evidence................................................................................................................................ 62

E. CONCLUSION............................................................................................................................. 64

SCHEDULE OF PARTIES.............................................................................................................. 66

HER HONOUR:

A. INTRODUCTION

PGA Group Pty Ltd (“PGA”) is the parent company of the PGA group of companies, controlled by Peter Gunn (“Gunn”). In June 1999, PGA and Mayne Group Limited (“Mayne”) (now known as Idameneo (No. 789) Limited) merged their respective logistics businesses (“the merger”) into a new entity, MPG Logistics Pty Ltd (“MPG”), in which PGA took a 25% interest through its wholly owned subsidiary PGA (Logistics) Pty Ltd (“PGA Logistics”) and Mayne took a 75% interest. Gunn was appointed the CEO of MPG and Stuart Hinchen (“Hinchen”) from Mayne was appointed MPG’s Chief Financial Officer (“CFO”). Although the parties intended to float MPG within two years of the merger, it soon became apparent that the business objectives were unachievable and the merger was short lived. In September 1999 an in principle agreement was reached that Mayne would purchase PGA’s minority interest in MPG for $62 million (“the demerger”). The demerger was effected on 29 February 2000, as the result of which MPG became a wholly owned subsidiary of Mayne.

Although the parties separated their interests in 2000, PGA and Gunn assert three unresolved matters between the parties. The first matter relates to a set-off effected by Mayne. Mayne was due to pay $10.5m to PGA on 2 January 2001 and another $10.5m on 2 July 2001 in part payment for PGA’s shares in MPG. Mayne set-off against the payments due by it, a total of $4,971,657 in respect of a debt that Mayne claimed PGA (as guarantor) owed it. PGA seeks the recovery of some or all of the amount set-off (“the Southcorp claim”). The second matter relates to the quantum of the dividend that MPG paid PGA on 29 February 2000. The parties are in dispute about whether PGA has an entitlement to be paid more than it received (“the dividend collateral agreement claim”). The third matter concerns the existence and terms of a consultancy agreement for Gunn to provide consultancy services to Mayne following the demerger (“the consultancy agreement claim”).

The determination of these claims requires consideration of events that took place over 11 years ago and depends to some extent upon witnesses’ recollections of those events. It was hardly surprising that some witnesses had difficulty recalling matters or were unable to be precise in their evidence, although both parties sought to impugn the reliability and credit of the other party’s witnesses. There was considerable disparity in the evidence that was given and from time to time witnesses contradicted their own evidence or were shown to have imperfect recollections. Nonetheless I am of the view that all witnesses gave their evidence honestly as best as they could recollect either from independent recollection or aided by their review of contemporaneous documents. I could not conclude, however, that the recollection of any of them was particularly reliable because of the considerable time that has elapsed since the events in question. I found the contemporaneous documents to be of greater probative value than the independent recollections and reconstructed recollections of the witnesses.

B. THE SOUTHCORP CLAIM

The issues that arise for consideration under this claim are more readily understood against the background of the relevant events that, by and large, were not in dispute.

Background

There were several agreements that governed and gave effect to the merger in June 1999. Those agreements included the PGA Sale Agreement pursuant to which PGA companies sold to MPG assets used by them in the PGA logistics business. Those assets excluded the “Southcorp contract” and the “Southcorp claim”.[1] At the time of the merger, PGA Logistics had a claim against Southcorp Whitegoods Pty Ltd (“Southcorp”) relating to the purported termination of a contract between PGA Logistics and Southcorp dated 17 August 1998. Although the “Southcorp contract” and the “Southcorp claim” were excluded assets, clause 9.1(d)(1) of the PGA Sale Agreement imposed the obligation on PGA Logistics to pursue the Southcorp claim actively “with a view to recovering the maximum realisable commercial benefit which is being foregone as a result of the loss of the Southcorp contract”.[2] Clause 9.1(d) further provided as follows:
[1]PGA Sale Agreement, definition of “Business Assets” and “Excluded Assets”, Cl 1.1.
[2]PGA Sale Agreement, Cl 9.1(d)(1).

(4)All proceeds recovered by PGA Logistics from the Southcorp claim must be applied first:
(A)In paying all reasonable costs incurred by PGA Logistics in prosecuting the Southcorp claim including but not limited to legal costs; and
(B)In paying the balance of the proceeds to [MPG];

(5)To the extent that proceeds recovered by PGA Logistics from the Southcorp claim are inadequate to meet the amounts referred to in clause 9.1(d)(4)(A), the Sellers and the Guarantors will be solely liable and [MPG] has no responsibility.[3]

[3]Ibid, Cl 9.1(d).

As all staff associated with PGA Logistics had gone across to MPG as part of the merger, Gunn had the Southcorp claim pursued through another PGA company, PGA Management Pty Ltd (“PGA Management”) under the responsibility of Ian Urquhart (“Urquhart”), a director of PGA whom Gunn described in his evidence as his “advisor … on all matters the subject of [PGA] companies’ businesses.”[4] The Southcorp claim was resolved in late 1999 upon Southcorp agreeing to pay PGA Logistics the sum of $5,000,000 which PGA Logistics received on or about 3 February 2000.
[4]Witness Statement of Peter Gunn (19 March 2010), [6].

On 8 November 2000 MPG sent PGA Management an invoice for $5,000,000 because it had not received any part of the Southcorp proceeds. On 15 December 2000 Gunn sent a facsimile in response to that invoice addressed to David Cranwell (“Cranwell”) the General Manager of MPG. In the facsimile Gunn acknowledged that PGA had an obligation to account to MPG for the proceeds from the settlement of the Southcorp claim “less costs incurred in settling this claim”. The facsimile went on to state that:

At this point in time we have not yet finalised our settlement with those who have a claim ranking ahead of MPG. However, so far as I can ascertain, the situation at this point is (sic) time is as follows:

$

·Gross amount received from Southcorp   5,000,000
·Less costs incurred to date
oPGA
-         Management Fee                   500,000
oSouthcorp
-         Sundry debtor claims            49,471
oC&S Howlett
-         Contractor settlement             61,522
oHemming
-         Termination settlement          35,000
oHenderson
-         Mediation fees    10,000
oCornwall Stodart
-         Legal Fees   18,343             674,336

·Net amount available to date $4,325,664
·Thus, as at December, 2000, there is a net amount of $4,325,664 available to pay to MPG. However, not all claims have yet been finalised…

The facsimile detailed a foreshadowed claim by Teklog Pty Ltd (“Teklog”) (a company in the PGA group of companies) against MPG and PGA (“the Teklog claim”).

Initially MPG disputed all the claimed costs and responded on 20 December 2000 by making written demands to PGA Logistics and PGA, as guarantor of PGA Logistics’ obligations under clause 20 of the PGA Sale Agreement, for payment of the whole of the proceeds of $5,000,000. On 22 December 2000 Gunn, in an endeavour to resolve matters, sent a cheque in the amount of $4,325,664 to MPG as payment of the net proceeds of recovery in respect of the Southcorp claim – that is $5,000,000 less deductions totalling $674,336. The payment was expressed to be:

….. made on the following basis:

·PGA to provide full particulars of expenses incurred. This will be provided in the New Year.
·MPG to indemnify PGA against any further expenses that may be incurred in concluding the Southcorp matter.

On 29 December 2000 Cranwell sent a letter on Mayne letterhead to PGA Logistics returning the cheque in which he wrote that:

We are unable to accept the cheque … The conditions on which it has been proffered are unacceptable, not being in accordance with the contractual rights and obligations under the PGA Sale Agreement.

On 2 January 2001 Mayne was due to pay PGA the first instalment of the cash component of the consideration for PGA’s shares in MPG due under the MPG Sale of Shares Agreement. The instalment payable was $10.5m. On that day, Mayne gave notice to PGA Logistics and the guarantors under the PGA Sale Agreement, which included PGA and Gunn, that MPG had assigned to Mayne:

all of its right title and interest in the amounts owing by you to [MPG] pursuant to [clauses 9.1(d)(4)(B) and 20] of the PGA sale agreement

By a separate letter, also provided on 2 January 2001, Mayne informed them that it claimed a “set off against its obligation to pay [PGA] the sum of $10.5 million … the amount of $4,825,664 in partial satisfaction of the debt owed by [PGA] as guarantor under [clauses 9.1(d)(4)(B) and 20] of the [PGA Sale Agreement]”. Mayne, in determining this amount, allowed all PGA Logistics’ claimed costs other than the management fee of $500,000 but reserved its rights to sue for the costs allowed if PGA could not adequately prove eligibility of those costs.

On 10 January 2001 Gunn wrote to Cranwell at Mayne stating that PGA Logistics would cancel the cheque returned to it on 29 December 2000, and would bank the cheque that the company had received from Mayne in the amount of $5,674,336. This was stated in the letter to be on the basis that PGA Logistics reserved its rights to be paid the $500,000 management fee and would provide all relevant information in support of its claim for the management fee “in the next week or so”. This information was provided on 23 March 2001 in a document headed “Justification of Fees” that was prepared by Urquhart.

The management fee issue remained an outstanding item for resolution between PGA and MPG and eventually on 2 July 2001 Mayne advised that it rejected the management fee claim as well as three of the other costs in respect of which it had earlier reserved its rights, namely $49,471 for sundry debtor claims, $61,522 in relation to the claim by C&S Howlett and $35,000 for the settlement of the wrongful dismissal claim by Hemming. On 2 July 2001, the day on which the second instalment of the cash component of the consideration payable by Mayne for PGA’s shares in MPG was due in the amount of $10.5m, Mayne informed PGA that it had set-off $145,993 and paid PGA an amount of $10,345,007.

The Dispute on the Southcorp Claim

In dispute between PGA and Mayne is:

(a) whether at the times of the set-offs, PGA was liable as guarantor under clause 20 of the PGA Sale Agreement with respect to any part or all of the proceeds recovered by PGA Logistics from the Southcorp claim;

(b) whether MPG assigned any of its rights under clause 20 of the PGA Sale Agreement;

(c) whether Mayne had a right of set-off from the debt that it owed PGA under the MPG Sale of Shares Agreement; and

(d) the amount payable as the “balance” of the Southcorp proceeds.

The pleadings have raised for determination a number of issues that underpin the dispute between the parties.

Issue 1: was there a default by PGA Logistics?

