Vasco Investments Ltd v Morgan Stanley Australia Ltd

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No S CI 2012 07147

VASCO INVESTMENT MANAGERS LIMITED (ABN 71138 715 009)	Plaintiff
v
MORGAN STANLEY AUSTRALIA LIMITED (ABN 67 003 734 576)	Defendant

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JUDGE:	VICKERY J
WHERE HELD:	MELBOURNE
DATE OF HEARING:	26-29 MAY, 02- 05, 10, 11 JUNE 2014
DATE OF JUDGMENT:	17 SEPTEMBER 2014
CASE MAY BE CITED AS:	VASCO INVESTMENTS LTD v MORGAN STANLEY AUSTRALIA LTD
MEDIUM NEUTRAL CITATION:	[2014] VSC 455

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CONFIDENTIAL INFORMATION- Elements to be proven – Sufficient development and identification of the information – Necessary quality of confidence – Imparted in circumstances of confidence – Unauthorised use – Remedy for breach of confidence.

RESTITUTION - Quantum Meruit - Advisory Services- Principles of action in Quantum Meruit and unjust enrichment considered - Actual or constructive acceptance – Benefit to recipient - Recipient realised provider expected to be paid – Unjust to accept services without payment – Restitution by way of success fee.

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APPEARANCES:

Counsel

Solicitors

For the Plaintiff

For the Defendant

Mr S Horgan QC with
Mr Barber of Counsel

Mr M Jones SC with
Mr Segel of Counsel

Kliger Partners

Turks Legal

HIS HONOUR:

Introduction

This proceeding emerges from the financial distress of a very large fund manager known as the Orchard group, following the onset of the global financial crisis (the ‘GFC’) in 2008.

As at 2011, the Orchard group was a property funds management business specialising in unlisted property funds. It had approximately $1.2 billion in funds under management in Australia and New Zealand. It had 16,600 scheme investors and over 700 shareholders in its principal holding company, Orchard Funds Ltd (‘OFL’).

The Orchard group was hit hard by the GFC. It suffered severe financial distress, and was still labouring under this condition in early 2011. Declining property valuations, together with relatively high debt levels and discontinued investor inflows left the Orchard business with few options but to proceed with asset sales to reduce leverage. At the same time, many of Orchard’s fund investors saw their investment value decline significantly leading to a loss in investor confidence and shareholder dissatisfaction.

The issues in this case arise from a subsequent successful transaction undertaken by the Defendant, Morgan Stanley Australia Ltd (‘Morgan Stanley‘), to recapitalise the entire Orchard platform in 2011. Morgan Stanley is the Australian arm of an international investment bank. The Morgan Stanley international investment bank (the ‘Morgan Stanley international investment bank’) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. It has over 1200 offices in 36 countries.

The recapitalisation project was carried out by Morgan Stanley under the project code name ‘Project Citrus’.

In 2011, the Plaintiff, Vasco Investment Managers Limited (‘Vasco’) described itself as a ‘multi-boutique real estate investment management firm’. It was a company with no funds of its own. It was an advisory firm providing wholesale and retail investment management services in relation to equity funds, fixed income funds, private equity real estate funds, real estate securities funds, mortgage and real estate debt funds.

During the period from April to June 2011, Vasco presented a plan for the recapitalisation of the Orchard group to Morgan Stanley (the ‘Plan’).

Vasco claims that this presentation was made on a confidential basis, and that from the beginning and during subsequent negotiations, the principals of Vasco, Mr Coulter and Mr Kotak, proposed terms on which Vasco would be remunerated by Morgan Stanley if the proposed recapitalisation deal were successfully concluded.

During the period from April to June 2011, Vasco claims that Morgan Stanley (through its agents, Mr Kingsley and a Mr Zhou), made numerous requests of Mr Coulter and Mr Kotak for information, assistance, advice, calculations and drafting of documents, including the drafting of an expression of interest letter, the final form of which Morgan Stanley ultimately sent to Orchard.

Despite several requests from Vasco during this period for payment terms to be agreed, no concluded agreement as to remuneration was ever reached between Vasco and Morgan Stanley.

In June 2011, Morgan Stanley's requests of Vasco ceased and Vasco had no further involvement in the recapitalisation of Orchard.

In November 2011, Morgan Stanley successfully concluded a profitable recapitalisation of the Orchard platform. It did not pay Vasco for any of the services it performed during the April to June 2011 period, and denies any liability to pay.

Vasco claims an account of the profits of the defendant Morgan Stanley Australia or equitable compensation for misuse of its confidential information leading to the profitable recapitalisation of Orchard by Morgan Stanley.

Alternatively, Vasco seeks payment on a quantum meruit basis for its services delivered to Morgan Stanley during the period of April-June 2011.

Factual background
The Orchard Group

OFL was a public company and the sole shareholder in Orchard Capital Investments Ltd (‘Orchard Capital’). Orchard Capital was the responsible entity for the management of several unlisted property funds.

The largest fund in the Orchard group was the Diversified Property Fund (the ‘DPF’). DPF held two classes of assets: direct property assets (buildings); and indirect assets (being interests held in other Orchard funds as well as externally managed funds).

1 The DPF was the cornerstone of OFL’s funds management business, holding controlling stakes in the majority of OFL’s managed funds.

The DPF had been significantly impacted by the GFC resulting in no redemptions or distributions being made to unitholders in the fund; devaluations in both direct and indirect property portfolios; a high level of gearing; and the threat of forced sale of assets in a soft market.

Other unlisted property funds under the Orchard umbrella included other funds (‘satellite funds’). DPF had an ownership interest in a number of these funds. The other satellite funds relevant to this proceeding, in respect of which Orchard Capital was the responsible entity, included:

·the Commercial Office Fund (‘the ‘COF’);
·the Chevron Renaissance Fund (‘Chevron’);
·the Childcare Property Fund (the ‘CPF’);
·the Hybrid Property Fund (‘Hybrid’); and
·the Sydney Healthcare Fund (‘SHF’).

OFL, Orchard Capital and its various Funds are referred to collectively in these reasons as ‘Orchard’ or the ‘Orchard platform’.

Each of OFL and each of the DPF and other satellite funds had their own lending arrangements, some with a combination of secured and mezzanine debt.

In 2010 and early 2011 the main lender to Orchard was Bank of Scotland International (‘BOSI’). BOSI had lent to both OFL and the DPF. However, its security was confined to holdings of DPF’s units in other funds. These units were not liquid as there was no market for them. As at March 2011 BOSI’s total debt stood at about $126 million. OFL was able to service its debt to BOSI through management fees that it received from the Funds. However, the DPF’s debt to BOSI was not being serviced. BOSI’s loan-to-value ratio was about 94% and its position was deteriorating rapidly.

The bank operated by National Australia Bank Ltd (‘NAB’) also had significant exposure. NAB had lent over $500 million to the DPF and other Funds. In terms of the DPF alone, the relevant funding as at March 2011 was $122 million secured over direct assets. However, unlike the security position of BOSI, the NAB's lending was secured directly over properties. NAB’s loan-to-value ratio was about 71%.

The bifurcated security arrangements at that time had the consequence that NAB had the benefit of direct recourse to the income stream of the direct assets and also had the ability to reduce debt against those assets. On the other hand, the indirect assets were not producing income sufficient to service the BOSI debt. For this reason BOSI’s exposure to NAB undertaking asset sales or quarantining income on the direct assets portfolio was substantial.

Consequently, in the period leading up to 2011, the Orchard funds platform was a high profile target for investors seeking to capitalise on a commercial opportunity because of its distressed financial state.

In recognition of this position, in early 2010 the Board of OFL retained KPMG to seek out potential buyers for the Orchard platform.

Orchard’s position was complicated by reason that, not only were there cross-holdings of units by reason of the DPF’s holding units in other Funds, but many of the individual unit-holders held units in more than one of the Funds, and many of the shareholders in OFL were also unit-holders in the Funds.

By 2011, Orchard’s financial difficulties were publicly known.

2008–2011 Recapitalisation Proposals

In 2008, Morgan Stanley became involved in a consideration of the acquisition of Orchard’s funds management business through a funds management business operated by Investa Property Group Holdings Ltd (Investa). Investa was owned by two other Morgan Stanley managed funds. Morgan Stanley carried out a ‘desk top’ analysis of Orchard. At that stage the approach being considered was to acquire Orchard’s responsible entity and not to recapitalise Orchard’s underlying funds. The object of the desk top audit was to consider, from Morgan Stanley’s perspective, the strategic benefit of recapitalising Orchard at the responsible entity level. A financial model was constructed by the Morgan Stanley team to facilitate that analysis. Consideration of the opportunity progressed to the due diligence stage. The due diligence exercise revealed that the funds management businesses of Orchard would not be as complementary to Investa as had been anticipated and the proposed transaction did not proceed.

In early 2010, arising from its distressed financial position, OFL sought further expressions of interest for potential recapitalisation solutions. The Board of OFL retained KPMG to seek out potential buyers for the Orchard platform.

During 2010 a number of bids were made to purchase OFL or parts of the Orchard platform. Prominent amongst these was a bid by Taemas Bridge. That bid failed before the end of 2010.

Morgan Stanley became aware of the process being undertaken by KPMG on behalf of Orchard from about March 2010. It followed the progress of that process through press comment, including press coverage of potential interest in Orchard expressed by Cromwell and Rueben Brothers. Morgan Stanley learned of a number of proposals which had been put to Orchard to buy out, recapitalise and take control of the responsible entity.

However, during this period, Morgan Stanley pursued other opportunities in the market and did not consider any acquisition of any part of Orchard.

A bid was also made by Barwon Investment Partners (‘Barwon’). In essence the Barwon bid was directed to a take-over by Barwon acquiring a controlling stake in OFL. The proposal had the following key elements: (a) a placement of $1.5m of ordinary shares and 80 million options (the latter to be exercised at a premium) to Barwon; (b) a 1 for 2 non-renounceable rights issue of up to $4.75m (on the basis that Barwon agreed to subscribe for their $0.75m entitlement, and agreed to underwrite $1.75m); (c) upon completion of the rights issue, OFL was to undertake an equal access scheme to buy back up to 86.8m shares for a consideration of $0.95m; and (d) the appointment of two senior executives connected to Barwon.

The proposal, if accepted, would have involved the investment of up to $5.25m into OFL, of which $4m was to come from Barwon. The consequence of the placement, rights issue and buy back would result in Barwon owning between 20-44% of the issued shares of OFL.

The crisis for Orchard came to a head by March 2011. Disgruntled shareholders of OFL called an extraordinary general meeting, seeking to spill the Board. The meeting was fixed for 8 April 2011.

On 11 March 2011, a meeting of the Board of OFL was held. Among other things, the minutes of the meeting recorded:

The directors … noted that it was apparent from the rigorous processes undertaken by the Board to date that there was no viable ‘whole of Orchard solution’ for the recapitalisation of the corporate and funds, and that the Board has formed a well founded view over many months that the most appropriate first step is to recapitalise and strengthen the responsible entity [OCIL] and then work from that basis to resolve the issues affecting the funds. It was noted that the Board had also formed a well founded view that there was no viable instant ‘solution’ to the issues facing the DPF that would serve the interests of existing unitholders.

From Barwon’s perspective, the preferred transaction appeared to be the Barwon recapitalisation proposal. An extraordinary general meeting was scheduled for 20 April 2011 to consider the Barwon bid.