PGA contended that as at 2 January and 2 July 2001, when the set-offs occurred, PGA was not liable to MPG under clause 20 as guarantor because the balance of the Southcorp Claim proceeds under clause 9.1(d)(4)(B) of the PGA Sale Agreement were not “due” by PGA Logistics to MPG, within the meaning of that word as used in clause 20.2.

(i) The meaning of “due” in clause 20.2

Clause 20 relevantly provided as follows:

20.1 Guarantee and indemnity
The Guarantors jointly and severally, unconditionally and irrevocably guarantee to [MPG]:
(a) The payment of the Guaranteed Monies; and
(b)The performance of [PGA Logistics’] obligations under this agreement.

20.2Payment
If the Guaranteed Monies are not paid when due the Guarantors must immediately on demand from [MPG] pay to [MPG] the Guaranteed Monies in the same manner and currency as the Guaranteed Monies are required to be paid.

It was argued that “due” in the context of clause 20.2 meant “presently payable”. I accept that construction as the meaning of the word “due” falls to be considered as part of the composite phrase “not paid when due” which clearly indicates that “due” must mean “presently payable”.[5]

(ii) Were the balance of the Southcorp proceeds “presently payable” by PGA Logistics to MPG under clause 9.1(d)(4)(B) at the set-off dates?

[5]Cf Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, 8-10 (Gibbs CJ).

PGA contended that the balance of the proceeds were not presently payable by PGA Logistics to MPG as at 2 January and 2 July 2001 because, on the proper construction of clause 9.1(d)(4), the obligation on PGA Logistics to pay MPG under clause 9.1(d)(4)(B) arose after the proceeds recovered from the Southcorp claim were applied in payment of PGA Logistics’ reasonable costs incurred. It was further contended that the process in clause 9.1(d)(4)(A) was not complete as at 2 January and 2 July 2001 because MPG had disputed PGA Logistics’ costs and there was a foreshadowed possibility of further costs arising relating to the Teklog claim.

Mayne contended that clause 9.1(d)(4) should be construed as requiring PGA Logistics to pay over the proceeds of the Southcorp settlement, subject to its entitlement to withhold amounts for reasonable costs incurred in prosecuting it. Mayne argued that those costs were ascertainable by, or shortly after, the date of the successful prosecution and that the obligation arose at that point.

Clause 9.1(d)(4) did not in language prescribe when PGA Logistics was required to pay the balance of the proceeds to MPG. Rather, the stipulation was that the proceeds “must be applied” by PGA Logistics. The issue is whether it can be read into that stipulation that the balance of the proceeds were not payable to MPG until after PGA Logistics had applied the proceeds recovered to the payment of its reasonable costs incurred in prosecuting the Southcorp claim. The determination of this issue requires an objective inquiry into what the parties’ intended by the language used and, in ascertaining intention, the Court must consider clause 9.1(d)(4) in light of the contract as a whole, its purpose and object and the surrounding circumstances in which the contract was made.[6] Context is important to convey the meaning of a text that a reasonable person in the position of the parties would have understood the parties to have intended by the language used in the contract.[7]
[6]Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165.
[7]Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451.

PGA argued that the attribution intended by the word “first” in clause 9.1(d)(4) must be the application of the proceeds to PGA Logistics’ reasonable costs incurred, otherwise the word “balance” cannot be given its ordinary meaning of an amount that is left over. It was argued for PGA that the reason for paying PGA Logistics “first” out of the recovered proceeds was “readily apparent when considered against the role that PGA Logistics was to play under the 9.1(d) arrangement”.[8] That role was said to be the pursuit of the cause of action that PGA Logistics had against Southcorp which necessarily would involve PGA Logistics incurring costs. It was argued that as there was no provision for compensation for those costs other than by application of the proceeds of the Southcorp claim itself, the obligation that PGA Logistics pay only the balance of the proceeds following the application of some or all of the proceeds to its reasonable costs represented an important exercise of risk allocation. PGA Logistics was not to be kept out of its money for any longer than necessary and “to the extent that there was any dispute between PGA Logistics and MPG about the reasonableness of costs incurred, PGA Logistics was to hold the money while the dispute was resolved”.[9] It was also submitted that unless and until the proceeds had been so applied, the quantum of the balance was unknown and MPG’s rights were inchoate such that it could not be said that any moneys were payable to it.
[8]Plaintiff’s Closing Submissions, [17].
[9]Ibid, [18].

I accept the submission that the proceeds were to be applied first in paying those costs of PGA Logistics which met the description in clause 9.1(d)(4) with the balance to be paid to MPG. The language of clause 9.1(d)(4) makes it plain that the parties intended that PGA Logistics would have the right to take its costs out of any proceeds recovered. This right is explicable having regard to the clear terms of clause 9.1(d)(1) read in conjunction with clauses 9.1(d)(4) and 9.1(d)(5). PGA Logistics was obliged to prosecute, at its own expense, the Southcorp claim for the benefit of MPG, subject to the right to recoup its costs to the extent that the proceeds that it recovered were sufficient to meet those costs and PGA Logistics was to bear the risk that its costs might outweigh the proceeds recovered. MPG had no responsibility for PGA Logistics’ costs, to the extent that the proceeds recovered by PGA Logistics from the Southcorp claim were inadequate to meet those costs, and the PGA Group was solely liable to meet those costs.

The question then is whether PGA Logistics’ right to take its costs out of any proceeds recovered meant that it was not liable to account to MPG for the balance before the proceeds were applied to PGA Logistics’ costs. In my view, clause 9.1(d)(4) should not be construed in that way.

Clause 9.1(d)(4) did not stipulate that the balance was not payable to MPG until the proceeds “had been” or “were” applied to PGA Logistics’ reasonable costs. The stipulation was that all proceeds recovered “must be applied … in paying”. The language was in the active sense. That is to say, in the sense of the doing of an act, a direction as to what must be done with the proceeds.

There was no express time for performance of PGA Logistics’ obligation to account to MPG for the balance of the proceeds. However, a term may be implied that it was to be done within a reasonable time from PGA Logistics receiving the Southcorp proceeds and ascertaining the costs incurred by it in prosecuting the claim.[10] Such an implied term is consistent with the parties’ evident commercial purpose that PGA Logistics was to pursue the Southcorp claim for the benefit of MPG, into which the parties had transferred their logistics businesses. PGA Logistics had the substantive contractual obligation to prosecute the Southcorp claim to recover the maximum realisable commercial benefit,[11] and the substantive contractual obligation to account to MPG for the proceeds recovered, subject to PGA Logistics recouping its costs of prosecution.[12]
[10]York Air Conditioning & Refrigeration (Australasia) Pty Ltd v Commonwealth (1949) 80 CLR 11; W & J Investments Ltd v Commissioner of Taxation (1987) 16 FCR 314; Southlink Holdings Pty Ltd (as trustee of the Failsafe Trust) v Moreland Pty Ltd [2010] VSC 214, 9 [28]-[29].
[11]PGA Sale Agreement, Cl 9.1(d)(1).
[12]Ibid, Cl 9.1(d)(4).

PGA Logistics received the proceeds on 3 February 2001. The evidence showed that PGA Logistics had ascertained its costs by 15 December 2000, at the latest. Gunn wrote to MPG on PGA Management letterhead advising MPG of those costs and that “so far as [he could] ascertain” the net amount of $4,325,664 was “available [to pay MPG] to date”. In my view, PGA Logistics was then liable to account to MPG for that net amount of $4,325,664. The obligation to account to MPG for the proceeds within a reasonable time of determining its costs meant that PGA Logistics could not withhold payment indefinitely pending some indeterminate claim by Teklog or because MPG subsequently disputed that PGA Logistics could net off the costs that it claimed. PGA Logistics by 15 December 2000, at the latest, was liable to MPG for the net amount that PGA Logistics had calculated was payable.

(iii) Time for payment not extended by Collateral Contract

An alternate submission put forward in PGA’s closing submissions was that “the terms of the collateral contract were such that no obligation was owed at all [by PGA Logistics to MPG] until the subject-issues were resolved by KPMG’s intervention”.[13] This submission did not arise on the pleadings nor was there any evidential basis for it. The submission is accordingly rejected.
[13]PGA Closing Submissions, [26].

Issue 2: Was PGA’s liability as guarantor enlivened under clause 20.2 of the PGA Sale Agreement?

On 20 December 2000 MPG made a demand for payment on PGA to enliven its liability under clause 20.2 of the PGA Sale Agreement. The demand was in the following terms:

Demand
We hereby demand that you pay us in accordance with clauses 20.1 and 20.2 $5,000,000.
…
In accordance with clause 9.1(d)(4) of the PGA Sale Agreement, the reasonable costs (if any) incurred by [PGA Logistics] in prosecuting the Southcorp claim are to be deducted from the proceeds of the Southcorp claim before the balance is to be paid to us. We have received a facsimile from [PGA Management] claiming that the sum of $674,336 is to be deducted but we have rejected that claim. If in due course [PGA Logistics] establishes any proper deduction under clause 9.1(d)(4) we will notify or credit you accordingly.
Payment
You should make payment to us at our office at Level 21, 390 St Kilda Road, Melbourne by noon on Friday 22 December 2000 (Attention David Cranwell).

PGA argued that the demand was defective for a number of reasons which counsel for PGA described as “deficiencies” that “when taken together, lead to the conclusion that no demand within the terms of clause 20.2 was made on [PGA]”.[14] Six “deficiencies” were identified. They were identified as:
[14]Ibid, [34]

(a) first: an overstatement of the debt, which “on Mayne’s own case… is no more than $4,971,657”. This appears to be a reference to the amount that Mayne set-off, some six months after MPG had made the demand on PGA. Although counsel for PGA rightly accepted that an overstatement does not ordinarily invalidate a demand for payment,[15] it was submitted that the overstatement was “a relevant factor tending towards invalidity when considered against the other deficiencies”.[16] It is difficult to see how that can be so. The demand did not overstate the amount that MPG then regarded as owing by PGA Logistics. MPG’s position at the time of the demand was that the whole of the Southcorp claim proceeds in the amount of $5,000,000 were payable to it because PGA Logistics had not established that any of the costs that it claimed fell within the description in clause 9.1(d)(4)(A) as being “reasonable costs”. MPG explained in the demand why it sought payment of the full $5,000,000. The terms of the demand were sufficiently clear for PGA to pay the amount that it considered was owing, which it did when it tendered the cheque for $4,325,664 to allow for the costs that it claimed were deductible from the gross amount it had received from Southcorp.
[15]Geraldine May Andrews and Richard Millett, Law of Guarantees (4^th ed, 2005), 253; see also Bank of Montreal v Winter (1981) 101 APR 385 (NLSC).
[16]Plaintiff’s Closing Submissions, [35].