The Plaintiff - Vasco Investment Managers Limited (Vasco)

The principals of Vasco were Mr Chris Coulter and Mr Deep Kotak.

Mr Coulter’s background was as a fund manager. From 3 October 2005 to 24 October 2009 Mr Coulter was employed by OFL (and its predecessors) as fund manager for its Diversified Property Fund (DPF).

Mr Kotak was employed by OFL (and its predecessors) as a project manager from 23 January 2006 to 31 July 2009. Mr Kotak’s background was as a fund manager and a product manager. He had been employed as COF Assistant Fund Manager.

An element of Vasco’s business involved the acquisition of distressed funds in order to recapitalise and rehabilitate those funds to profitability. For this purpose Vasco had launched its own Special Situations Fund that aimed to provide investors with exposure to commercial property. The focus of the Special Situations Fund was on distressed unlisted property funds. Vasco had spent considerable time and effort attempting to raise funds to acquire such assets. Those fundraising activities were conducted on a relatively modest scale.

The Defendant – Morgan Stanley Australia Limited (Morgan Stanley Australia)

Morgan Stanley Real Estate Investing (MSREI) is the global real estate investment management arm of the Morgan Stanley international investment bank. It is one of the largest real estate investment managers globally. It manages over US $50 billion in real estate assets on behalf of its clients.

The defendant, Morgan Stanley, amongst its other commercial activities, conducts in Australia the business of MSREI. In conducting the business of MSREI in Australia, Morgan Stanley formulated and advanced expressions of interest for investments as agent for and on behalf of funds such as Morgan Stanley Real Estate Fund VII Global (‘MSREF7’), an international managed property fund. The manager of MSREF7 is a Delaware Company. As at 2011, MSREF7 had in excess of US $4 billion in undrawn equity commitments for the purposes of investment opportunities.

The Australian business unit of MSREI was MSREI Australia. MSREI Australia worked on the recapitalization of the Orchard platform, on behalf of MSREF7.

Principal Participants (Morgan Stanley)

Principal Participants involved in the ‘Project Citrus’ Orchard recapitalisation proposal on behalf of Morgan Stanley were as follows:

a.Anthony Kingsley:Mr Kingsley had worked for Morgan Stanley Australia since about 2005. Between 2007 to July 2011, he was Executive Director, as head of its real estate investment business including the Australian arm of MSREI (MSREI Australia). His duties included proposing investments for Morgan Stanley funds including MSREF G7. He had considerable experience in investment banking and had been intimately involved in direct and indirect investment in real estate. In particular, Mr Kingsley had extensive experience in considering investment opportunities in listed and unlisted real estate focussed trusts that were in financial distress and required significant capital to stabilise them. In the period leading up to 2011, he had been involved in attempts by Morgan Stanley to provide recapitalisation solutions to both the Becton Group and Centro Group, which like Orchard, were also distressed retail fund businesses. Mr Kingsley worked for the Australian business unit of MSREI (MSREI Australia). He did the initial work on the recapitalization of the Orchard Funds Management platform, on behalf of MSREF7 until on or shortly after 10 July 2011, when he was succeeded Mr Christopher Tynan as Executive Director. Mr Kingsley left Morgan Stanley, initially to serve a period of leave, on 22 July 2011. Thereafter he did not return.
b.Colin Zhou: was one of the staff of Morgan Stanley who reported to Mr Kingsley when Mr Kingsley was employed there.
c.Christopher Tynan:Mr Tynan joined Morgan Stanley Australia in 2003. In the period from January 2010 to July 2011, he was a Vice President working under Mr Kingsley. Mr Tynan was appointed as the Head of the Real Estate Investing team in Australia in July 2011 and remains in that position. Like Mr Kingsley, Mr Tynan is experienced in investment banking and has an intimate knowledge of investment in listed and unlisted real estate focussed trusts that were in financial distress and required significant capital to stabilise them. On or shortly after 10 July 2011, Mr Tynan succeeded Mr Kingsley as Executive Director of Morgan Stanley with the same responsibilities and duties. He worked on the recapitalization of the Orchard platform for the Australian business unit of MSREI (MSREI Australia), which in turn acted on behalf of MSREF7. He undertook this work iinitially with Mr Kingsley, until Mr Kingsley left in July 2011.
d.James Goodwin:Together with Mr Mitchelson, Mr Goodwin is currently the joint managing director of Arena Investment Management Limited (formerly Orchard Capital Investments Limited (OCIL). Mr Goodwin is legally qualified. Between March 2006 – December 2010, Mr Goodwin worked as a Corporate Finance Manager, Treasurer and then CEO Funds Management at Becton Investment Management Limited. In the period between December 2010 – December 2011, Mr Goodwin ran his own advisory business (Seebeck Advisory). Mr Goodwin’s knowledge in structuring corporate transactions was highly valued by Morgan Stanley. In particular in relation to the Orchard recapitalisation proposal, Morgan Stanley valued Mr Goodwin’s input in structuring transaction on a basis that would give a return on capital that was acceptable to Morgan Stanley while also encouraging the key stakeholders, the lenders and the equity holders to agree to participate. Mr Goodwin was engaged to assist Morgan Stanley in pursuing the Orchard recapitalisation proposal. Mr Goodwin also had a close relationship with Mr Mitchelson, as well as a working relationship with Mr Mahaffy of BOSI.

In the organisation of the Morgan Stanley international investment bank, Mr Kingsley and Mr Tynan each reported to Mr Hoke Slaughter who was based in Hong Kong. Mr Hoke Slaughter in turn reported to Mr John Klopp and Mr Olivier de Poulpiquet, the joint heads of the MSREI business who were based in New York and London respectively.

Principal Participant (Orchard)

The Principal Participant involved in the Orchard recapitalisation proposal on behalf of Orchard was Bryce Mitchelson. Together with Mr Goodwin, Mr Mitchelson is currently the joint managing director of Arena Investment Management Limited (formerly Orchard Capital). In late 2010, Mr Mitchelson had assisted Mr Kingsley and his team in progressing another investment proposal called the Centro proposal. After the Orchard board was spilled in April 2011, Mr Mitchelson, was appointed as the Chief Executive Officer of OFL.

Project Citrus

Project Citrus was the internal project name which Morgan Stanley gave to the Orchard recapitalisation proposal. The object of the proposal was to provide a comprehensive re-capitalisation and liquidity solution for OFL and some of the funds managed by OCIL (the responsible entity), including the Diversified Property Fund (DPF), Commercial Office Fund (COF) and Chevron Renaissance Property Trust (Chevron).

The aim was to provide a holistic solution for all stakeholders in Orchard’s platform. The objective of MSREI in acquiring the Orchard platform was to stabilise the funds and allow time for value to recover over the medium term.

The recapitalisation of Orchard, which was approved by OFL shareholders at the Orchard Annual General Meeting on 22 December 2011 was a complex scheme. It involved the following key elements:

a.Purchase of all BOSI debt in DPF at a discount. BOSI sold its debt in the DPF to MSREF7 for $150 million, representing a discount of approximately 12% (88 cents in the dollar as at September 2011). The payment was to be made from three sources: a lump sum payment from MSREF7 a paydown from the sale of St Leonards pre-recapitalisation and deferred fees from DPF. That debt was then to be converted into equity in the responsible entity and the funds via a series of acquisitions and discounted rights issues.
b.Sale to MSREF7 of DPF’s interests in the COF fund at a discount. This was effected for $29.29m (which represented about 32.5% discount to the book net tangible assets value (‘NTA’).
c.Sale to MSREF7 of DPF’s interests in the Childcare fund at a discount. This was effected for $29.29m (which represented about 32.5% discount to the book NTA value.
d.Sale to MSREF7 of DPF’s interests in the Chevron fund at a discount. This was effected for $4.65m (which represented about 40% discount to book NTA value).
e.The acquisition by MSREF7 of Orchard’s funds management business (OCIL) (the responsible entity/trustee and investment manager of the funds). This was achieved by purchase of OFL’s shares in OCIL thus acquiring ownership of OCIL’s management rights. The purchase price was $12.85m plus the Retained Net Assets of OCIL. The payment was to be applied, inter alia, to fund employee separation obligations and repay BOSI debt;
f.New Board for OCIL. The acquisition of OCIL was accompanied by the appointment of a new independent board (as opposed to outsourcing the responsible entity functions to the Trust Company), with Messrs Goodwin and Mitchelson as the joint managing directors;
g.A rights issue in DPF. A pro-rata non-renounceable rights issue in DPF was facilitated to raise $101.7 million (fully underwritten). The rights issue (which represented about 38.5 % discount to book NTA after adjustments), was underwritten by up to $66.5 m, with proceeds to retire BOSI debt;
h.A rights issues in COF. A pro-rata non-renounceable rights issue in the COF was facilitated to raise $12 million (fully underwritten);
i.A rights issue in Chevron. A pro-rata non-renounceable rights issue in Chevron was facilitated to raise about $27.25 million (partially underwritten up to $16.2m) with the proceeds to repay the mezzanine facility and reduce senior debt.
j.A mezzanine loan to Chevron. MSREF7 was to provide $15m mezzanine facility to replace the existing mezzanine facility and reduce senior debt in Chevron;
k.A liquidity offer to COF unit holders. A liquidity offer by MSREF7 to COF unit holders of up to $5m was provided; and
l.The sale of non-core DPF holdings in funds.The sale of non-core DPF holdings in funds was effected.

The ‘Equity Recapitalisation Terms Sheet’ evidenced other details relevant to the transaction that was ultimately effected.

By means of this strategy the principal interests of the entities within the Orchard group, and its stakeholders, the unit holders and supporting bankers, were largely met, at least as far as the prevailing financial circumstances would permit. The prospect of a significant profitable financial gain by Morgan Stanley, and the entities it acted for within the Morgan Stanley international investment bank, was also achieved.

The Project Citrus transaction, containing the elements described above, was settled on 3 January 2012.

Factual Findings as to the Vasco Plan

Vasco claims that during the period from 25 March to early June 2011, its representatives Mr Coulter and Mr Kotak presented to Mr Kingsley of Morgan Stanley a plan developed by Vasco for the recapitalisation of the entire Orchard platform.

I accept that both Mr Coulter and Mr Kotak during 2010 worked up a plan to recapitalise OFL and all the Orchard Funds, as well as separate plans confined to single Funds being Chevron and the COF.

Mr Kotak said in cross-examination, which I accept, that during 2010 they put the strategy together ‘for an investor who had the capital’ and ‘we were still seeking large investors who had the capital and could execute such a deal’.

I accept that Mr Coulter, as the former DPF fund manager, which was the largest fund in the Orchard group, was very conversant with this entity and its structure and how to fix it. It will be recalled that Mr Coulter’s background was as a fund manager. From 3 October 2005 to 24 October 2009 Mr Coulter was employed by OFL (and its predecessors) as fund manager for its Diversified Property Fund (DPF).

Mr Kotak also had considerable in-house knowledge and experience of Orchard. It will be recalled that he was employed by OFL (and its predecessors) as a project manager from 23 January 2006 to 31 July 2009. Mr Kotak’s background was as a fund manager and a product manager. He had been employed as COF Assistant Fund Manager.

I find that Vasco’s ‘Plan’ for the recapitalisation of OFL and its Funds using the investment funds of a third party such as Morgan Stanley was as follows:

a.purchasing all of the BOSI debt in DPF at a discount. This was a critical part of the Vasco strategy and was an essential element to generate an attractive return (this element was ultimately completed as part of Morgan Stanley’s ‘Project Citrus’);
b.purchasing all of the DPF’s units in the COF, Chevron and the CPF at a discount (this element was ultimately completed as part of Morgan Stanley’s ‘Project Citrus’);
c.purchasing OFL’s shares in OCIL, thus acquiring ownership of OCIL’s management rights (this element was ultimately completed as part of Morgan Stanley’s ‘Project Citrus’);
d.acquiring equity in the DPF using a rights issue at a discount or via debt/equity conversion (a rights issue in DPF was ultimately completed as part of Morgan Stanley’s ‘Project Citrus’);
e.using rights issues in the COF and Chevron (rights issues in COF and Chevron were ultimately implemented as part of Morgan Stanley’s ‘Project Citrus’);
f.making a mezzanine loan to Chevron (this element was ultimately completed as part of Morgan Stanley’s ‘Project Citrus’);
g.making a cash offer to COF unit-holders (this element was ultimately implemented as part of Morgan Stanley’s ‘Project Citrus’); and
h.selling the DPF's non-core holdings in the other Funds (this element was ultimately implemented as part of Morgan Stanley’s ‘Project Citrus’).

Following recapitalization, Vasco proposed the following strategies to carry its plan forward:

a.outsourcing the responsible entity function so that an investor could vote on Fund resolutions;
b.listing the CPF or merging it with or taking over similar social infrastructure funds managed by Austock; and
c.stapling the COF and the DPF to OFL and then listing the consolidated entity.

Communications between Vasco and Morgan Stanley in respect of the Vasco Plan
The 25 March Tele-Conference

On 25 March 2011 Mr Coulter and Mr Kotak of Vasco telephoned Mr Kingsley of Morgan Stanley. They spoke together for about an hour. Mr Coulter and Mr Kotak were in Melbourne and Mr Kingsley was in Sydney. Mr Coulter and Mr Kotak had been introduced to Mr Kingsley by email through a business acquaintance, Mr Lam.

Mr Coulter and Mr Kotak explained their backgrounds and current situation, including that they had launched a Special Situations Fund to exploit the distress in the unlisted market. They further explained that the retail unlisted funds had struggled to recapitalise during the GFC because they did not have access to the capital available to the listed funds and the wholesale funds.

Mr Kingsley explained that Morgan Stanley would not invest in a third party managed fund like Vasco’s Special Situations Fund because Morgan Stanley itself had a fund which did the same thing.

After discussing a possible investment by Morgan Stanley in a relatively small fund, Mr Kingsley asked Mr Coulter and Mr Kotak whether they had anything larger for him to look at.

Although Mr Kingsley denied any discussion about Orchard during the tele-conference of 25 March, Mr Kinglsey did express a general interest in meeting to talk about potential opportunities which were under consideration by Vasco.

Mr Coulter and Mr Kotak suggested a meeting in Sydney, and it was agreed to make arrangements for that to occur. Mr Kotak also said to Mr Kingsley that he would send to Mr Kingsley a non-disclosure agreement so that they could talk openly when they met.

The 31 March Meeting

On 31 March 2011 Mr Coulter and Mr Kotak met with Mr Kingsley at the offices of Morgan Stanley in Chifley Tower, Sydney.

Mr Kingsley acknowledged having received Vasco’s non-disclosure agreement (the ‘NDA’) which Vasco had sent him. He had not read the document in any detail although he had briefly reviewed it. He explained that he had not signed the agreement and could not sign it. His explanation was that an internal Morgan Stanley legal process had to be complied with. He indicated that this would take some time and would be a lengthy process. Mr Kingsley then said that ‘Morgan Stanley is a firm of solid reputation’ and that ‘Morgan Stanley is not in the business of breaching confidentiality agreements’ and that ‘Morgan Stanley is not in the business of stealing ideas’. Mr Kingsley said this to Mr Coulter and Mr Kotak, because, as he conceded, ‘I encouraged them to tell me the opportunity.’ To this, Mr Coulter said ‘If you can maintain confidentiality, I’m happy to disclose the opportunity to you.’ By this Mr Coulter conveyed to Mr Kingsley that not just the target, but the whole of the opportunity would be described and disclosed the Morgan Stanley.

Mr Kingsley accepted that the information about the opportunity that Mr Coulter and Mr Kotak were intending to disclose to Mr Kingsley on 31 March was considered by them to be confidential. Mr Kingsley knew that they were not going to disclose that information unless he agreed to maintain confidentiality. Further, Mr Kingsley accepted that he would deal with the information on that basis.

Mr Coulter and Mr Kotak then disclosed to Mr Kingsley a series of ideas that were possible for the recapitalisation of the Orchard platform. The discussion between Mr Coulter and Mr Kotak and Mr Kingsley on 31 March included a long and detailed oral explanation about a solution to achieve this end. Throughout the meeting, Mr Kingsley indicated that the concept was potentially of interest to Morgan Stanley as an investment by one of its funds, MSREF7.

There was also discussion about how Vasco might be engaged by Morgan Stanley.

Mr Kotak then gave an update on Orchard. He explained the background of Orchard, and it funds, and its history, including the number of investors in the DPF, the shareholders in Orchard and the conversion of the note holders to shareholders. Mr Kotak also said that the two key lenders to Orchard, BOSI and the NAB, were applying pressure to the Orchard board to accept the Barwon offer that was on the table. Mr Kotak also said that there were two new offers in existence, one from Landmark White and one from Otway Partners, but that the Barwon offer was a better offer.

Mr Coulter explained the position of Orchard in greater detail, including the position of BOSI and the NAB. He advised that BOSI had become critically stressed and that its debt ratio was over 95 per cent. He also mentioned the arrangement held in escrow, pursuant to which, upon BOSI paying a sum of money to the NAB, if Orchard assets were sold, BOSI would be paid to satisfy or reduce its exposure to the Orchard debt. The proposal by Barwon, which was then on the table, was also mentioned.

Mr Kingsley shook his head and said how messy and complicated it was.

Mr Coulter explained to Mr Kingsley the essence of the Vasco plan. He explained that the key to doing any transaction with Orchard was to remove the BOSI debt, which was the cause of the distress. Mr Coulter then explained Vasco’s proposed deal structure, which involved purchasing BOSI’s debt at a discount and then converting that debt to equity by taking DPF’s interests in the COF, Chevron, Sydney Healthcare Trust and Childcare funds. In this way the new provider of capital would not simply step into the shoes of BOSI as a major creditor and would avoid becoming another lender at high risk. The conversion of the BOSI debt to equity could also be undertaken in a number of ways.

Mr Coulter further explained to Mr Kingsley that because BOSI effectively had control of the manager, from his experience at Orchard, given his understanding of the DPF and his discussions, negotiations, and relationship with the NAB, BOSI at that point would force the manager to sell its debt at a discount. In Mr Coulter’s view, that was the best way to convert that debt to equity.

Mr Kingsley suggested that consideration be given to also purchasing the NAB debt.

Mr Coulter then dealt with the external indirect holdings that the DPF had in funds not managed by Orchard, including what he described as indirect holdings including in entities he called ‘Reid, Jepara, Centro, and Metro Maddington’, which were being liquidated at the time. Mr Coulter explained that the Centro and Metro Maddington entities were going to be sold on the open market, and that Jepara was going to be wound it up. Some of the other entities he explained were more difficult to assess when they would be able to be sold.

Mr Coulter also explained a little about the taking of further equity in DPF and explained that it was problematic because in the relevant constitution there was a 10 per cent cap on the rights issue, there would be difficulty in diluting the unitholders further.

Mr Coulter also spoke a little about the other funds into which DPF had invested, namely the Office Fund (COF), the Childcare Fund (Childcare) and the Chevron Fund (Chevron) primarily. He also mentioned the Primary Infrastructure Fund, to which Mr Kingsley shook his head, and said that he wasn't interested, when Mr Coulter said it was an investment in farms. On the other hand, Mr Kingsley expressed some interest in the Office Fund, when Mr Coulter explained that these consisted predominantly of investment in B grade office assets in Sydney and Melbourne. However, Mr Kingsley was not convinced about the potential for Morgan Stanley to be interested in the other funds mentioned, namely Childcare and Chevron.

Mr Kotak then talked a little about taking extra stakes in the underlying funds, namely COF, Chevron, and Childcare. He spoke about the methods of doing liquidity offers and rights issues.

Mr Kingsley repeated a number of times how messy and complicated it was, and that he had looked at it previously.

Mr Coulter also mentioned that there was to be an extraordinary general meeting of Orchard shareholders the following Friday, and they had heard that, based on the proxies already received, it looked like the existing board would be ousted. Mr Kingsley expressed interest in this development.

Towards the end of the meeting, Mr Kingsley said he needed to see the plan in writing, in order to explain the value proposition to his team. He said that he wanted to see a profit at the level of a ‘9 or 10 per cent blended cap rate post discount’ and a rate of return in excess of 20 per cent. He said that when they did their modelling numbers that he would also like his suggestion of buying the NAB debt included. Mr Kingsley’s purpose was to demonstrate to his team the value of the potential investment for Morgan Stanley.

Mr Kingsley said he would be in Melbourne the following week and could meet again with Mr Coulter and Mr Kotak there. It was agreed that they would arrange another meeting.

7 April Vasco Summary of the Proposed Orchard Recapitalisation

On 7 April 2011 pursuant to the meeting in Sydney the previous week, Mr Kotak sent by email to Mr Kingsley what he described in the email as ‘a high level summary of the proposed Orchard deal’. The attachment to the email was a presentation document entitled: ‘Vasco Special Situations Fund Orchard Recapitalisation’. It was dated April 2011 and contained the following notation on the front page: ‘private & confidential discussion materials only’. The document included the following:

We have summarised the following:
current structures of both the corporate and funds,
proposed transactions
future strategies for funds and corporate, and
value proposition for Morgan Stanley.
With regard to our role, if you are interested in progressing with the transaction, as discussed with you we would like to be engaged by you as follows:
Due Diligence
Success Fee if the deal proceeds
Ongoing operational role post deal completion
We appreciate that the deal has to move quickly hence why you cannot sign an NDA/CA. We therefore have no issue with providing you with this information in the absence of form documentation. However, would you please confirm you agree in principle to the nature of our engagement. If this is all acceptable and you are prepared to move forward on the basis we have outlined then we can sign a formal engagement letter.

The 7 April Meeting

Coulter, Mr Kotak and Mr Kingsley met on 7 April 2011 at the Morgan Stanley office at 101 Collins Street, in Melbourne at some time between 5 - 6 pm.

Mr Kingsley had received the email and attachment from Mr Kotak dated 7 April a few hours before the meeting. Although Mr Kingsley had read the email, he had not read the attached presentation. Mr Kingsley understood that the presentation summarised the items referred to in the email.

Mr Kotak spoke firstly about a letter that had been released by NAB and BOSI that day. He said that there had been a letter released supporting the Barwon proposal and that the banks were not promising to extend facilities to Orchard after the end of April if the Barwon facility was voted down.

There was an extraordinary general meeting of Orchard shareholders scheduled for the next day, 8 April. Mr Kotak told Mr Kingsley that he had heard that the proxies were sufficient to result in the board spill and oust the board. Mr Kingsley expressed satisfaction at this outcome.

Mr Coulter and Mr Kotak spoke to a written presentation which they had prepared in relation to the Vasco proposal to re-capitalise Orchard.