(b) secondly: it was argued that MPG sought to do three things in its letter – (1) demand monies that did not constitute the balance of the proceeds as so described under clause 9.1(d)(4)(B); (2) assert a right to reject – and, by implication, unilaterally determine – what constituted a reasonable cost; and (3) require the proceeds of the Southcorp claim to be applied, first, in full payment to MPG, and then second, with any reasonable costs to be credited back to PGA Logistics. It was submitted that MPG did not have a contractual entitlement to do any of these three things and that by framing its demand in these terms, it did not comply with its obligations under clause 20.2. In my view, this is not a fair characterisation of the demand. The letter explained the basis for demanding the amount of $5,000,000 and not some lesser amount. It was based upon MPG’s view that PGA Logistics had not established that any of the costs claimed were costs as described in clause 9.1(d)(4)(A);

(c) thirdly: it was argued that MPG withheld from PGA its intention to assign its claim against the guarantors to Mayne which “goes to the question of good faith”.[17] It was submitted that PGA ought to have been told about the proposed assignment and set off. It is difficult to see why, as PGA was not the principal debtor. PGA was guarantor for PGA Logistics and had the secondary obligation to answer for the debt of PGA Logistics. In making the demand, MPG was seeking to enforce the guarantee by exercising its contractual right to make PGA liable as guarantor for the debt of PGA Logistics;
[17]Ibid, [38].

(d) fourthly: it was argued that the terms of the letter and subsequent conduct of MPG evinced an intention to reject a payment of an amount less than $5,000,000, even if the amount tendered was the amount that was justly due. Apart from the fact that no attempt was made to identify the putative conduct in question, the submission was unsupported by the terms of the letter. The submission is rejected;

(e) fifthly: it was argued that the letter required payment within two days, which was not a reasonable time because (1) it was not enough time to organise the mechanics of a multi-million dollar payment; (2) the demand was to expire just before the Christmas and New Year break in which many employees are typically not at work; and (3) MPG and PGA Logistics were still in dispute as to the amount that was due and no mode of resolution had been suggested in the letter. Once a demand has been served, the guarantor must be given a reasonable time to comply because failure to comply enlivens the guarantor’s liability. What may constitute a reasonable time will depend on the particular circumstances. In this instance, the short answer to this submission is that PGA Logistics was able to organise payment in response to the demands to it and PGA Logistics within the time provided. Further, the fact that there was a dispute between the parties as to the actual amount payable did not make the time for meeting the demand unreasonable; and

(f) sixthly: it was argued that the demand contravened the terms of “the collateral agreement”. This submission entirely lacks substance. It was not part of PGA’s case as presented on the pleadings nor was there any evidence to that effect. The submission is rejected.

Upon scrutiny, the submissions on the “deficiencies” identified appeared to suggest, without being explicit, that MPG made the demand on PGA for some collateral purpose that has vitiated the validity of the demand. Insofar as the submissions were intended to amount to an attack on the bona fides of MPG in making the demand, those submissions are rejected as they lack evidentiary basis. No lack of good faith on the part of MPG could be inferred merely because it took steps to enforce the guarantee given by PGA under clause 20 of the PGA Sale Agreement.

Issue 3: Were PGA’s obligations as guarantor discharged by PGA Logistics’ tender of payment of $4,325,664?

On 22 December 2000 PGA Logistics, in response to the demands for payment, sent a cheque for $4,325,664 to MPG under cover of a memorandum from Gunn to Cranwell. The memorandum relevantly stated:

The letters received at our office earlier this week do not help in amicably resolving anything. Attempts to do so, in the absence of discussion concerning related matters, are also not helpful. Nonetheless, in a further attempt to resolve matters, please find attached a cheque for $4,325,664 in settlement of the Southcorp issue. This payment is made on the following basis:
*PGA to provide full particulars of expenses incurred. This will be provided in the New Year.
*MPG to indemnify PGA against any further expenses that may be incurred in concluding the Southcorp matter.

Mayne returned the cheque by letter dated 29 December 2000. The letter explained that:

The conditions on which it has been proffered are unacceptable, not being in accordance with the contractual rights and obligations under the PGA Sale Agreement. The requirements are clearly stated in our letter of 20^th December.

PGA has contended that its obligations as guarantor were discharged by the tender of the cheque. Mayne has contended that the tender was invalid because of the basis on which payment was made.

The legal principle of tender is that payment should be proffered unconditionally. A tender is invalidated and is of no effect if the tender is made on terms that would adversely affect the rights of the person to whom the tender is made. In Shaw v Wright[18] Molesworth J said:

I think a condition, to make a tender bad, must be one which, if the money be taken, would preclude the taker from disputing a matter which he has a right to dispute, not the preserving to the person making the tender his rights of litigation.[19]

The rationale for the legal principle is that the creditor would be required, as a condition of the tender, to give up the right to recover more than that which the debtor considers is in fact owed.[20] The creditor must be left in a position after accepting the tender to be able to allege that more was due than the payment that was made.

[18](1863) 2 W&W(E) 57.

[19]Ibid 70.

[20]Henwood v Oliver (1841) 1 QB 409.

It was submitted for PGA that the terms on which the cheque was sent to MPG were analogous to a tender where the debtor states that he considers that the amount tendered is all that is due or that he reserves the right to dispute the amount. A tender on that basis would be valid because in essence all that is conveyed is that payment is tendered without admission of liability. However, that was not the language of the memorandum. The actual wording was in terms that the cheque for $4,325,664 was proffered “in settlement of the Southcorp claim” on the “basis” that “MPG [was] to indemnify PGA against any further expenses that may be incurred in concluding the Southcorp matter”. In my view, it was plainly conveyed to MPG that acceptance of the cheque on the terms prescribed was payment in settlement of the Southcorp claim. This was not an unconditional payment by way of tender. The payment was proffered in satisfaction of PGA’s liability to MPG and accordingly did not constitute good tender.[21]
[21]Mitchell v King (1833) 172 ER 1223.

I find that PGA’s obligations as guarantor were not discharged by PGA Logistics’ tender of payment.

Issue 4: Were PGA’s obligations as guarantor discharged to the extent of $4,325,664 under clause 18.2 of the PGA Sale Agreement or by general law?
(i) Clause 18.2 of PGA Agreement

PGA argued that its obligations to the extent of $4,325,664 were discharged by operation of clause 18.2 of the PGA Agreement. Clause 18.2 was in terms that:

Limitation for Future Events
The …. Guarantors are not liable to [MPG] for any Claim which would not have arisen but for, or any loss or damage attributable to:
(a)anything done or not done after Completion by [MPG] or any subsidiary of [MPG] or any person acting, or purporting to act, on behalf of [MPG] or any Subsidiary of [MPG]; ….

The argument was to the effect that PGA’s liability under the guarantee would have been no more than $674,336 had Mayne not rejected the tender but accepted payment of $4,325,664, and therefore no claim would have arisen against PGA for the amount of $4,325,664 “but for” the rejection of the tender.[22] This argument has no merit. The claim under clause 20 arose against PGA because PGA Logistics was in default. MPG was acting within its lawful rights to make its demand on PGA under clause 20.2 and Mayne (as assignee) was acting within its lawful rights to reject PGA Logistics’ tender of payment. Accordingly clause 18.2 has no application and did not operate to discharge PGA from liability for the unpaid proceeds.
[22]Reply and Amended Defence to Counterclaim (25 February 2011), [36]; Plaintiff’s Closing Submissions, [50].

(ii) General law

Next it was argued for PGA that the rejection of the tender should be regarded as the refusal by a creditor of performance of the duty guaranteed that constituted “misconduct” which attracted the intervention of equity to relieve PGA from its obligations under clause 20 to the extent of $4,325,664. This submission is rejected for like reasons for rejecting the argument based on clause 18.2.

Issue 5: Was there an effective assignment from MPG to Mayne of MPG’s claim against PGA as guarantor?

The assignment was executed on 27 December 2000 in the following terms:

For good and valuable consideration as agreed between them, [MPG] hereby assigns to [Mayne] all of its right title and interest in and to:
1the right to be paid any amount payable from the proceeds of the Southcorp claim (as defined in the PGA Sale Agreement dated 7 June 1999) by [PGA Logistics] pursuant to clause 9.1(d)(4)(B) of the PGA Sale Agreement; and
2each and every claim that MPG has against [PGA, Gunn and Stanlake] as Guarantors under the PGA Sale Agreement in respect of the amount payable by [PGA Logistics] as described in point 1 above.

PGA accepted that a claim under clause 20.2 of the PGA Sale Agreement was a claim in respect of the amount payable under clause 9.1(d)(4)(B) and thus that the assignment was effective to pass claims against PGA “in respect of the amount payable” by PGA Logistics to MPG pursuant to clause 9.1(d)(4)(B), if there was an extant claim at the time of the assignment.[23] PGA’s contention that the assignment was ineffective was based on the contention that no amount was presently payable by PGA Logistics to MPG as at 20 December 2000, when the demand was made by MPG on PGA. I have already rejected that contention.
[23]Property Law Act 1958 (Vic), 134.

The balance of the arguments for PGA supporting its contention that the assignment was ineffective related to whether the assignment was effective to assign claims under clauses 20.3 and 20.4 of the PGA Sale Agreement. It is unnecessary to deal with those arguments in view of my finding that MPG had a claim against PGA under clause 20.2.

Issue 6: Was there a valid set-off?