Mr Coulter briefly explained the structure of the funds with reference to the diagrams in the presentation which described the Orchard structure and the proposed transaction. He went into more detail about the NAB and BOSI debt. He explained the NAB and BOSI debt position to Mr Kingsley. He also dealt with the agreement between BOSI and the NAB which was held in escrow and the ramifications if the agreement came out of escrow, namely that BOSI would then gain security for its debt over physical assets, provided that the NAB debt was paid down to a 40 per cent loan to asset value ratio. In this event BOSI would receive debt servicing from physical assets and would also be placed in a position to recoup loan capital from the sales of those assets.

Mr Coulter, by reference to the printed presentation, also went through the structure of the transaction proposed by Vasco and the transaction steps designed to achieve the planned outcome.

He commenced with the proposal to acquire the NAB debt at face value at $122 million and not at a discount, because the NAB was not under pressure.

The structure explained by Mr Coulter included purchasing the BOSI debt at a discount and then converting the BOSI debt to equity in the relevant funds. The conversion could be effected in a number of different ways.

Mr Kingsley said that he didn't want necessarily to buy Orchard Funds Limited, because it was an existing company with liabilities and he wasn't sure what he would be taking on.

Mr Coulter emphasised that it was important to better the offer which was on the table from Barwon so the shareholders would be more amenable to any investment by Morgan Stanley. Mr Kingsley appeared to accept this position.

Mr Kotak described how the Vasco plan worked for all or the relevant stakeholders in Orchard, by sharing in some of the discounting across the structure. Other elements of the Vasco plan were discussed.

Other aspects of the Vasco presentation were discussed.

Mr Coulter and Mr Kotak also spoke about the capitalisation rates or yields that Mr Kingsley had asked to be produced by reference to their written presentation. Mr Kingsley asked for the asset level assumptions for the funds represented in the models, given that they described five year asset plans. Mr Coulter and Mr Kotak said that this would be provided.

As to fees, Mr Kingsley said that on transactions of this kind Morgan Stanley would usually like to have a partner who could co-invest, but acknowledged that Vasco did not have the necessary capital for this particular project. He then said that in cases like these, Morgan Stanley would prefer to pay fees as a mixture of cash and profit share. Mr Kingsley also asked whether Mr Coulter or Mr Kotak wanted jobs at Orchard. The concept of Morgan Stanley paying success fees was also discussed by Mr Kingsley. This demonstrated that he was receptive to the idea of paying a success fee to Vasco and including that in a remuneration package.

Mr Kingsley requested that he provided with the asset level assumptions which had been earlier discussed. He also requested Mr Coulter and Mr Kotak to work up an alternate proposal in the event that the NAB and BOSI transaction came out of escrow. He also requested an update on the progress of the Orchard shareholders meeting that was to take place the following day.

In summary, the outcome of the meeting was that Mr Kingsley said that he wanted to review the materials in the Vasco presentation and consider what had been proposed. Mr Kinglsey knew and understood, amongst other things, that Vasco wanted to be engaged by Morgan Stanley on the basis that they would be paid a success fee if the deal proceeded. He also knew that Vasco wanted to be engaged by Morgan Stanley on the basis that they would be remunerated for carrying out due diligence on the transaction, and be engaged by Morgan Stanley in an ongoing operational role post completion. Critically, Mr Kingsley knew from this time that Vasco expected to be paid for the work it was doing on the transaction.

Mr Kingsley set three tasks for Vasco during the 7 April meeting. First, to provide the asset values and yields behind the cap rate assumptions in the 7 April presentation; second, to work up an alternate proposal if the NAB/BOSI deal came out of escrow; and third, to explain to Kingsley why Morgan Stanley should invest in the Childcare Fund.

Mr Kingsley clearly signalled to Mr Coulter, Mr Kotak and to Vasco that Morgan Stanley was interested in progressing the transaction to recapitalise Orchard.

Email of 11 April 2011

On 11 April 2011 Mr Kotak sent to Mr Kingsley an e-mail setting out an alternate proposal in the event that the NAB/BOSI deal came out of escrow. This was in response to Kingsley’s request at the 7 April 2011 meeting.

In summary, the e-mail proposed that in the event foreshadowed the following steps should be taken:

·to establish a liquidity fund and underwrite capital raising in this fund to acquire units in COF, Chevron, CPF and Sydney Healthcare Trust from the DPF at a pre-determined discount of 25% agreed with the new Board, and direct from unit-holders at a higher discount than from the DPF;
·the new vehicle could acquire units in DPF itself from direct unit-holders at deep discounts but the merits of an equity position in DPF needed to be carefully considered given BOSI’s possible 2^nd ranking on direct assets;
·implied capitalisation rates that were set out in the e-mail, calculated for a range of discounts;
·offer liquidity to shareholders of OFL subject to minimum acceptances to ensure control and block the Barwon bid. The offer would reflect a discount in the value of management rights since the BOSI/NAB deal effectively meant the winding up of the DPF;
·alternatively, underwrite a placement or rights issue into Orchard to reduce corporate debt and ensure control of OCIL;
·possible stapling of the DPF and COF at a later date;
·approach the Board with the proposal and work on a friendly basis to manage execution risk;

the prospect of BOSI taking a discount in the short term because the COF and CPF were not fixed-life vehicles and were unlikely to be wound up, such that BOSI would have to seek a buyer for these positions, and because it was highly improbable that BOSI would easily refinance its debt. The e-mail explained that this would give Morgan Stanley:

·exposure to performing real estate assets at distressed pricing;
·control of OFL with high embedded value in management rights of existing funds;
·internal rate of return of 20%+;
·a platform from which to grow property exposure and effect an ultimate exit strategy through an initial public offering or trade sale;
·minimisation of risk by structuring the transaction as one deal, that is, not executing until minimum criteria are met.

The e-mail attached a copy of a letter dated 5 April 2011 from NAB and BOSI recommending the Barwon deal to shareholders of OFL. It also attached asset growth assumptions for the DPF and Chevron.

Telephone Conversation 11 April

As at 11 April 2011, Morgan Stanley, through Mr Kingsley, needed to keep Vasco in place to assist it to advance any transaction to recapitalise Orchard, should it determine to proceed. So much was conceded by Mr Kingsley.

Mr Kingsley telephoned Mr Kotak on the evening of 11 April 2011.

Mr Kingsley said that he would like to bring Mr James Goodwin into the deal, and asked whether either Mr Kotak or Mr Coulter would have any issue with that.

Mr Kotak responded by saying that they wouldn’t: ‘As long as any payment that’s going to us, any fees being paid to us, are not altered in any way’, so that Mr Goodwin would be paid separately. Mr Kingsley agreed with this condition.

Mr Kingsley asked Mr Kotak to contact Mr Goodwin to arrange for a meeting with Mr Goodwin, himself, Mr Kotak and Mr Coulter.

Mr Kingsley also asked to be provided with some of the assumptions in the proposed transaction relating to some of the funds.

Mr Kotak also asked Mr Kingsley in that telephone conversation whether he had given further consideration to Vasco’s fee structure. Mr Kingsley responded that if it was structured in the manner he suggested, being a profit share in the deal, it could look ‘very interesting’ for them. Mr Kotak’s account of this part of the conversation was not challenged in cross-examination.

Email and Telephone Conversation 13 April

Mr Kotak sent an email to Mr Kingsley on 13 April 2011. This email set out the asset values and yield assumptions for the COF and had been prepared and sent to complete the work that he had requested of Vasco in respect of yields and assets.

Also on 13 April, Mr Kingsley telephoned Mr Kotak and said that he had spoken with Mr Goodwin and asked that Mr Kotak follow up to arrange for a meeting between himself, Mr Goodwin, Mr Kotak and Mr Coulter. Mr Kingsley also said that he would like Mr Michelson, who had been appointed as the CEO of Orchard, to be involved in the discussions as well. He said that he would like an ‘insider’ to be involved to exert some influence on the Orchard board as to the proposal suggested by Vasco.

Vasco Email of 14 April

On 14 April 2011 Mr Kotak sent an email to Mr Kingsley. It indicated that contact with Mr Mitchelson would not be possible on that day.

The email provided strategic advice to Mr Kingsley on two things of importance: first, that the banks were exerting considerable pressure on Mr Mitchelson and the Orchard board to accept the Barwon proposal that was then still on the table; and second, that if the Barwon proposal was not accepted upon the vote of shareholders, the banks had reiterated that the loan facilities for DPF would not be extended after the month. Mr Kotak’s email also suggested on behalf of Vasco that ‘our offer’ to the Orchard board ‘outlining our strategy as previously discussed’ should be proposed. The following key elements of the proposal were then set out, namely:

· Offer liquidity to OFL shareholders, valuing the corporate at circa $8-10m ( the actual figure will depend on our due diligence outcome)

· Underwrite rights issues of up to %5m into the corporate reducing corporate debt

· Offer liquidity to unit holders in COF & Childcare

· Offer to acquire DPF’s units in COF & Childcare at a reasonable discount reducing DPF’s BOSI debt

· If necessary, refinancing DPF senior debt.

Mr Kingsley took no issue with the description in Mr Kotak’s email in referring to ‘our offer’ or ‘outlining our strategy …’.

18 April Emails

On 18 April 2011 Mr Kotak sent Mr Kingsley by e-mail a summary of the CPF including the current portfolio break-up and the forecast growth and income assumptions. The e-mail described features of the childcare sector generally and of the CPF in particular. It suggested a future merger with the Australian Education Trust and the Australia Social Infrastructure Trust and attached the December 2010 financial results for each of these trusts.

That evening, Mr Kingsley replied by e-mail, ‘Good summary’. Mr Kingsley agreed that Mr Kotak’s email gave him useful and timely information. The information was provided in response to Mr Kingsley’s request to show why Morgan Stanley should invest in the Childcare Fund.

Telephone Conversation 19 or 20 April

Mr Coulter then had a telephone conversation with Mr Kingsley on about 19 or 20 April 2011 about presenting a new offer on the part of Morgan Stanley to the new Orchard board which had by then been appointed.

Email Exchange 20 April Re: Fees

On 20 April 2011 there was an email exchange between Mr Coulter and Mr Kingsley about fees.

Mr Coulter sent an email to Mr Kingsley requesting ‘a little more certainty on fee structures’. The email included the following:

We haven’t yet heard from Colin [Zhou] but no doubt we will today. As discussed we are happy to do whatever you need in order to get the transaction up and running from your end. However, pursuant to our fee discussions in your office in Melbourne we would like to get a little more certainty on fee structures. Are you able to let us know in more detail what you have in mind.

Mr Kingsley in turn sent an email to Mr Coulter which included the following:

Not that I am trying to avoid setting this out (fees), but we are a long way from getting a deal done. Need to focus our energies on that side before I know what fees looks like.
Why don’t you lay out what you are thinking as a straw man and we can commence discussions. Does that work?...

Mr Coulter replied by email the same day agreeing to put his mind to what Vasco thought would be an equitable and a reasonable structure and to get back to Kingsley.

Late on 20 April 2011, Mr Kingsley emailed Mr Kotak twice, about the vote on the Barwon bid, enquiring whether the Board of OFL would know that night whether the Barwon bid would be voted down. Mr Kotak replied the same day saying that he was hoping to hear something later that day. The Barwon bid was not accepted by Orchard.

Telephone Conversations 27 April

On 27 April 2011 Mr Kotak had two telephone conversations with Mr Kingsley.

In the first conversation, Mr Kingsley telephoned Mr Kotak and told him that he had contacted Mr Mitchelson, the CEO of Orchard, and had told him about Vasco’s proposal and that he was happy with that proposal, subject to one issue which he noted relating to the value of the interests of the unitholders being diluted, and that this would be an issue for the new board to contend with.