On 2 January 2001 Mayne claimed a set-off in the following terms:

Under clause 2.3(a) of the MPG Sale of Shares Agreement, [Mayne] is obliged to pay [PGA] the sum of $10.5 million on 2 January 2001.
By an assignment dated 27 December 2000, [MPG] assigned to [Mayne] the right to receive payment from each of you of the sum of $5 million less “reasonable costs” of prosecuting the Southcorp Claim under clause 9.1(d)(4)(B) of the PGA Sale of Shares Agreement dated 7 June 1999. To date, neither MPG nor [Mayne] has received that payment or adequate explanation of any expenses claimed. On 15 December 2000, [PGA Management] (which is not a party to either of these agreements) asserted that proper costs included:
1       A management fee payable to [PGA Management] of $500,000.
2       Sundry debtor claims payable to Southcorp of $49,471.
3       C&S Howlett Contractor settlement of $61,522.
4       Hemming termination settlement of $35,000.
5       Henderson mediation fees of $10,000.
6        Cornwall Stodart legal fees of $18,343.
MPG has rejected [PGA Management’s] standing to make any such claims and that any of these claims are properly made without adequate detail to justify that they are “reasonable costs” within clause 9.1(d)(4)(A) of the PGA Sale Agreement. [Mayne], as assignee of MPG’s rights under clause 9.1(d)(4)(B) and its rights under clause 20 in respect of that amount against the Guarantors under the PGA Sale of Shares Agreement also rejects that assertion.
[Mayne] hereby claims set-off against its obligation to pay [PGA] the sum of $10.5 million under the MPG Sale of Shares Agreement the amount of $4,825,664 in partial satisfaction of the debt owed by [PGA] as guarantor under those clauses of the PGA Sales of Shares Agreement.
In determining this amount, [Mayne] has taken into account all amounts claimed referred to in 2 to 6 above, but without prejudice to, and while reserving its rights in respect of, any claim made by [PGA Logistics] in respect of these items under clause 9.1(d)(4)(A) of the PGA Sale Agreement. For clarity, [Mayne] reserves its rights as assignee from MPG to sue for the amount of $174,336 if adequate proof of the eligibility of the items referred to above in 2 to 6 above is not given by [PGA Logistics].
Accordingly, we attach our cheque for $5,674,336, being the balance of the $10.5 million payable under clause 2.3(a) of the MPG Sale of Shares Agreement.

Gunn responded by letter on PGA Logistics letterhead dated 10 January 2001 that:

1[PGA] will bank the [Mayne] cheque for $5,674,336 on the basis that we reserve our rights to be paid our $500,000 Management Fee.
2We will let you have, in the next week or so, all relevant information in support of our claim for payment of the Management Fee.
3We will cancel our own cheque which you returned to us with your letter of 29^th December.

On 23 March 2001, Urquhart sent documentation to MPG “in support of the Management Fee claimed in respect of prosecuting the Southcorp Claim”. The documentation was under cover of a document headed “Justification of Fees”.

On 2 July 2001, Mayne wrote to PGA Logistics, Gunn, PGA and Stanlake. After referring to the “Justification of Fees” document and to Mayne’s letter to them of 2 January 2001 in relation to setting off amounts referable to the Southcorp Claim, Mayne advised that it did not consider that the management fee was a “reasonable cost” of prosecuting the Southcorp Claim and that Mayne also rejected the claims for $49,471 for the sundry debtor amounts, $35,000 for the Hemming settlement and $61,522 for the C&S Howlett claim. The letter went on to state:

In our letter of 2 January 2001, we “allowed” $174,336 in relation to the [costs claimed]. In view of the material which you have now provided, Mayne hereby sets off $145,993 … from the $10,500,000 payment due to be made under the MPG Sale of Shares Agreement today. Accordingly I enclose Mayne’s cheque payable to [PGA] for the sum of $10,354,007 which, taking into account the matter the amount of $145,993 set-off, satisfies Mayne’s obligation under clause 2.3(b) of the MPG Sale of Shares Agreement.

By letter dated 4 July 2001, the solicitors for PGA and Stanlake advised Mayne that PGA “vehemently” disputed that the payments made by Mayne satisfied Mayne’s obligations contained in the MPG Sale of Shares Agreement, but that PGA Logistics would bank the cheque for $10,354,007 “on the basis that it reserves all of its rights generally” and “particularly” with respect to the costs that it had claimed.

(i) Equitable set-off

Mayne contended that the right to set-off existed in equity. To establish the right to a set-off in equity, it is not sufficient merely to point to cross claims nor is the issue one of fairness only. The basis of the right is founded in the connection of the claims with each other. Equity will recognise the set-off if the cross claim “impeaches” or “goes to the root” of the claimant’s “title” to the other claim.[24] The notion of impeachment reflects the requirement that the claims must be so closely linked with each other that payment on one claim could not fairly be made without accounting for the cross claim. For equitable set-off the nature of the connection between the claims must call into question the right of one party to assert its claim without giving recognition to the other party’s claim. Where there is that connection, equity will recognise the right to set-off if it would be unjust or inequitable to allow one claimant to insist on satisfaction of his or her claim without taking account of the cross-claim.[25] As the learned authors of Equity and Trusts in Australia[26] explained, after reviewing the authorities on equitable set-off:

… set-off in equity is “firmly rooted in the need to achieve fairness between the parties”. It follows that proof of a close connection between the claims per se does not justify set-off: the court also considers “the effect the remedy would have on the equities between the parties”.[27]

Each case needs to be considered on its own particular facts to determine whether the required interconnection of claims exists. In a particular case, the sufficiency of the connection between the claims and the injustice of one claim being paid without accounting for the other claim may be established simply from the fact that they arise out of the same contract or transaction. However, it is not necessary for the claim and the cross claim to arise from the same contract as the test is not whether the claims are mutual but whether one claim is so interrelated with the other claim that it would be unjust or inequitable for one claim to be met without bringing the other claim to account. [28] Thus, the fact that the claims arise out of the same contract will also not be determinative because the claims nonetheless may be separable and independent. The required standard for the party claiming the set-off to show is that the cross-claim is “essentially bound up with”[29] the other claim so that the other claimant’s right to recover is called into question or “impeached” by that party’s claim.

[24]The classic test was formulated by Lord Cottenham LC in Rawson v Samuel (1841) 41 ER 451; see also AWA Ltd v Exicom Australia Pty Ltd (1990) NSWLR 705, 711 (per Giles J), Cathedral Place Pty Ltd v Hyatt Australia Ltd & Ors [2003] VSC 385, 20 [39].

[25]Forsyth & Anor (as trustees for the C & S Forsyth Superannuation Fund)v Gibbs [2009] 1 Qd R 403, 406 [10] (Keane JA).

[26]GE Dal Pont and DRC Chalmers, Equity and Trusts in Australia (4^th ed, 2007).

[27]Ibid 806 [30.110] (citations omitted).

[28]AWA Ltd v Exicom Australia Pty Ltd (1990) NSWLR 705 (per Giles J); Grant v NZMC Ltd [1989] 1 NZLR 8.

[29]Cathedral Place Pty Ltd v Hyatt Australia Ltd & Ors [2003] VSC 385, 20 [39].

In this case, the respective claims arose under different contracts. Nonetheless I am of the opinion that the claims were sufficiently interrelated to entitle Mayne in equity to set-off the debt due by PGA to MPG, which MPG had assigned to Mayne, against the debt due by Mayne to PGA. Mayne’s debt to PGA arose in the context of the termination of the joint undertaking that Mayne and PGA had conducted through MPG, as the joint venture corporate vehicle for their merged logistics businesses. The joint undertaking had been terminated because its objectives could not be achieved and the parties had agreed to sever their business connection by Mayne buying-out PGA’s shareholding in MPG for cash and the issue of shares in Mayne. As Mayne and PGA were the only shareholders in MPG, the consequence of the buy-out was that MPG became a wholly owned subsidiary of Mayne. On the due dates for payment of the cash component of the consideration for PGA’s shares in MPG, Mayne set-off the unpaid debt that PGA owed to it. That debt arose in the context of the failure of PGA Logistics to account to MPG under clause 9.1(d)(4)(B) of the PGA Sale Agreement, with respect to the Southcorp proceeds that PGA had been contractually bound to pursue for the benefit of Mayne and MPG jointly. PGA had contracted to pursue the Southcorp proceeds with a view to recovering the maximum realisable commercial benefit[30] and to pay the amount recovered less its costs in recovering it to MPG.[31] PGA had guaranteed the making of that payment. These obligations were part of the joint venture arrangements that PGA effected with Mayne. It is not to the point that the debt was owed to MPG and that Mayne obtained its rights by way of assignment. The respective claims fall to be considered against the background that Mayne and PGA were the sole shareholders of MPG, which they had set up specifically for the purposes of conducting the joint business operations and in which they held shares proportionate to their respective interests in the joint undertaking. Those joint undertaking arrangements were the source of both liabilities. In my view, the claims were sufficiently related so as to make it unjust and inequitable that PGA could have enforced Mayne’s obligation to pay it the amounts owing for its 25% interest in MPG without accounting to Mayne for the balance of the proceeds from the Southcorp claim.
[30]PGA Sale Agreement, Cl 9.1(d)(1).
[31]Ibid, Cl 9.1(d)(4)(B).

It was then submitted for PGA that an equitable set-off should be denied notwithstanding the closeness of the respective claims, because of MPG’s conduct in rejecting tender of the cheque and “reversing … the order of succession laid out in clause 9.1(d)(4)”[32] by requiring payment from PGA Logistics of the whole of the proceeds with a right of credit for those costs that PGA Logistics was able to verify to the satisfaction of Mayne. The conduct of the parties is relevant to the question of the availability of equitable relief by way of set-off because the issue is whether equity should intervene to prevent an injustice.[33] However, as I have already found that MPG was within its lawful rights to make the demand and for Mayne to reject the tender, I would not deny the equitable set-off on the basis of Mayne’s refusal of the tender.
[32]Plaintiff’s Closing Submissions, [79].
[33]Re Interesting Developments Pty Ltd (2009) VSC 12, [36]-[37]; AWA Ltd v Exicom Australia Pty Ltd (1990) NSWLR 705, 712 (Giles J).

In the circumstances, it is unnecessary to consider Mayne’s alternate contention that it was entitled to rely on r 13.14 of the Supreme Court (General Civil Procedure) Rules 2005[34] and also undesirable that I do so given that there is a divergence of judicial views on whether this rule itself creates a substantive defence or simply describes the procedure to be followed where a cross-claim is relied on as a defence to a plaintiff’s claim.[35]
[34]Rule 13.14 provides as follows:
Where a defendant has a claim against a plaintiff for the recovery of a debt or damages, the claim may be relied on as a defence to the whole or part of a claim made by the plaintiff for the recovery of a debt or damages and may be included in the defence and set off against the plaintiff’s claim, whether or not the defendant also counterclaims for that debt or damages.
[35]MEK Nominees Pty Ltd v Billboard Entertainments Pty Ltd (1993) V Conv R 54-468, 65,465 (Tadgell J); Moffatt v Pinewood Resources Ltd (Unreported, Tadgell J, 7 April 1989); Victorian WorkCover Authority v Concept Hire Ltd (2009) 24 VR 695 at 700; cf LU Simon Builders Pty Ltd v HD Fowles [1992] 2 VR 189, 195 (Smith J).

Accordingly I find that Mayne was entitled to the set-offs that it claimed.

(ii) Waiver

I would, in any event, have concluded that PGA is estopped from contesting that Mayne had an equitable right of set-off. Mayne had put PGA on notice of the basis on which it was making the remittance less the amounts that it was contracted to pay. On both occasions PGA banked the cheques. On the first occasion it banked the cheque on the basis that it reserved its rights to be paid the $500,000 management fee. On the second occasion it banked the cheque on the basis that it reserved its rights generally but particularly reserved its rights to be paid all of the items of cost that Mayne had not accepted. Critically, whilst that letter stated that PGA Logistics reserved its right generally, at no stage before proceedings were commenced did PGA cavil with Mayne’s asserted right to set-off the net amount that PGA Logistics had ascertained was available to pay MPG as at 15 December 2000. The evidence bore out that PGA’s dispute with Mayne was not over its right to set-off but, rather, the dispute was over the amount that Mayne had set-off. By its actions in banking the cheques and disputing only the quantum, PGA represented to Mayne that it did not contest the right to set-off. PGA resiled from that position when it challenged MPG’s right to set-off on commencing this proceeding in 2006. PGA now contends that Mayne would be statute barred from recovering the balance of the proceeds or precluded by clause 18.3 of the PGA Sale Agreement, if the equitable set-off was denied to Mayne. If that were correct, Mayne will have suffered detriment, given that it was lawfully entitled to recover the balance of the Southcorp proceeds from PGA as assignee of MPG’s claim against PGA. In the circumstances, I would have concluded that PGA is estopped from resiling from the representation by conduct.[36]
[36]Commonwealth v Verwayen (1990) 170 CLR 394

Issue 7: PGA Logistics’ “reasonable costs incurred”

The parties are in dispute over the amount due by PGA Logistics under clause 9.1(d)(4)(A) of the PGA Sale Agreement. The clause provided that the proceeds of the Southcorp claim were to be applied first “in paying all reasonable costs incurred by PGA Logistics in prosecuting the Southcorp claim including but not limited to legal costs”. In issue is whether:

(a) the management fee of $500,000;

(b) the sundry Southcorp debtor claims of $49,471;

(c) the C&S Howlett contractor settlement of $61,522; and

(d) the Hemming termination settlement of $35,000 –

were costs of this character.

(i) The management fee

The management fee is a claimed success fee of 10% of the gross proceeds of the Southcorp claim that PGA Logistics alleges it agreed to pay PGA Management for prosecuting the Southcorp claim on its behalf. Gunn and Urquhart gave consistent evidence to the effect that Gunn made a request to Urquhart in about June 1999, shortly following the merger, for PGA Management to pursue the Southcorp claim on behalf of PGA Logistics. They discussed the engagement by PGA Management of an external firm to undertake the task. Urquhart approached KPMG to undertake the task on a “no win no fee” basis. KPMG indicated that it would only perform the task on a fee for service basis. Urquhart’s evidence was that he and Gunn subsequently decided in discussion in mid to late June 1999 that PGA Management would undertake the task itself on behalf of PGA Logistics. Urquhart’s evidence was that he then engaged two persons to work exclusively on the prosecution of the Southcorp claim, one person to undertake the basic investigative work which he directed and supervised and the other person to provide secretarial support. His evidence was that both these persons worked exclusively on the prosecution of the Southcorp claim between July and December 1999. The work done between this time culminated in a formal claim document being drafted which was presented to Southcorp on 13 December 1999. Shortly afterwards, Southcorp through Robert Aitken (“Aitken”), Southcorp’s then Executive General Manager, made an offer to settle the Southcorp claim for $2,700,000. A few days later negotiations between Gunn and Aitken resulted in an agreed settlement sum of $5,000,000. A letter of acceptance was received a day or two later from Southcorp confirming the settlement and a cheque for $5,000,000 was received by PGA Logistics on 3 February 2000. A deed of release was executed.

Urquhart’s evidence in chief was that he had an expectation from his discussions with Gunn that PGA Management would receive a fee sufficient to cover its costs, plus a success fee. He did not elucidate in his evidence in chief what he expected to be paid by way of a success fee.

Gunn in his examination in chief said that Urquhart came up with a formula based on the amount recovered, with the greater the amount recovered from Southcorp the greater the fee that would be payable[37] and that “we adopted that as the method”.[38] Gunn also said that he spoke to Robert Dalziel (“Dalziel”) the Managing Director of Mayne and the Chairman of MPG, about the fee arrangement by which Urquhart would be “incentivised” to recover as much as possible from Southcorp and that Dalziel “accepted that and he said, ‘it can only be upside and all the downside is with you’ or words to that effect”.[39] Gunn said that he had a similar discussion with Robert Atkins (“Atkins”) the incoming CEO of MPG.[40]
[37]Transcript of proceeding, 4 May 2011, 201.
[38]Ibid.
[39]Ibid, 202 - 203.
[40]Ibid, 203.

Gunn also gave evidence about a later discussion he had with Atkins in December 1999 when it looked as though there was going to be a resolution of the Southcorp claim. He said that he told Atkins that he felt that the fee formula that had been previously agreed was going to be too generous to PGA and that Atkins said that he wanted to reflect on it. Gunn said that Atkins came back to him one or two days later with “the concept” of a 10% success fee “since the overheads of the business were of the order of 10%”.[41] Gunn “thought that it made sense”.[42]
[41]Transcript of proceedings, 4 and 5 May 2011, 201-11.
[42]Ibid, 210.

Urquhart’s evidence was that Gunn communicated to him verbally the amount of the fee shortly prior to Christmas 1999. Urquhart said that Gunn told him that this amount had been arrived at between him and Dalziel or Atkins of Mayne and was based on 10% of the gross settlement amount. On 23 March 2001 Urquhart sent to MPG in his capacity as a director of PGA Logistics a paper entitled “Justification of Fees”. The document recorded:

D5     The [PGA Management] fee based on the agreement with [PGA Logistics] was:
Base fee 26 weeks @ $20,000  $520,000
Success fee 7.5% of $4,825,664                   $361,925
$881,925

Subsequently, on instructions from [Gunn], [PGA Management] agreed to waive the success fee and to accept $500,000 in settlement of its claim for work performed. This was communicated to [Atkins] in his role as CEO of MPG.

The figure of $4,825,664 was the gross amount of $5,000,000 less the “cost” items contended for by PGA, other than the management fee.

The management fee is not supported by any accounting records created by PGA Management. Urquhart explained in his evidence that:

I deliberately did not create any accounting documentation between PGA Logistics and PGA Management recording the $500,000 owing by PGA Logistics to PGA Management (such as an invoice or entries in the ledgers of the respective companies) pending confirmation of acceptance from MPG of this amount as a reasonable deduction because I formed the view that to record the transaction in the books of the respective companies could result in the situation whereby PGA Management was exposed to a tax liability while PGA Logistics may not be entitled to a tax deduction. Therefore, I took the view that unless and until the $500,000 fee was accepted by MPG, I would not record the transaction.[43]

[43]Witness Statement of Ian Urquhart (1 March 2010), [22].

It was argued for Mayne that the management fee of $500,000 was not deductible from the gross proceeds of the Southcorp claim because it was not “incurred” in the prosecution of the Southcorp claim as there was no legal obligation on the part of PGA Logistics to pay it. The proposition that no legal obligation arose was based on the contention that any agreement as to fees was as between Gunn on the one part and Mayne on the other part, not as between PGA Logistics and PGA Management. The contention has a degree of artificiality about it. Gunn was a director of both PGA Logistics and PGA Management. His evidence was that he was aware in June 1999 that PGA Logistics had the responsibility to chase Southcorp for damages but as all staff associated with the PGA Logistics business had gone across to MPG as part of the merger he accordingly asked Urquhart, who was then employed by PGA Management, to undertake the responsibility of preparing a claim against Southcorp. Urquhart gave evidence to similar effect. There was no reason on the evidence to doubt their evidence or to doubt that the work was undertaken by PGA Management. The lack of accounting records supporting the fee agreement was explained by Urquhart, whose evidence I accept on that matter. I find on the evidence on the balance of probabilities that PGA Management was engaged by PGA Logistics to undertake the prosecution of the Southcorp claim on behalf of PGA Logistics for a fee, agreed in the amount of $500,000. It follows from this finding that the management fee was a cost “incurred” by PGA Logistics within the meaning of clause 91.(d)(4)(A) of the PGA Sale Agreement.

Next it was argued for Mayne that the management fee was not a “reasonable cost” because it was a success fee the benefit of which accrued to the parent company PGA, because PGA Logistics and PGA Management were wholly owned subsidiaries of PGA. This submission does not give due regard to the existence of PGA Logistics and PGA Management as separate corporate entities carrying on separate businesses. The mere fact that they had common ownership or a common board does not dispel their separate existence. Moreover, the fact that the fee is incurred internally within the group does not detract from the reasonableness of a fee incurred under a commercial arrangement between two group companies where one group company is paid for the services that it provides to another group company.

Accordingly, I find that the fee of $500,000 payable by PGA Logistics to PGA Management was a reasonable cost incurred by PGA Logistics in prosecuting the Southcorp claim.

(ii) Sundry debtor claims

Urquhart gave evidence that Southcorp had a debt owing to PGA Logistics for $49,471 in respect of work performed by PGA Logistics prior to the termination of the Southcorp contract. As part of the settlement with Southcorp, PGA Logistics released Southcorp from the obligation to pay this debt and hence part of the settlement involved the extinguishment of the debt that Southcorp owed to PGA. Mayne argued that this was not a “cost” of prosecuting the claim. I disagree.