Mr Kingsley then asked Mr Kotak to prepare a comparison for him of the Vasco offer and how it compared with another offer which had been made in 2010, the Taemas Bridge offer. Mr Kotak agreed to prepare and provide that information.

Mr Kingsley also asked to be provided with information as to the key adviser groups who were advising the unitholders in the Orchard funds and recent media articles on Orchard.

Later in the day on 27 April, there was a further telephone conversation between Mr Kingsley and Mr Kotak. Mr Kingsley advised that he had discussed the BOSI / NAB escrow transaction with an advisor to BOSI and had been told that the agreement was likely to come out of escrow in mid-May so that there was an opportunity for a deal to be done before that event.

Mr Kingsley and Mr Kotak then discussed the expression of interest letter proposed to be sent from Morgan Stanley to the Orchard board. Mr Kingsley said that Morgan Stanley would struggle to get it done internally so he requested that Mr Coulter and Mr Kotak draft the document. Vasco had already been working on it, so it would have been easier for it to prepare the first draft. Mr Kingsley said that he would send a template based on the Centro deal that Morgan Stanley had looked at in the previous year 2010, and requested that the draft letter prepared by Vasco be in the same format.

Discussion also took place about the dilution of the value of the unitholders’ interests in the DPF. Mr Kingsley asked Mr Kotak to carry out some dilution calculations for him to illustrate the extent of the dilution for unitholders at the completion of the transaction proposed by Vasco with the conversion of the BOSI debt to equity and after DPF’s interests in the other funds had been bought out.

Mr Kotak said that he would do the calculations and send them to Mr Kingsley on the following day.

Mr Kingsley also said that he wanted control of the Orchard management company and asked Mr Kotak to think about how the shareholders of OFL could participate in that.

Mr Kingsley also indicated that he had no interest in the Childcare Fund, and Mr Kotak agreed not to include that in the drafting process.

Mr Kotak also asked Mr Kingsley about the email that Mr Coulter had sent him the previous week about Vasco’s fees, and whether he had any further thoughts about what the fee structure would look like.

Mr Kingsley said that he was content with the ‘finder’s fee/success fee’ concept, and repeated that this would be ‘rolled into the deal’ so that it would not be paid up-front in cash. Mr Kotak was not sure what that meant, and he asked Mr Kingsley to send him more details on the concept. Mr Kingsley also said that the proposed due diligence fee was acceptable and that Morgan Stanley would pay a fee for due diligence work. As to post transaction work, Mr Kingsley commented that, as Morgan Stanley would control the management company OFL, ongoing fees would be paid out of the Orchard platform.

Mr Kingsley also said during the conversation with Mr Kotak’ ‘Don’t take this to Blackstone’. Blackstone was another private equity fund manager which provided very similar funds to the Morgan Stanley funds.

To the extent that there is any conflict between the versions of the telephone conversations of 27 April 2011 between Mr Kotak and Mr Kingsley, I prefer that of Mr Kotak. He was not successfully challenged in cross-examination and the documentary evidence tended to support what he said in his oral testimony.

Emails of 28 April

On 28 April 2011 Mr Kingsley sent an e-mail to Mr Coulter and Mr Kotak, forwarding an e-mail he had sent to Mr Goodwin on 20 April 2011. The e-mail to Goodwin summarised the proposed transaction by reference to five points.

Mr Kingsley’s 28 April 2011 e-mail to Mr Coulter and Mr Kotak began ‘Deal construct as discussed’. It identified a number of features of the proposed deal that Kingsley agreed were elements of the Vasco proposal.

Mr Kingsley agreed that these were not all his ideas, that this was just one particular way of structuring a deal that worked for Morgan Stanley. He also said that this was not the form of the proposal that he had most recently been discussed with Vasco.

Later on 28 April 2011, Mr Kotak e-mailed Mr Kingsley a sensitivity analysis that he had prepared on a debt to equity conversion in the DPF. This was based on Vasco’s wider proposal involving the purchase of DPF’s units in both COF and Chevron. It analysed the dilutive effect of that transaction on DPF unitholders. Dilution of the interests of the Orchard unitholders was an element of concern in the proposed transaction.

Telephone Conversation 28 April

On 28 April 2011, Mr Kingsley sent to Vasco a template for the expression of interest letter that he had mentioned in his conversation with Mr Kotak on the previous day. The template was incomplete in terms of detailed information.

A telephone conversation between Mr Kingsley and Mr Kotak also took place on 28 April in which the structure of the proposed letter from Morgan Stanley to present to the new Orchard board was discussed. Matters such as the inclusion of the key transaction steps and the capacity of Morgan Stanley to execute a transaction of this size were discussed.

The content of the proposed expression of interest (the ‘EOI’) was also discussed. Mr Kotak told Mr Kingsley that the EOI should demonstrate to the Orchard Board that Morgan Stanley had the financial resources to complete the proposed transaction.

Mr Kingsley requested Mr Kotak to organise a telephone conference the next day with himself (Mr Kingsley), Mr Zhou, Mr Goodwin, Mr Kotak and Mr Coulter.

Telephone Conference 29 April

Pursuant to Mr Kingsley’s request, Mr Kotak organised a telephone conference which was conducted on 29 April 2011. Mr Coulter and Mr Kotak, along with Mr James Goodwin and Mr Romano Nenna (a former CEO of Centro who had previously worked with Vasco on another project and been brought by Mr Goodwin), telephoned from the Vasco office at 459 Collins Street Melbourne. They spoke with Mr Kingsley and Mr Colin Zhou who were in the Morgan Stanley office in Sydney.

Mr Coulter and Mr Kotak printed out the agenda for the meeting from an email sent on the morning of the meeting by Mr Kingsley. The agenda emanated from Mr Kotak’s discussion with Mr Kingsley on the previous day. The items in the agenda were discussed. Some time was spent discussing whether to put in the proposed letter of offer from Morgan Stanley the purchase of the BOSI debt. Mr Coulter and Mr Goodwin were both of a view that this should be done. Mr Kingsley, on the other hand, expressed a view that he did not wish to put a reference to it in the letter. Other aspects of the Orchard funds relating to reducing the gearing of the debt were also discussed.

Mr Kingsley also said that he wanted to express in the letter of offer from Morgan Stanley a vision for the future of Orchard focusing on the two principal funds. He also said that he wanted to retain the present Chief Executive Officer of OFL, Mr Bryce Mitchelson, who was appointed after the Orchard board was spilled in April 2011.

Mr Goodwin spoke about the importance of corporate governance being expressed in the proposed letter of offer.

Once the agenda items had been discussed, Mr Coulter and Mr Kotak said that they would commence drafting the letter of expression of interest and would send through the first draft the following week.

At the end of the conference, it was Mr Kotak’s evidence that Mr Kingsley thanked the participants, acknowledged that they had done a fair bit of work on spec and said ‘You’ll all be rewarded for this when the deal is done’.

Mr Coulter’s recollection was to similar effect. He gave evidence that at the end of the conference, Kingsley said ‘I appreciate you are working on spec, you’ll be rewarded when the deal’s done’.

Mr Kingsley gave evidence that he recalled thanking people at the end of the conference. He did not recall acknowledging that participants had worked on spec or saying that ‘You’ll all be rewarded when the deal is done’ but acknowledged that he might have said these things.

Mr Goodwin had no memory of the content of the telephone conference.

Mr Kingsley had an uncertain recollection of what was said at the end of the 29 April 2011 telephone conference.

The clear recollections of Mr Kotak and Mr Coulter as to the inducement in the nature of financial reward offered by Mr Kingsley at the conclusion of the telephone conference of 29 April 2011 are unchallenged and I find that the inducement in fact occurred as described by them.

May Expression of Interest Letter (‘EOI’)

In response to Mr Kingsley’s request, Mr Coulter and Mr Kotak worked on the draft expression of interest over the following weekend, which they sent to Mr Kingsley on 2 May 2011 by email.

Although the draft used the Centro EOI as a template, most of the drafting was undertaken by Vasco, including the proposed deal structure.

Mr Kotak’s covering e-mail made a number of comments on the draft and suggested outsourcing the responsible entity function to the Trust Company with reasons given for this proposal.

Telephone Conversation and Email of 2 May

On 2 May 2011 Mr Coulter sent an email to Mr Kingsley in which he set out Vasco’s proposals for a fee structure. This responded to the invitation expressed in Mr Kingsley’s 20 April 2011 e-mail. In relevant parts, Mr Coulter’s email read:

Further to your request please refer below to our proposed fees and terms of engagement for the proposed Orchard transaction.
Engagement consists of:
Deal sourcing
Deal Structuring
Negotiating with stakeholders
Due diligence
Ongoing advisory role on successful conclusion of the deal
We note that we have already used our knowledge and intellectual property to undertake points 1 and 2 above. We believe if the deal is concluded successfully the work we have performed to date would have been crucial in that successful conclusion. In noting this we are fully aware that any payment for this work will only be made if the transaction proceeds.
Given our knowledge of the company, its assets, funds and debt facilities we believe it will be essential for us to be an integral part of the due diligence team if the transaction proceeds to that stage, Due diligence would of course include a thorough review of all relevant documentation, meetings with stakeholders, etc. in order for sufficient comfort to be gained that the strategy as proposed will yield the forecast returns in our modelling. Payment for this part of the engagement would be set upon commencing due diligence and would be subject to a break fee payable by the company so would be an at risk costs of MS.
The ongoing advisory role would be subject to the final structure of the transaction.
Our proposed fees and indicative structure thereof is as follows:
*Deal origination/sourcing – ‘finder’s fee’ that can be rolled into the profit share as part of our ‘co-investment’ into the transaction.
*Due Diligence – our standard Vasco charge-out rates are $350 per hour subject to a minimum of 50K. Payment to be made as a cash fee.
*Success fee – fee of 65 bps of capital subject to minimum of 500K payable only on successful conclusion of deal. You mentioned before that this is most likely to be paid in shares / units in management company or as profit share upon achieving certain KPIs/hurdles. Could you please explain how you think this will work? As proposed by you previously we are amenable to an incentive subject to meeting ongoing KPIs being applied to this proportion of the fee.
*Ongoing advisory role – TBD subject to confirmation of the scope of the role. This fee however would probably be payable out of Orchards post-transaction.
We acknowledge your previous advice that we are still some way from concluding the transaction and do not wish to distract ourselves with side negotiations on our fees. However we believe some clarity on this matter at this stage would be beneficial as we will get more pressed for time if the transaction proceeds. It would also assist us in our discussions with stakeholders if we had a formal appointment as your representative.
Would you please consider and revert at your earliest convenience.

On 2 May, Mr Kotak also spoke to Mr Kingsley by telephone about the proposal to outsource the responsible entity function to a Trust Company. Mr Kotak gave Mr Kingsley as description of how that could work and the potential benefits for Morgan Stanley of taking that step by appointing an independent responsible entity in place which would free up Morgan Stanley’s capacity to vote on resolutions in relation to the funds. Mr Kingsley asked for more information on the proposed Trust Company and how much that would cost.

Mr Kingsley acknowledged that when he received this e-mail he understood that Vasco wanted a success fee.

Mr Kingsley responded by e-mail that evening saying ‘Thanks Chris. Will revert’.