In my view, there is no warrant for a restricted construction of the clause in relation to the items of “costs” qualifying under it. First, the ordinary and natural meaning of “cost” is broader than expenditure. Its connotations include “price”, “loss” or “sacrifice”.[44] The release of a debt is within the connotation of “price”, “loss” or “sacrifice”. Secondly, it is evident from clause 9.1(d)(4) itself in the provision that the costs that PGA Logistics was entitled to deduct were not limited to legal costs and that the parties did not intend to restrict the type of ‘cost’ that PGA Logistics would be able to deduct. Rather the limitations imposed were in the qualifications that the costs were “incurred” and “reasonable”. Thirdly, the contractual obligation on PGA Logistics to which clause 9.1(d)(4) related, namely clause 9.1(d)(1), did not require anything other than that the ordinary and natural meaning be given to clause 9.1(d)(4).
[44]See definition of “cost”, Macquarie Dictionary (5^th ed, 2009).

In my view, the release of debt was a cost incurred by PGA Logistics within the meaning of clause 9.1(d)(4)(A).

(iii) C&S Howlett contract settlement

Urquhart gave evidence that PGA Logistics engaged C&S Howlett Pty Ltd (“Howlett”) to assist it with the provision of services to Southcorp pursuant to the Southcorp contract. As a result of the termination of the Southcorp contract, PGA Logistics terminated Howlett’s contract. Howlett then sought reimbursement from PGA Logistics of its costs. PGA settled the claim by agreeing to pay Howlett $61,522. Mayne argued that third party costs were not “costs” of prosecuting the claim. I disagree.

The costs that PGA Logistics was entitled to deduct were those costs that were “incurred” by it in pursuing the Southcorp claim. The parties gave “Southcorp Claim” a broad meaning for this purpose:

any claim which PGA Logistics may have arising out of or in connection with the purported termination of the Southcorp contract.[45]

The language was apt to include claims by and against PGA Logistics arising out of the termination of the Southcorp contract. In my view payment out of such claims could reasonably be regarded as a cost to PGA Logistics within the terms of clause 9.1(d)(4)(A) and the clause should not be read restrictively so as to exclude costs incurred in paying out third party claims arising out of the termination of the Southcorp contract.

[45]PGA Sale Agreement, Cl 1.1.

(iv) Hemming termination settlement

This was another third party claim. PGA Logistics had terminated Hemming’s employment as the result of the termination of the Southcorp contract. Hemming sued PGA Logistics for wrongful termination. PGA Logistics settled with Hemming for $35,000. This claim falls into the same category as the Howlett claim and comes within the terms of clause 9.1(d)(4)(A) as a “cost” that was deductible by PGA Logistics.

(v) Conclusion

I find that PGA Logistics was entitled to deduct the amount of $645,993 from the Southcorp proceeds received of $5,000,000. Accordingly PGA has been successful on the Southcorp claim to the extent of establishing that it is entitled to recover the amount of $645,993 from Mayne.

C. DIVIDEND COLLATERAL AGREEMENT CLAIM

When the objectives of MPG could not be achieved, PGA agreed to sell its shares in MPG to Mayne. The sale was effected and completed on 29 February 2000 on the terms contained in the MPG Sale of Shares Agreement, which was executed by the parties on that date. On the same day, shortly before the MPG Sale of Shares Agreement was executed, MPG paid an interim dividend to PGA out of the profits of the company for the half year to 31 December 1999. The signed minutes of meeting of the directors of MPG on 29 February 2000 recorded the resolution to pay the dividend:

[Cranwell] reported that the profits of [MPG] for the period to 31 December 1999, based on accounts agreed between [Mayne] and [PGA] were sufficient to support a interim dividend of per share, being an aggregate amount of .
It was resolved that:
1.The directors have formed the view that the profits of [MPG] for the full year ended 30 June 2000 will be sufficient to support the payment of an interim dividend in relation to the period to 31 December 1999 of $6.2m.
2.[MPG] should pay an interim dividend to the shareholders in aggregate of $6.24m on 29 February 2000.

The minutes of meeting had been prepared in advance of the meeting and left blank the amount of the interim dividend that the directors would resolve to pay. Someone hand wrote in “$6.2m” and “in aggregate of $6.24m”. No witness was able to identify the handwriting but it was common ground that Gunn was presented with a cheque at that meeting in the amount of $1.56 million, which is 25% of $6.24 million.

PGA has alleged that the profits of MPG for the period to 31 December 1999 were greater than $6.24m and that MPG, in paying an aggregate dividend of $6.24m, did not discharge its obligation under the terms of the MPG Shareholders Agreement, made on 22 April 1999 as amended on 7 June 1999, to distribute its profit to the shareholders to the fullest extent possible[46] and to do all things necessary to give full effect to the MPG Shareholders Agreement[47].
[46]Shareholders Agreement MPG Logistics Pty Limited, Cl 7.4(a).
[47]Ibid, 14.8.

PGA has also alleged that in order to induce PGA to enter into the MPG Sale of Shares Agreement, Mayne, by collateral agreement with PGA, had agreed:

(a) to pay PGA the difference between the dividend paid to it of $1.56m and the dividend that MPG was obliged to pay;

(b) to appoint KPMG to determine “the true net profit after tax” of MPG for the period between 7 June 1999 and 31 December 1999; and

(c) to pay PGA the difference between one quarter of the amount determined by KPMG as MPG’s true net profit after tax for the period and the dividend paid to PGA on 29 February 2000.[48]

[48]Fourth Further Amended Consolidated Statement of Claim (11 May 2011), [20].

The collateral agreement was alleged to have been constituted by discussions between Gunn and Dalziel in a private meeting during the course of the MPG directors’ meeting on 29 February 2000. PGA has alleged a breach of the collateral contract and has claimed damages equal to the adjusting payment that it would have received from Mayne had KPMG carried out the task of determining MPG’s true net profit after tax for the period to 31 December 1999.

Mayne did not dispute that Dalziel had a private conversation with Gunn during the directors’ meeting on 29 February 2000, but disputed that Dalziel made any agreement with Gunn to the effect alleged. It was common ground that KPMG was not appointed to undertake a review of MPG’s profit and that Mayne did not make any adjusting payment to PGA. Moreover it was Mayne’s case that MPG’s net profit for the period to 31 December 1999, which was premised on its reported EBIT, was $6.4m.[49]
[49]Defence to Fourth Further Amended Consolidated Statement of Claim (18 May 2011), [12.2(c)].

Issues for determination

There are two primary issues for determination on this claim. The first issue is whether there was a collateral contract as alleged. The second issue is the quantification of the loss and damage, if there was a collateral contract as alleged. It is alleged that the loss and damage is equal to the difference between the dividend payment that PGA received of $1.56m and the dividend payment that it should have received representing, first, one quarter of the difference between $8.142m, being MPG’s reported net profit after tax and $6.24m, being the dividend declared by MPG on 29 February 2000, and secondly, one quarter of the difference between $8.142m and MPG’s “true net profit after tax”, taking into account the “proper treatment of the Southcorp settlement sum”.[50] The sub-issues raised by the loss and damage claim are whether MPG’s net profit figure of $6.24m on which the dividend was based was understated because (1) profit on the sale and lease-back of certain equipment was reversed out of the accounts without the approval of the MPG board; and (2) capitalised costs of $2.3m were incorrectly written off against the Southcorp settlement sum brought to account.
[50]Fourth Further Amended Consolidated Statement of Claim (11 May 2011), [22 (Particulars)].

Was there a collateral contract?

It was common ground that shortly into the board meeting of the MPG directors on the afternoon of 29 February 2000, where the parties intended to finalise and execute the demerger transaction documents, Gunn was presented with a cheque for $1.56m representing PGA’s share of the interim dividend paid by MPG for the half year to 31 December 1999. It was also common ground that Gunn protested about the amount and raised issues about the way that the profit had been calculated. Gunn recalled mentioning that the profit from the Southcorp settlement had been understated and that there had been a washing of Mayne’s expenses through the MPG accounts. His evidence was confirmed by Urquhart and another witness, Michael Skerrett (“Skerrett”), PGA’s then solicitor. Skerrett recalled Gunn looking at the cheque and immediately protesting as to its adequacy and saying “this doesn’t reflect one quarter of MPG’s published profit”.[51] His evidence was that Gunn then raised the issue of alleged washing of Mayne expenses through MPG with the effect that MPG’s profit was diminished at the expense of PGA and that at the mention of washing of accounts, Dalziel immediately said to Gunn that “we need to discuss this”[52] privately and that Gunn and Dalziel left the room. Dalziel (who was called for Mayne) recalled Gunn raising some issue about MPG’s profits although he could not recall the details.
[51]Transcript of proceedings, 12 May 2011, 731.
[52]Ibid.

It was also common ground that Dalziel and Gunn left the meeting and went to Gunn’s office where they were in private discussions for about half an hour and that, on their return, the transaction documents were executed. Dalziel was frank that he had a poor recollection of the discussion as it occurred more than 10 years ago, and that he was unable to be specific about what was said. Gunn said he had a clear recollection of the “thrust” of that discussion. Notwithstanding the asserted clear recollection, Gunn’s evidence cannot be accepted uncritically in the light of all of the evidence considered as a whole.

(i) The private discussion

Gunn’s evidence was that he showed Dalziel accounts for MPG for the half year ended 31 December 1999 which recorded the net profit at $8.142m and that Dalziel agreed that an adjustment would have to be made. Although Dalziel could not recall seeing those accounts or recall agreeing to any adjustment, it was a fact that the 6 month financial statements of MPG, as presented to the board members of MPG on 19 January 2000, recorded a net profit of $8.142m. Also in evidence was a note that Gunn made of the discussion that same day. The note recorded that the dividend was “agreed to be $2.04m” (i.e. 25% of the $8.142 million profit figure). Gunn was adamant that Dalziel agreed to the adjustment “because I produced the accounts in my office”[53] and that “faced with the actual copy of the accounts which were put in front of him, he could draw no other conclusion”.[54]
[53]Transcript of proceedings, 9 May 2011, 390.
[54]Ibid, 391.

The note went on to record that “70% or more of the $2.04m dividend will be tax free in the hands of PGA” and “30% or less may be exposed to tax in the hands of PGA”. Gunn could not explain this nor had he given any evidence about it in examination in chief as he had no recollection of what Dalziel said to him about the franking of the dividend. In my view this was telling about the reliability of his recollection. This becomes important in view of the next part of the note.

Gunn had also written:

NB Dalziel undertook with Gunn to make up the difference in a way yet to be determined.
[Trust Me!]