Emails 3 May to 15 May

On 3 May 2011, Mr Kotak e-mailed Mr Kingsley advice about outsourcing the responsible entity function to the Trust Company and attaching a presentation by the Trust Company on how such outsourcing works.

On 5 May 2011, Mr Kotak e-mailed Mr Kingsley advising that he had sourced buyers for the healthcare and childcare assets, which he had done at Mr Kingsley’s request.

Also on 5 May 2011, Mr Kotak e-mailed Mr Kingsley Vasco’s detailed Chevron recapitalisation presentation, which Mr Kingsley had also requested him to do.

On 11 May 2011 Mr Zhou emailed Mr Kotak requesting information on the Commonwealth Bank security pool in the DPF and maturity and covenant details on the key facilities in the DPF, COF, Chevron and CPF Funds. Mr Kotak replied the same day with most of the information requested to which Zhou responded by email thanking him and saying that this was ‘very helpful’.

On 14 May 2011, Mr Kingsley sent the draft EOI to Mr Coulter, Mr Kotak and Mr Goodwin under cover of an email that said ‘Please keep this highly confidential … Can you take a look and come back to me with your thoughts/suggested amendments in mark up’.

On 15 May 2011, a Sunday, Mr Kotak responded by email to Mr Kingsley setting out a number of comments and attaching the draft EOI with suggested amendments marked.

Also on 15 May 2011, Mr Kingsley requested Mr Kotak by email to provide the constitutions for all the Funds, mentioning in particular those of the DPF, COF and Chevron. Mr Kotak replied the same day attaching the Chevron and COF constitutions, and the next day, 16 May 2011, with the DPF constitution.

Telephone Conference 17 May

On 17 May 2011 Mr Coulter and Mr Kotak telephoned Mr Kingsley. Mr Colin Tynan was also in attendance with Mr Kingsley, as was Mr Zhou.

The conference was called to discuss the second draft of the expression of interest. A second draft had been prepared by Morgan Stanley over the weekend.

At this meeting the effect of the debt to equity conversion on the unit value or the net tangible asset value of the DPF was discussed. A legal issue arising from the purchase of management rights of the COF, Chevron and Childcare funds was also discussed.

Mr Coulter advanced the view that if management rights were to be changed, 50 per cent or more of the unitholders in the fund which is being managed would need to agree. He also said that it was his understanding that in order to issue units at par to convert debt to equity at the same value, there would not need to be a constitutional change, but if there was to be issue at more than 10 per cent, it would require a constitutional change to clause 7 of the DPF constitution which contained a unit pricing formula, but whether a constitutional change was or was not necessary for this purpose, was uncertain. However, if the constitution needed to be amended, it would require a special resolution, passed by at least 75 per cent of unitholders, to approve the change by a vote. Mr Coulter concluded with the observation that that Morgan Stanley would need to obtain legal advice on these matters.

There was also discussion about the dilution of the value of the interests of the unitholders in the DPF.

17-20 May e-mails

By e-mail on 17 May 2011, Mr Zhou requested Mr Kotak to review Morgan Stanley’s DPF unitholder dilution calculations.

On 18 May 2011, Mr Kotak emailed to Mr Zhou Vasco’s calculations and explained the difference.

Also on 18 May 2011, Mr Zhou e-mailed Mr Kotak, Mr Coulter and Mr Goodwin requesting thoughts on the possibility of avoiding a special resolution of unitholders in the DPF.

On 18 May 2011, Mr Kotak replied by email advising how to avoid a special resolution and the risks that a deal on such a basis would raise.

Later on 18 May 2011, Mr Tynan e-mailed Mr Kotak and others asking whether there was any restriction on a vote for a greater than one-for-one rights issue, apparently referring to the DPF.

Shortly afterwards, Mr Kotak replied that there did not appear to be any such restriction and enquiring whether Morgan Stanley’s lawyers had reviewed the DPF constitution.

Early in the afternoon on 18 May 2011, Mr Zhou replied to Mr Kotak’s email on the DPF dilution calculations expressing agreement with Mr Kotak’s analysis and requesting Mr Kotak to fill in gaps in Morgan Stanley’s balance sheets for the Funds.

Later that afternoon, Mr Coulter replied by e-mail attaching more detailed balance sheet values from the 31 December 2010 audited accounts and a further table deriving net assets for current unit prices and number of units where available.

Also during the afternoon of 18 May 2011, Mr Tynan asked Mr Kotak by email for the product disclosure statement for the DPF.

Shortly afterwards, Mr Kotak replied by email attaching the product disclosure statements for the platforms and for the COF.

The next day, 19 May 2011, Mr Kotak emailed Mr Goodwin the DPF supplemental and consolidated constitutions. The following day, 20 May 2011, Mr Kotak sent by email to Mr Zhou and Mr Kingsley the Chevron product disclosure statement.

Late in the afternoon on 18 May 2011, Mr Zhou emailed to Mr Coulter and Mr Kotak an updated draft EOI, requesting their thoughts. This was the third occasion on which Morgan Stanley had asked for Vasco’s assistance with the EOI. In the light of this I do not accept that Morgan Stanley viewed Vasco’s drafting as being below standard or that Vasco’s work on the EOI was of no assistance.

On 19 May 2011 Mr Kotak emailed the draft EOI back to Mr Kingsley, Mr Tynan and Mr Zhou with changes and comments marked up.

Late on 19 May 2011, Mr Zhou emailed Mr Kotak asking what the discount to net tangible assets was on the last COF raising, and the size of the raise. Mr Zhou said he had tried looking for press releases but did not have any luck.

Mr Kotak replied the same evening explaining that the COF raising was at a 40% discount but there would be no press as the raising had not succeeded.

Mr Zhou responded by email suggesting that if it hadn’t succeeded it couldn’t be used as a precedent for a 30% or 35% discount in COF or Chevron.

Mr Kotak replied by email the next morning pointing out that the raisings could indeed be used as precedents even though they hadn’t been successful because of the fact that OFL took them to market and in the case of Chevron, they raised $3million, which fell short of the minimum target.

On 20 May 2011, Mr Zhou emailed Mr Kotak asking about the terms of the BOSI/NAB deal.

Mr Kotak replied shortly afterwards by email setting out his understanding of the BOSI/NAB deal with rough numbers leading to an estimate of the amount that BOSI would have to pay to get NAB down to a 40% loan-to-value ratio.

Mr Kingsley replied two days later by email stating ‘Thanks Deep. This is very interesting’.

23-24 May e-mails about fees

On 23 May 2011, Mr Coulter e-mailed Mr Kingsley asking ‘Have you had a chance to review our fee proposal?’.

Mr Kingsley replied the next day, 24 May 2011, saying:

Apologies for the delay in responding. I have all our senior guys in town this week so running ragged. Have not had a chance to review the proposal in detail but I promise I will in time. Need to establish a constructive dialogue with BOSI before I know where I stand on any of this. Appreciate the assistance you guys have provided thus far. Will revert when I come up for air.

Mr Coulter replied later that day, 24 May 2011, by e-mail, saying:

We understand your position and acknowledge that our time and contributions are on spec. until the deal goes ahead (dd and then execution). We’re confident it will go ahead but we are eternal optimists! Plus, we know the bind BOSI is in. Commonsense however, does not always prevail. Note we’re happy that whenever you do get some time to have a quick look just for you to give us an indication our proposal is within the framework you expect.

I accept that in Mr Coulter’s e-mail of 24 May 2011, where he uses the words ‘on spec. until the deal goes ahead’, in the context of the overall chain of correspondence and conversations in telephone calls and meetings, that the words meant and were intended to mean that Vasco was speculating on whether the transaction would go ahead or not. In other words, Vasco, recognised that its fee was at risk depending on whether the deal went ahead or not. The words did not mean and were not intended to mean that payment of a fee to Vasco was contingent on whether a particular fee structure had been formally accepted by Morgan Stanley or not.

Meeting 1 June 2011

Mr Coulter and Mr Kotak next met with Mr Kingsley and Mr Tynan at the Vasco office at 459 Collins Street, Melbourne.

There was an initial discussion about the management rights of OFL and the legality of acquiring these without a vote of shareholders. There was also discussion about the possibility of shareholders of OFL co-investing in the transaction.

Mr Kotak gave evidence that Mr Coutler then asked Mr Kingsley whether the Vasco fee structure and the quantum of that fee was in the ballpark. Mr Kingsley laughed and said, ‘Fees? What fees?’, to which Mr Coulter repeated the question. Mr Kingsley then said ‘Yes’. According to Mr Kotak, Mr Coulter then asked Mr Kingsley whether he would confirm in writing to them the fee structure and the quantum, to which Mr Kingsley responded yes, he would.

Mr Coulter gave evidence that after he asked Mr Kingsley, ‘Now, our fees, are the quantum and structure in the ballpark?’ Mr Kingsley looked away, looked up, giggled and said ‘Fees? What fees?’ to which Mr Coulter stared at him and repeated ‘Our fees, are the quantum and structure in the ballpark’. Mr Coulter’s evidence was that Kingsley hesitated and then said ‘yes’. Mr Coulter then asked him, ‘Will you put that in writing?’ to which Kingsley said ‘Yes’. Mr Coulter also gave evidence that on the way out, in the corridor, he asked Mr Kingsley ‘Will you confirm that by email’ to which Mr Kingsley replied ‘Yes’.

Mr Kingsley’s evidence about the fee discussion at this meeting was not far removed from that of Mr Kotak and Mr Coulter. He acknowledged that Mr Coulter had asked him whether he had had an opportunity to review Vasco’s fee proposal. Mr Kingsley joked ‘What fee proposal?’. He then said that Mr Coulter asked him whether that fee proposal was consistent with their discussions. Mr Kingsley said he said to Mr Coulter that ‘Yes, it was consistent with our discussions and the conceptual discussion that we had’ but that he needed time to review the proposal in detail.

I accept Mr Coulter’s account of what was said about Vasco’s fees at the 1 June 2011 meeting. I do so because it is consistent with, and indeed necessary to explain, the e-mail that Mr Coulter subsequently sent to Mr Kingsley on 14 June 2011, which is referred to below.

Telephone Conversation 2 June

Mr Kotak telephoned Mr Kingsley on 2 June 2011 to inquire how a dinner meeting the evening before between Mr Kingsley, Mr Michelson (the Orchard CEO) and Mr Kurt Roberts (who was the chairman of Orchard) had gone.

Mr Kingsley reported that they were both very receptive to the proposed recapitalisation transaction. Mr Roberts asked that a formal expression of interest be submitted to them.

Mr Kingsley then said that he would bring his team in from Sydney the following week and start discussions with the Orchard management and executives. Mr Kotak offered the services of himself and Mr Coulter to participate in these meetings. To this, Mr Kingsley said that he would bring them in as he needed to. Mr Kotak said that he and Mr Coulter were available.

The 14 June e-mails

On 14 June 2011 Mr Coulter sent an e-mail to Mr Kingsley which materially read as follows:

Are you sending the offer through to us? Also, further to our discussions last week are you able to confirm by email that our fee proposal is in the ball park if the deal does proceed?

Mr Kingsley responded by e-mail the same day attaching a copy of the final EOI, which had been submitted to the Board of OFL on 8 June 2011. His e-mail did not dispute any of the content of Mr Coulter’s e-mail dated 14 June 2011. Relevantly, it said:

Have not gone through your proposal just yet. This deal is still a long way from happening. Its on my list, trust me. Let me come back to you when we get traction. Does that work?