Whilst Gunn was unable to recall what was discussed about the franking of the dividend, Gunn’s evidence was that he recalled Dalziel telling him that he should trust him. Furthermore that the “trust me” was in relation to KPMG coming in to do a forensic review of MPG’s profit, with the adjustment of the dividend to which PGA was entitled to be made “in a way yet to be determined”.

The full note is set out below:

The signatures on the note were that of Gunn and Skerrett whom Gunn called into his office after Dalziel left.

Gunn’s evidence was that he also pointed out that MPG’s profit figure did not take into account the “washing” of Mayne expenses through MPG’s accounts and understated the profit to be brought to account on the Southcorp settlement. On Gunn’s evidence, Dalziel agreed to appoint KPMG to do a forensic audit of the accounts of MPG and to make an adjusting payment to PGA in cash or in the form of shares or both. According to Gunn, Dalziel said “[Gunn], we will appoint KPMG, trust me to ensure that this is done”.[55] Dalziel asked him whether he wanted him to document that by way of a side letter and Gunn said “no, that's okay”.[56] Gunn said that the meeting concluded by Dalziel going back to the main meeting. Gunn stayed while he called his solicitor, Skerrett, (who was also in attendance at the board meeting) to come in and witness a document “concerning the dividend that was going to be adjusted immediately and the rest of it were the “trust me” that I said [Dalziel] has promised to do various things”.[57] In cross examination he elaborated on his answer and said that he told Skerrett that:

Documents between 23 February and 29 February 2000 are consistent with Mayne’s case that Gunn and Dalziel agreed to defer negotiating the new services contract until after Gunn’s state of health was known:

(a) Skerrett informed Farrell by letter dated 23 February 2000 that his understanding was that Gunn’s service contract was to be terminated;

(b) on 24 February 2000 Farrell wrote to the ASX advising:

That in view of [Gunn’s] recently discovered illness, the current Service Agreement between [Gunn] and [Mayne] will be terminated with effect from 29 February and no new agreement will be negotiated until his long term prognosis is clear. It could be 3 to 6 months before that is fully known. [Mayne] will want to enter into an arrangement with him if his health permits [Gunn] to do so, given his experience in the contracts logistics business over 30 years, and in particular his skills in areas such as property, plant and equipment rationalisation and e-commerce development.

(c) a board paper for the directors of Mayne signed by Dalziel and the then CFO of Mayne on 24 February 2000 seeking approval to purchase PGA’s minority interest recorded:

5. CONSULTANCY AGREEMENT
5.1 Subject to his recovery to full health from the forthcoming surgery, it is anticipated that [Gunn] will assume the primary responsibility for the delivery of a property rationalisation project and a plant and equipment rationalisation project within MPG. [Mayne] wishes for him to complete these projects and to utilise his skills in more broad ranging projects encompassing all of our Australian logistics activities. Timing of any renewed consultancy arrangements is uncertain.
5.2The current Service Agreement between [Gunn] and [Mayne] will be cancelled and a new one entered into upon his return; which will including:
·An initial period of 12 months with annual mutual renewal
·[Gunn’s] services for the purpose of implementing the wider property rationalisation project and the wider plant and equipment rationalisation project, general consultancy services in relation to the consolidation of MPG, MNE and Armaguard , along with Group wide Logistics and e-commerce strategies. The consideration for this will be a retainer fee to be negotiated by the Managing Director.

(d) on 28 February 2000 Skerrett passed onto Farrell his “final comments regarding” the 1999 Transaction Document Amendment Agreement. The letter made no mention of clause 2.7.

(e) the final form of the agreement that was executed by the parties on 29 February 2000 contained a clause 2.7 in the following terms:

Gunn Service Contract
The Gunn service contract is hereby terminated without [Gunn] having any right of compensation but without prejudice to the liability of the parties for any breach of that agreement which may have occurred prior to its termination.

Gunn was a signatory to that agreement in his personal capacity and in his capacity as director of, amongst entities, PGA and PGA Logistics. Also on that date Gunn resigned as a director and CEO of MPG. On 1 March 2000, Dalziel announced through the media and at the Mayne shareholder’s meeting that Gunn would continue to have a role in Mayne.
(f)the board minutes of the meeting of the directors of Mayne on 29 February 2000 (who included Dalziel) recorded that:
[Gunn] will resign as a director and CEO of MPG and [Atkins] will become CEO of MPG. [Gunn’s] Service Contract with [Mayne] will be terminated. When his health position is clearer, a new Service Agreement will be negotiated.

The documentary evidence up to 29 February 2000 is inconsistent with a concluded binding agreement for Gunn to provide consultancy services to Mayne. Furthermore, the existence of a concluded binding agreement as at 29 February 2000 was not supported in the evidence of Urquhart or Skerrett. Urquhart said that the matter of Gunn’s consultancy was a matter of “ongoing discussion up to February 29,”[78] and Skerrett’s evidence was that if he had been alerted to the possibility that a consultancy agreement had been orally concluded he would have insisted that it was adequately documented.
[78]Transcript of proceedings, 10 May 2011, 536.

The documentary evidence after 29 February 2000 is also inconsistent with a concluded binding agreement for Gunn to provide consultancy services to Mayne:

(a) an internal Mayne memorandum of 4 April 2000, in which Dalziel was copied, “confirmed” the “details” of “a consultancy fee for [Gunn]”:

[Gunn] is providing consultancy services to [Mayne] for the months of March, April, May and June 2000.
The fee for those services is the same as his monthly salary was when he was an employee ($500,000 per annum).
Would you kindly arrange payment to [Gunn] for March, as before, with a direct debit to his bank account, the details of which you have on file. Further, the same arrangement should be put in place for April, May and June on the 15^th of the month, after which time the fee for services will be renegotiated.

(b) on 24 July 2000, Atkins, the new CEO of MPG, sent an email to Gunn in which he stated:

As your contract for services to MPG concluded on June 30 I will discontinue our direct payment for your services. The payment which was erroneously made in July will be dealt with as part of the wash up of the Southcorp monies. Any further contractual arrangements for your services will be pursued by you with Peter Smedley this week.

(c) also on 24 July 2000, Atkins sent a memorandum to Peter Smedley [Smedley], the then group managing director and CEO of Mayne, in which Atkins wrote:

[Gunn’s] contract for consulting services at $500k per annum terminated on 30^th of June, 2000 and consequently I met with him today and amongst other things agreed that we would immediately terminate any further payments to him under this agreement. A payment made on 15^th July for July will be repaid by [Gunn].
He maintains that he has a verbal understanding with [Dalziel] to make himself available to [Mayne] until 31 December 2000 on terms to be agreed.
He will contact you directly to determine whether you wish that to continue.
I have told [Gunn] that [MPG] has no further operational requirement for his services and therefore any renewed contractual relationship is a matter for [Mayne] and therefore yourself.

(d) Gunn also sent a memorandum to Smedley on 27 July 2000 in which he wrote:

My role with MPG came to its conclusion on 30^th of June. From that date, for at least the next six months, it had been intended that I work with [Dalziel]. However, given the events of the past month, any future role for me with [Mayne] is now unclear. As a result, I wish to resolve the matter as soon as possible. Hence my desire to meet with you at your earliest convenience.

(e) Smedley did not meet with Gunn but rather responded to him by letter dated 31 July 2000. Smedley confirmed that Mayne “will not require any further assistance from [Gunn] through any formal consultancy arrangements past 30 June 2000”. Smedley also wrote that:

I also understand that a payment was also made to you in error in July in relation to consultancy services that you and [Atkins] have agreed that it should be addressed in the “wash up” of these matters.

(f) Gunn responded to that letter on 1 August 2000. Significantly, there was no indication in that letter that Gunn disputed that his contract had come to an end on the 30^th of June or that he was to repay the salary paid to him on 15 July 2000.

(g) on 13 October 2000 Urquhart did a calculation of what PGA owed MPG in the “wash up” of the demerger. Urquhart claimed an amount of $43,385 was due by MPG to PGA. He determined this as follows:

Schedule K Peter Gunn salary payment, July 2000
·     [Gunn] received a salary payment for the month of July.
As the agreement struck with [Dalziel] provided that [Gunn] would resign as an employee of MPG as at 30-06-00 and henceforth be engaged as a consultant to [Mayne] for at least the next six months, the salary payment made by MPG was done so in error.
·     MPG does, however, owe [Gunn] an amount for annual leave due to him; calculated to be equivalent to 173 hours from 01-06-99 to 30-06-00 … or an amount of $45,052.
·     Hence, we suggest that the July payment be put against this latter amount; resulting in $3,385 being still payable to [Gunn].
·     [Gunn] commenced as consultant to [Mayne] as from 01-07-00 and his services were terminated by notice received from [Smedley] as at 31-07-00. An amount of at least $40,000 is therefore payable to [Gunn] i.e. 4 weeks at $10,000 per week.
·     In summary, therefore, the following is put by way of summary:
Annual leave due      $45,052
Consultancy fee due $40,000
$85,052

Salary paid in error $41,667
Balance due $43,385

(h) significantly, whilst over the ensuing months Gunn prepared several documents in which he outlined the “outstanding issues” with Mayne, there was no mention of the consultancy claim.

If I was to confine my consideration of the evidence on this claim solely to the contemporaneous documents, I would not hesitate to find that there was no concluded binding contract for the provision of services on the terms alleged in the statement of claim. The letter from Cranwell to Gunn on 21 January 2000 containing the “terms” which were alleged by PGA must be considered in context. The evidence showed that the discussions between Gunn and Dalziel on 21 January 2000 were preliminary. It was plainly the intention of the parties that Gunn would be engaged to provide consultancy services to Mayne after the demerger, but those documents on their face evidenced that no concluded agreement was reached on those terms by 29 February 2000. This was to be explained by Gunn’s ill health, which became known on 15 February 2000 and disclosed to Mayne on or around 18 February 2000. It is inherently plausible that the parties determined not to conclude the terms of a new consultancy agreement at that time when Gunn’s prognosis was unknown, and agreed to defer negotiations until Gunn’s health position was clearer. The interim arrangement was that Mayne would pay Gunn three month’s sick leave to 30 June 2000 based on his existing salary.