This exchange is consistent with the discussion that had occurred on 1 June 2011, about whether the Vasco fee proposal was ‘in the ballpark’. It suggests that Mr Kingsley indeed accepted that the proposal was within workable parameters for Morgan Stanley but that it had determined to delay any final communication on the issue of fees to Vasco.

Telephone Conversation 21 or 22 June

Mr Coulter’s evidence is that he next spoke with Mr Kingsley when he telephoned Mr Coulter on 21 or 22 June 2011. Mr Kingsley said that Morgan Stanley was considering entering a ‘soft stage 1’ due diligence process.

Mr Coulter offered to undertake this exercise, mentioning in this context that Vasco would do that: ‘as we have been and keep working on spec for you.’ Mr Kingsley declined the Vasco offer, saying words to the effect that: ‘We will get you guys in for hard DD, stage 2 and we will respond in writing to you when we do that, on your fees’.

Meeting 22 June 2011

Mr Kotak then met with Mr Kingsley and Mr Tynan in Melbourne on 22 June 2011. Mr Coulter did not attend this meeting.

Mr Kingsley wanted to give Mr Kotak and update on how Morgan Stanley were progressing with the discussions with Orchard management. He said that everything was tracking well so far, and they (Morgan Stanley) had commenced inspections of some of the assets and examining Orchard’s internal financial models and asset models. Mr Tynan also said that they had spoken to Orchard representatives about the discounts that DPF would sell its units in the COF, Chevron and Childcare funds which was part of the Vasco proposal. The discounts discussed were 35 per cent, which was higher than the discounts considered by Vasco. This gave some confidence to Morgan Stanley.

Mr Kingsley also said that his team would continue with what he called a ‘soft’ due diligence exercise, but followed that with words to the effect: ‘We will get you in for the hard due diligence’. He said that he would let Mr Coulter and Mr Kotak know when he needed them.

[58](1995) 65 SASR 1, 12-13.

Fundamentally, an action on quantum meruit, such as that brought by Vasco, rests not on any implied contract, but on a claim to restitution based on unjust enrichment. Such a claim arises from the benefits accruing to a defendant as a result of the plaintiff's performance of services which were requested and accepted by the defendant, but not paid for.

The High Court considered the restitutionary principles informing an action based on quantum meruit in Pavey.[59] The following passage from the judgment of Deane J in that case,[60] was cited by Byrne J in Brenner,[61] and it is repeated here:

The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or where such an agreement is frustrated, avoided or unenforceable. In such a case, it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for (and part of the circumstances giving rise to) the imposition by the law of the obligation to make restitution.

[59](1987) 162 CLR 221.

[60](1987) 162 CLR 221, 255- 256.

[61]Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 255 - 256.

Claims in restitution for unjust enrichment are not determined by reference to a subjective evaluation of what is unfair or unconscionable: recovery depends on the existence of a qualifying or vitiating factor falling into some particular category.[62]
[62]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 [150]; see also Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 256 - 257.

Morgan Stanley, in response to Vasco’s prayer for quantum meruit relief, submitted that the law in Australia requires Vasco to make out the cause of action in unjust enrichment,[63] which demonstrates three things:[64]

i.that Morgan Stanley has been enriched;
ii.that the enrichment was gained at Vasco’s expense;
iii.that Morgan Stanley’s enrichment at Vasco’s expense was unjust.

[63] Citing David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.

[64] Goff & Jones, The Law of Unjust Enrichment 8^th ed ( Sweet & Maxwell, 2011) at [1-09]; Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221, 227; Benedetti v Sawiris [2013] UKSC 50, 3 WLR 351 [10] (Lord Clarke, Lords Kerr and Wilson agreeing)

Morgan Stanley further submitted that only by establishing the three basic elements of ‘benefit’, ‘at Vasco’s expense’ and ‘injustice’ would Vasco establish a ‘prima facie’ claim to restitution.[65]
[65] Australian and New Zealand Banking Group Ltd v Westpac Banking Corp (1988) 164 CLR 662, 673.

However, an analysis, framed exclusively as a cause of action in unjust enrichment terms, is misplaced in this case. A claim for quantum meruit is a free standing claim arising in specific circumstances, while unjust enrichment has been identified in Australian law as a legal concept unifying a variety of distinct categories of case.[66] It is not identified as a principle which in itself can provide a sufficient basis for direct application in particular cases, however compelling it may be as a theoretical justification for the law to operate to provide restitution in response to particular indicia.
[66]Lumbers v W Cook Builders Pty Ltd (in liq) (2008) 232 CLR 635 [85].

As Deane J said in Pavey,[67] what the recognition of the unifying concept of unjust enrichment does is to assist ‘in the determination, by the ordinary processes of legal reasoning, of the question whether the law should, in justice, recognise such an obligation in a new or developing category of case.
[67] Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 257.

The factors identified by Morgan Stanley, which describe characteristics of unjust enrichment, may inform a determination to grant or withhold relief by way of restitution under a cause of action based on quantum meruit, but they do not constitute the cause of action. In this case, these matters will be weighed in considering the third limb of the quantum meruit cause of action falling within the first class of case, discussed above.[68]
[68]At paragraph [339], above.

Vasco’s claim in quantum meruit presents neither a sufficiently new factual matrix nor falls into a developing category of case requiring the Court to undertake an analysis of the kind proposed by Morgan Stanley.

While quantum meruit may derive its underlying theoretical justification from the concept of unjust enrichment, such a claim does not require a plaintiff to identify and prove the specific nature of the benefit and that the recipient has been enriched thereby, or any corresponding dis-benefit to the plaintiff, or to found its claim purely upon an ‘unjust factor’. Quantum meruit falls squarely into the categories of claim where the law has recognised an obligation to make payment when certain well-defined circumstances arise. These well-defined circumstances have been set out above.

Assessment of Restitutionary Sum on quantum meruit

When considering a quantum meruit claim, the Court's task is not to assess damages for breach of contract, but to ascertain what is fair and reasonable compensation for the benefit of the services performed, requested and accepted actually or constructively by the recipient.[69] In assessing the appropriate quantum of restitution in a quantum meruit claim, the principles gleaned from the cases are:
[69]Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 262, 265 (Byrne J); Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 262 (Deane J).

a)The enquiry is not primarily directed to the cost to the plaintiff of performing the work, since the law is not compensating that party for loss suffered’; however, the actual cost should not be ignored.[70]
b)Any price or commission agreed between the parties may be received as evidence of the value the parties themselves put on the services performed, even where the services have not been totally performed, but the agreed amount is not determinative of the matter.[71]
c)‘[I]n many cases, the appropriate method of assessing the benefit of the work is by applying an hourly rate to the time involved in performing those services’, and ‘the court may have regard to the rate of remuneration which is commonly accepted in the industry’, taking into account ‘the standing of the person performing the services, the difficulty of the task, [and] the fact that the services required imagination and creativity which may be difficult to discern in the end product’.[72]
d)‘[I]n the case where the services are of such [a] kind that it is difficult or impossible to assess the number of hours involved or to itemise the precise services, the court is entitled to make a global assessment or to reduce or increase the remuneration which can be proved with some certainty in order to reflect the fair and reasonable value’.[73]
e)Where it is customary, in a particular industry, for the services to be recompensed on a commission basis, calculated on an event the court may have regard to what is a reasonable commission and apply it, if appropriate, subject to adjustment where the relationship has been terminated before the service provider has completed the tasks which produced the event.[74]
f)Further, adopting the principles referred to by the Court of Appeal[75] in Sopov v Kane Constructions Pty Ltd (No 2),[76] in a situation where a quantum meruit claim arises where an existing concluded contract has been terminated, given that ‘the quantum meruit remedy rests on the fiction of the contract’s having ceased to exist ab initio, that contract can have no “continuing influence” when the value of the work is being assessed on a quantum meruit.’[77] In such a situation the quantum meruit remedy ignores the bargain which the parties struck, and ignores the rights accrued under the contract up to the date of termination.[78] The contract price is relevant on a quantum meruit, but not because of any ‘continuing influence’ of the contract. The price is merely a piece of evidence, showing what value the parties attributed – at a particular time – to the work which the claimant was agreeing to perform.[79] It may be taken into account as relevant evidence in the body of evidence to be considered by the court in assessing a reasonable sum. However, it needs to be born in mind that the contract price is struck prospectively, based on the parties’ expectations of the future course of events. A quantum meruit, on the other hand, is assessed with the benefit of hindsight, on the basis of the events which actually happened.[80]
g) As the New South Wales Court of Appeal observed in Renard Constructions v Minister for Public Works,[81] there is no conceptual difficulty in the notion that the ‘fair and reasonable’ value of the benefit conferred may exceed any price for which the service provider contractually agreed to provide the services or carry out the works in question.[82] Restitutionary liability is independent of contract.
h) It is well-established that the value of the services or work done can be proved by evidence of costs actually and fairly and reasonably incurred.[83] But proof of the appropriate quantum is not confined to such evidence.
i) Restitution may also include an entitlement to a margin for profit and overhead.[84] As stated by the Court of Appeal in Sopov, the existence of the entitlement to a profit margin is consistent with the restitutionary objective of measuring the value of any benefit conferred. The inclusion of a margin for profit and overhead means that the calculation approximates the replacement cost of the work or services and is an appropriate index of value to ascertain what it would have cost the principal to have had this work or the services carried out by another in comparable circumstances.[85]

[70] Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 262 (Byrne J).

[71]Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 263 (Byrne J), referring to Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 257.

[72] Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 263 (Byrne J).

[73]Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 263 (Byrne J), referring to Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64, 83.

[74]Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 264 (Byrne J), referring to Way v Latilla [1937] 3 All ER 759, 764 (Lord Atkin).

[75] Comprising Maxwell P, Kellam JA and Whelan AJA.

[76](2009) 24 VR 510.

[77]Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, 517 ([21]).

[78]Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, 517 ([21]).

[79]Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, 517 ([21]).

[80]Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, 518 ([26]).

[81]Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234, 276-278.

[82]Renard Constructions v Minister for Public Works (1992) 26 NSWLR 234, 276-8 (Meagher JA).

[83]Sopov and Anor v Kane Constructions Pty Ltd (No 2) [2009] VSCA 141 at [30]-[31].

[84]Sopov v Kane Constructions Pty Ltd (No 2) (2009) 24 VR 510, 520 ([34]-[37]).

[85] Sopov and Anor v Kane Constructions Pty Ltd (No 2) [2009] VSCA 141at [34-37].

By analogy, commercial negotiations towards a contract, which has not been concluded may also provide a piece of evidence (albeit usually of lesser weight than the situation where a contract has actually been entered into), which may show what value the parties attributed – at a particular time – to the work which the claimant was proposing to perform. But once again such evidence would need to be assessed bearing in mind that the price negotiated towards an incomplete contract would be considered prospectively, based on the parties’ expectations of the future course of events. A quantum meruit, as has been stated, is assessed with the benefit of hindsight on the basis of the events which transpired.

The facts of the Brenner case also illustrate the position that ‘where the services are of such [a] kind that it is difficult or impossible to itemise [them] precisely … the court is entitled to make a global assessment or to reduce or increase the remuneration [that] can be proved with … certainty in order to reflect fair and reasonable value’.[86] The Court must do the best it can with the evidence, despite in some cases ‘the scanty material’ which may be available.[87]
[86]Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 263, citing Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 83.
[87] Brenner v First Artists’ Management Pty Ltd [1993] 2 VR 221, 271 (and, more generally, 267 and 270).

In Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd,[88] Warren J (as her Honour then was) reinforced the ‘principles to be applied in assessing the appropriate restitution to be made in [cases] of unjust enrichment’ in the terms referred to by Byrne J in Brenner.[89]
[88](2002) 5 VR 577, 608 (‘Andrew Shelton’)
[89][1993] 2 VR 221, 262-265.

Her Honour said:[90]

First, the task of the court is to make an assessment of fair and reasonable compensation for the benefit of the services performed by a plaintiff and accepted by a defendant.
Secondly, the court is not engaged in a task of compensating for loss thus the actual cost or loss to the plaintiff in providing the subject services is not a primary consideration.
Thirdly, where the subject services were provided in an industry where it is customary to pay for services on a commission basis, the court may consider a reasonable commission and apply it as a measure of restitution subject to any appropriate adjustment.[91]

[90]Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd (2002) 5 VR 577, 608.

[91]Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd (2002) 5 VR 577, 608.

The Andrew Shelton case was one where a fee based upon a percentage of the final contract price for the transaction was considered to be appropriate by the Court, but, it should be noted, in circumstances where the provider of the services was instrumental in facilitating the transaction in question to a successful conclusion.[92]
[92]Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd (2002) 5 VR 577, 608-609.

Findings on Claim for quantum meruit

Given that there was no binding or enforceable contract between Vasco and Morgan Stanley for the provision of its services, the question is whether Morgan Stanley has an obligation, independent of contract, to pay a fair and reasonable sum to Vasco for the services it provided and the documentation it prepared, arising from its claim in quantum meruit. I find on the facts of this case that there is such an obligation.

The gist of Vasco’s claim made under the first class of case in quantum meruit is that Morgan Stanley actually or constructively accepted the benefit of Vasco’s services, when it should have realised that Vasco expected to be paid for them and where it would be unjust for it do so without making restitution to Vasco.

Actual or Constructive Acceptance of Vasco’s Services

A relevant factor in determining whether there was acceptance is whether Morgan Stanley requested Vasco’s services. In this case I am satisfied that Morgan Stanley made, as I have found, various requests of Vasco to perform services between 25 March and 22 June 2011. This provides evidentiary support for a finding that Morgan Stanley accepted the services it provided for the purposes of satisfying this element of the first class of case in quantum meruit. It also evidences the making of requests for work to be done for the purposes of the second class of case in quantum meruit.

Further, the very fact that requests were made by Morgan Stanley to Vasco for provision of the documentation it prepared, and the services it performed, lends weight to the conclusion that the documentation and the services were of benefit to Morgan Stanley.

In the factual context of this case, I find that Morgan Stanley accepted the benefit of the services performed by Vasco.

Whether Morgan Stanley should have realised that Vasco Expected to be Paid for its Services

In this case I am satisfied that Vasco’s services were provided to Morgan Stanley pursuant to requests made in a normal commercial relationship, and that Vasco was a company whose business it is to provide those services for reward.

Further, the services were provided by Vasco were pursuant to a requests accompanied by discussions with Morgan Stanley, namely with Mr Kingsley, as to the mode of payment. The discussions included discussion about payment of a success fee to Vasco.

In the circumstances, the reasonable expectation of Vasco was that it would be paid by way of success fee in the event that the transaction were to be successfully concluded, and this was communicated to Morgan Stanley. The work done in respect of the requests made by Morgan Stanley was not done gratuitously, and Morgan Stanley should have appreciated that this was the case.

In the circumstances, Morgan Stanley should have realised that Vasco expected to be paid for its services on the basis of a success fee when the transaction was completed.

Unjust for Morgan Stanley to Accept Vasco’s Services Without Payment

Plainly, two of the principals of Vasco, Mr Coulter and Mr Kotak, spent considerable time and at their expense, both to prepare the Plan and then in presenting it to Morgan Stanley and responding to Morgan Stanley’s various requests for the provision of further information and the preparation and presentation of documentation requested by Morgan Stanley, including the expression of interest to the Orchard board.

Morgan Stanley took advantage of these services and was enriched thereby. Much of the Vasco Plan was reflected in the final transaction entered into by Morgan Stanley, which it did in the expectation of achieving profit for itself.

It is unjust that Morgan Stanley should have the benefit of Vasco’s services provided to it in circumstances where the services were provided in the reasonable expectation of payment by way of success fee in the event that the transaction was to be successfully concluded, without paying for those services.

Quantum of the Restitution Claim

The Court's task is to ascertain what is fair and reasonable compensation for the benefit of the services performed by Vasco and requested, and accepted actually or constructively by Morgan Stanley.

In the present case, there was no evidence as to the number of hours worked by Vasco, or to itemise the precise work involved. In these circumstances the Court is entitled to make a global assessment in order to reflect a fair and reasonable value.

There was evidence that it was customary in industry for the services to be recompensed on a success fee basis calculated on the aggregate purchase price ultimately settled for the transaction. In this event the Court may have regard to what is reasonable success fee and apply it, if appropriate. This exercise may be subject to adjustment where the relationship has been terminated before the service provider has completed the tasks which produced the eventual product of the work.

Mr Buckley observed that there are no standard fee scales for the type of work undertaken by Vasco in undertaking its services for Morgan Stanley. He approached his task by making a judgment on what the market would bear and what would be a likely outcome of negotiation between adviser and client for the provision of the services. He opined further that, for the type of services provided by Vasco to Morgan Stanley, in his experience, the fees are typically percentage success fees.

Mr Buckley said in this regard that:

Success fees are payable regardless of the type of commercial transaction that eventually is executed. The aggregate purchase price in a transaction is any investment in the target business or its related entities, equal to the sum of:
a)The aggregate value of any securities issued, any other non-cash consideration delivered and any cash consideration paid to an acquired entity or its security holders in connection with a transaction (including any amounts paid into escrow and including all amounts paid, distributed of issued to holders of options, warrants, stock appreciation rights or similar rights or securities of the acquired entity, whether vested or unvested); plus
b)The amount of all indebtedness of the acquired entity that is assumed or acquired, directly or indirectly, by the acquiring entity or an affiliate thereof or retired or deceased in connection with a transaction, plus
c)The expected present value of any absolute and contingent future payment obligations, such as earn-outs, joint venture arrangements to be paid to any entity or its security holders arising in connection with a transaction.

Mr Buckley’s opinion was that the percentage to be applied to achieve a market success fee and hence market value for the services provided by Vasco is between 0.5% to 1.0% of the aggregate purchase price payable in the transaction.

The Orchard recapitalisation transaction was ultimately settled in January 2012.

On this analysis, whatever percentage is applied to calculate the success fee, it should be applied to the aggregate purchase price paid by Morgan Stanley, which was admitted by Mr Tynan to be $207.45 million. This was an aggregate purchase price made up as follows:

(a)       Purchase of shares in OCIL:            $12.45 million
(b)       Purchase of BOSI debt:  $150.00 million
(c)       Purchase of DPF’s units in Funds:    $45.00 million
Total:  $207.45 million

The Court accepts the evidence of Mr Buckley that in his experience, fees paid in this industry for the nature of the work performed by Vasco for Morgan Stanley are typically percentage success fees.

The range assessed by Mr Buckley for the services provided by Vasco was between 0.5% of the aggregate purchase price $207.45 million, being $1,037,250 and 1.0% of the aggregate purchase price, being $2,074,500.

However, I heavily discount from the top of Mr Buckley’s range to account for the fact that Vasco’s services to Morgan Stanley did not continue beyond 22 June 2011.

In order to reflect fair and reasonable value for its services the sum I award the lower end of Mr Buckley’s range, namely $1,037,250.

In so doing, the evidence of the expert called by the Defendant, Mr James Dunphy, is not preferred, and is rejected.

Mr Dunphy was an investment banker of 27 years, with a broad range of experience. Mr Dunphy ventured opinions on the common market practices in relation to, and payment for, work of the type undertaken by Vasco in its dealings with Morgan Stanley.

However, unlike the present case as I have found it to be, Mr Dunphy said: ‘I have encountered very few situations where the firm I was working was able to provide a uniquely innovative or proprietary idea or proposal to a client.’

Further, Mr Dunphy described market practice, from his perspective, in the following terms:

I believe it is common market practice for bankers/advisors to perform potentially large amounts of work on a ‘spec’ basis as the parties to the dispute refer to it in their affidavits. Market practice is that fee agreements are contained in engagement letters which are signed by the parties as I have described above.

Mr Dunphy was asked by those instructing him to express an opinion in answer to the following central question on quantum: ‘If Morgan Stanley is assumed to be liable for the work undertaken by Vasco, what would be the price that a reasonable person in the position of Morgan Stanley have expected to pay for such work?’ However, Mr Dunphy confined himself to general observations in his first report in answer to this question. No actual opinion as to any price was ventured by him in this report.

Mr Dunphy then said in his supplementary report, which he prepared in response to Mr Buckley’s report, that:

I would answer the question Mr Buckley addresses in paragraphs 47-52 of his statement differently. The question is framed in an interesting way ‘As at 2011, what was the market value of the services rendered by Vasco to Morgan Stanley Australia Limited?’ This question could sensibly be disaggregated into questions I have identified in the following paragraphs.
The first question could be ‘would other firms in the market have been prepared to solicit Morgan Stanley for the mandate in a similar manner to Vasco?’ I am very confident that this would have been the case.
The second question could be ‘would other firms have been prepared to take the risk on working up to the stage Vasco worked (assistance in relation to the expression of interest letter) with no guaranteed role or defined fee structure?’ I am confident that the answer to this question is also yes.
An inevitable consequence of answering both of these questions as I have is that the market value of the services rendered by Vasco was zero.
As I referred to in my first statement, I have direct experience in relation to undertaking a large amount of work on a transaction I believed a client a client was going to proceed with (and did proceed with) where my firm received no fees from the transaction.
The key event that turns work into solicitation or pitching (which has a market value of zero) into a valuable claim is the execution of an engagement letter with specific fee terms. As this did not occur in the Vasco/Morgan Stanley scenario, I believe there is no need to form a view about what a success fee might have been.

I do not accept that the market value of the services provided by Vasco to Morgan Stanley was zero. In arriving at this conclusion, Mr Dunphy confined himself to a quantum meruit assessment of the services provided by Vasco on the assumption that the services were provided in the context of a solicitation or pitch to Morgan Stanley in the course of an exercise towards securing the execution of an engagement letter with specific fee terms. His assessment was not based on the value of the services actually provided at the request of Morgan Stanley. Rather it was founded in a context which was not an accurate reflection of the facts as I have found them to be.

Mr Dunphy did not take into account two important elements which set the position of Vasco apart from the situation of a usual pitch for a retainer in this industry which Mr Dunphy described and considered.

First, there were the numerous requests made by Morgan Stanley for further work to be done by Vasco to refine its proposal and present the product to Morgan Stanley, not only for its consideration, but also for use by it, including for example, the preparation of the draft expression of interest. A good number of the requests have been described in earlier findings in these reasons.

Second, Morgan Stanley, through Mr Kingsley, gave various assurances as to payment to Vasco as it proceeded to do further work at the request of Morgan Stanley. The assurances have also been described in earlier findings. These assurances give rise to the inference that Morgan Stanley itself regarded the services being provided by Vasco as being of value to it, and were not regarded as merely a gratuitous pitch towards a formal contract.

Orders

I will order that:

The Defendant pay to the Plaintiff the sum of $1,037,250.00.

On the adjourned return date I will hear the parties on what other orders, including orders as to costs, which should be made.

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[2014] VSC 455

17 SEPTEMBER 2014