PGA pointed to other evidence, however, to demonstrate that there was a binding agreement on the terms alleged in the statement of claim. Gunn’s evidence was to the effect that there were no outstanding matters on the consultancy that had to be resolved as at 18 February 2000. His evidence was that Dalziel had agreed to a project by project success fee calculated as a percentage of “the net tangible benefit to Mayne” and that in the event that agreement could not be reached on the net tangible benefit, the parties would appoint an external umpire, such as KPMG, to determine the dispute. The evidence of Dalziel was to the contrary. Dalziel acknowledged that points he had discussed with Gunn included that Mayne would agree to a consultancy agreement that had success fees attached to specific projects as well as a monthly retainer, but his recollection was that the success fee had not been negotiated and no agreement reached on the fee that would apply. The written submissions for PGA expressed a different view of Dalziel’s evidence. It was submitted that there was no dispute on the evidence that by 29 February 2000 Gunn and Dalziel had reached agreement on the essential terms of the consultancy. Reliance was placed in particular on the line of questioning at pages 777-779 of the transcript. The fair reading of that evidence however was that the principles of the new consultancy agreement had been determined but the actual terms and conditions were still subject to negotiation. Moreover, this is supported by the contemporaneous documentation. To the extent that there is inconsistency between the documents and Dalziel’s oral evidence, I place greater weight on the content of the contemporaneous documents than Dalziel’s independent or reconstructed recollection.

The written submissions for PGA also placed considerable weight on the importance to Gunn of securing a concluded consultancy agreement. The significance to Gunn at the time is not doubted but Mayne has never disputed that it intended to engage Gunn to provide consultancy services. Its contention was that nothing was concluded as at 29 February 2000 because of Gunn’s ill health and that because of Gunn’s ill health, the parties had agreed to defer negotiations on the terms and conditions of the consultancy agreement until they knew what his position would be.

Next it was argued for PGA that Mayne’s position that there was no concluded binding agreement was inconsistent with Farrell’s letter to the ASX dated 16 February 2000. I disagree. It was sent as a draft only, not as the formal application. The formal application to the ASX was not made until 24 February 2000 under cover of Farrell’s facsimile of that date. In that facsimile Farrell referred to discussions with personnel at the ASX and confirmed her advice to them that in view of Gunn’s recently discovered illness, the current service agreement between Gunn and Mayne would be terminated with effect from 29 February 2000 and that no new agreement would be negotiated until his long term prognosis was clear.

Next the submission was made that Farrell’s draft letter to the ASX of 16 February 2000 was misleading as on Gunn’s evidence there was never any agreement between PGA and Mayne in the terms of her letter. It was submitted that the Court should draw an adverse inference from the failure of Mayne to call Farrell as a witness. I reject that submission. I am not satisfied on the strength of the evidence that Gunn should be believed on this matter. The evidence bore out that Gunn and his advisors, Urquhart and Skerrett, knew about the content of the 16 February draft letter as Farrell had provided Gunn with a copy some days before she sent it to the ASX, yet there was no evidence that suggested that they raised any issue about the content with Farrell. It would have bee expected that if the content of the draft letter was inaccurate in any material sense to the PGA interests it would have brought this to Farrell’s attention.

Next it was submitted that the Court should draw an adverse inference from the failure of Mayne to call Cranwell as a witness, having regard to Farrell’s letter of 17 February 2000 to Skerrett which was based on her understanding from Cranwell. Again I reject that submission. It is inherently implausible on the evidence that Skerrett did not take instructions from Gunn. If Farrell’s understanding was incorrect, it would have been expected that the PGA interests would have conveyed this to Farrell.

Accordingly, I reject PGA’s consultancy claim.

The 53 Foot Container Project

In case I am wrong in my finding that there was no consultancy agreement and no concluded agreement that Gunn would be paid a success fee on a project by project basis, I should deal with the claim for damages based on the 53 foot container project. Gunn’s evidence was that from 1 July 2000 he continued to provide some consultancy services to Mayne in relation to specific projects. One of these was the 53 foot container project, which was successfully completed some time in late 2001, early 2002. PGA has made a claim for damages based on a “reasonable” success fee payable on that project.

It was clear from the evidence that Gunn had commenced work on this project before the merger of PGA and Mayne Logistics into MPG, and that Gunn continued to work on the project during the period of the joint venture operations conducted through MPG. Gunn’s evidence was that he provided guidance and advice to Mayne personnel in respect of the 53 foot container project after he came out of hospital. That evidence may be accepted, but it does not support the claim for damages made, assuming that Gunn provided those services under the new consultancy agreement with Mayne. First, I have not accepted Gunn’s evidence that Dalziel agreed that Gunn would be paid a success fee based on the net tangible benefit to Mayne of the project. Secondly, the best evidence of the contractual arrangements (on the assumption there was a concluded agreement) is that contained in Farrell’s draft letter to the ASX of 16 February 2000, which recorded that from July to December 2001 Gunn would provide consulting services to Mayne on a project by project basis for which he would receive an hourly rate. Thirdly, there was no evidence that this was a specific project which Mayne engaged him to undertake, in respect of which any success fee would be payable. Accordingly this claim is also rejected.

Expert Evidence

In case I am wrong, and as a considerable proportion of the trial was taken up with expert evidence on the quantum of the success fee payable to Gunn on the 53 foot container project, it is desirable that I address the expert evidence. Expert evidence was led by both parties. PGA called Dr Cameron, a logistics expert who gave evidence on the “process by which … the net economic benefit” to Mayne of the 53 foot container project would be calculated and, applying that process, on Mayne’s “net economic benefit”. PGA also called Mr Meredith, a forensic accountant, who gave evidence on what was a reasonable success fee payable by Mayne to PGA. Mayne called Mr Cordukes, also an expert in logistics and Mr Bryant, a forensic accountant.

Mayne objected to the evidence of Dr Cameron and Mr Meredith on the ground of relevance and to Mr Meredith’s evidence on the ground that his evidence of what is a reasonable fee was not based wholly or substantially on specialised knowledge. I reserved on the objections in order to give consideration to the question of relevance and the issue of expertise based on a full comprehension of the issues and the evidence. In my view that evidence should be admitted.

The challenge to the relevance of the evidence was based on the submission that the evidence of Dr Cameron and Mr Meredith was directed to projections as to the benefits that Mayne might be expected to achieve, not to the benefits actually derived by Mayne, which they contended was the issue that the Court must determine in this case. That submission takes an unduly narrow and unrealistic view of the evidence. The issue is not one of relevance, but rather whether it was sufficient for PGA to establish the quantum of the success fee on the balance of probabilities based on assumed costs and returns to Mayne, as distinct from actual costs and returns.

The submission that Mr Meredith’s evidence was not based wholly or substantially on specialised knowledge also took an unduly narrow view of the nature of that evidence. Dr Cameron’s evidence was directed to determining the net economic benefit to Mayne on which the success fee would be based. Dr Cameron calculated that benefit as the projected costs savings from the use of the 53 foot containers in lieu of 48 foot containers. Mr Meredith opined on what would be an appropriate success fee based on that net economic benefit. For that purpose Mr Meredith applied his skills as a forensic accountant to identify an appropriate proxy to determine a reasonable success fee payable to Gunn. In his opinion, that proxy was a percentage of annual net cost savings of between 12.5% and 50% of the net cost savings realised over a period of 1 to 2 years. I disagree with the submission that the determination of that proxy did not require specialist knowledge.

PGA’s pleaded case was that Gunn and Dalziel agreed a success fee based upon the net economic benefit of the 53 foot container project to Mayne. There is cogency in the submission on behalf of Mayne that this required PGA to prove Mayne’s net economic benefit, and that Dr Cameron’s evidence about projected costs savings for Mayne was insufficient to establish that fact, based as it was on unproved assumptions. Apart from the fact that it is implausible that Dalziel would have agreed to a success fee based on net economic benefit without fixed and determined integers by which the fee was capable of calculation with certainty, Dr Cameron’s calculations were not based on Mayne’s actual data.

It was submitted for PGA that it could not undertake a calculation of net economic benefit based on actual data because of inadequate discovery by Mayne and that in the absence of proper discovery the Court should proceed on the assumption that the figures as projected by Dr Cameron was the best evidence of the actual net economic benefit. The assertion that there was inadequate discovery was made by PGA’s solicitors to Mayne’s solicitors in a letter dated 14 October 2010. Confirmation was sought from Mayne’s solicitors that they did not have any further discoverable documents in their possession, power or control, given that there was no discovery material relevant to the question of Mayne’s financial performance prior to and subsequent to it utilising the 53 foot containers. Senior counsel for PGA did not put the response into evidence but informed the Court that Mayne’s solicitors claimed that they had made discovery. On the state of the evidence it is not possible to form a view that Mayne had not complied with its discovery obligations.

In the circumstances, I do not accept Dr Cameron’s report as establishing the net economic benefit of the 53 foot container project to Mayne. Accordingly, PGA failed to establish the quantum of the success fee to which it was entitled, assuming that I am wrong on my finding that no binding consultancy agreement was made.

E. CONCLUSION

PGA has been successful only on the Southcorp claim to the extent of establishing that it is entitled to recover the amount of $645,993 from Mayne. In the circumstances I will give judgment for that amount to PGA but otherwise dismiss the proceeding. It follows from the findings that have been made that the counterclaim should also be dismissed. I direct the parties to put orders before the Court reflecting the judgment and will hear the parties on the question of costs, in the event that they cannot be agreed upon.

---

SCHEDULE OF PARTIES

S CI 2006 10603
BETWEEN:
PGA Group Pty Ltd (ACN 005 265 921)	Plaintiff
- and -
Idameneo (No. 789) Limited (ACN 004 073 410) (formerly Symbion Health Limited)	Defendant
AND BETWEEN:
Idameneo (No. 789) Limited (ACN 004 073 410) (formerly Symbion Health Limited)	Plaintiff by Counterclaim
- and -
PGA GROUP PTY LTD (ACN 005 265 921)	Firstnamed Defendant by Counterclaim
Peter Gunn	Secondnamed Defendant by Counterclaim
Stanlake Nominees Pty Limited (ACN 005 371 460)(IN ITS CAPACITY AS TRUSTEE OF THE GUNN FAMILY TRUST)	Thirdnamed Defendant by Counterclaim
PGA (L) Pty Ltd (ACN 005 824 751) (formerly PGA (Logistics) Pty Ltd)	Fourthnamed Defendant by Counterclaim

[2011] VSC 382

18 August 2011