- Unreported Judgment
- Appeal Determined (QCA)
SUPREME COURT OF QUEENSLAND
QCoal P/L & Anor v Cliffs Australia Coal P/L & Anor  QSC 130
QCOAL PTY LTD ABN 99 010 911 234
QCOAL SONOMA PTY LTD ABN 72 117 116 784
CLIFFS AUSTRALIA COAL PTY LTD
CLIFFS AUSTRALIA WASHPLANT OPERATIONS PTY LTD ACN 123 748 032
BS 9591 of 2007
Supreme Court at Brisbane
29 May 2009
16 to 20 March 2009
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS – where “Adjustment Amount” to be paid is to be calculated from “the amount expended by the Vendors to advance the Sonoma Project to its position at Completion” – whether “amount expended” means amount actually paid or amount of unpaid liability – whether “amount expended” is limited to that which was expended prior to completion or whether it includes amounts expended after completion up to the date of the statement – whether amount was expended “to advance the Sonoma Project”
TRADE AND COMMERCE – TRADE PRACTICES AND RELATED MATTERS – CONSUMER PROTECTION – MISLEADING, DECEPTIVE OR UNCONSCIONABLE CONDUCT – CHARACTER AND ATTRIBUTES OF CONDUCT – GENERALLY – where plaintiffs failed to disclose the nature and extent of the “disputed fees” – whether the character of the fees gives rise to a reasonable expectation of disclosure – whether the non-disclosure was misleading or deceptive or likely to mislead or deceive
DAMAGES – MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT – GENERAL – where defendants alleged that they lost a chance to negotiate a contract under which the disputed fees would be excluded or a chance to negotiate a decreased price to be paid under the contract – whether there was a loss of a chance under the Sellars v Adelaide Petroleum NL principle – whether there was more than a theoretical chance of some adjustment to the terms of the contract
Trade Practices Act 1974 (Cth), s 52, s 82
Chappel v Hart (1998) 195 CLR 232, cited
Demagogue v Ramensky (1992) 39 FCR 31, applied
Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, cited
New Zealand Flax Investments Ltd v Federal Commissioner of Taxation (1938) 61 CLR 179, applied
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, considered
Warner v Elders Rural Finance Ltd (1993) 41 FCR 399, cited
M M Stewart SC, with J Chapple, for the plaintiffs
G J Gibson QC, with G D Beacham, for the defendants
Russell and Company for the plaintiffs
Mallesons Stephen Jaques for the defendants
- For some years prior to 2007, the plaintiffs were pursuing what became known as the Sonoma Coal Project, which was a proposed new coal mine just south of Collinsville. By late 2006, they were well advanced in obtaining the necessary statutory approvals, applications for mining leases had been lodged and compensation agreements were in place with all but one of the relevant land owners. The plaintiffs estimated that in excess of $150,000,000 would be required to develop this project and they were seeking joint venture partners. They found the American company, Cleveland Cliffs, of which the defendants are subsidiaries. By a contract of sale dated 3 April 2007, the plaintiffs agreed to sell to the defendants a share of the project.
- The agreed price was $35,202,680, subject to certain adjustments. This case is a dispute about the agreed adjustment according to what had been “the amount expended by the Vendors to advance the Sonoma Project to its position at Completion [of the contract]”. If that amount exceeded $13,000,000, the purchasers were to pay an additional sum being 45 per cent of the excess. If it was less than $13,000,000, the vendors were to repay 45 per cent of the deficit. The figure of 45 per cent effectively represented the share in the project which was being purchased by the defendants (although they were buying different assets of the project in different shares and the asset which was to be the washplant for the coal mine was to be wholly owned by the second defendant).
- The contract of sale was completed on 19 April 2007. The plaintiffs’ case is that the amount expended by them to advance the project to its position at that date was $15,326,124.26. Accordingly, they claim 45 per cent of the difference between that sum and $13,000,000, which is $1,046,755.92.
- The defendants’ case is that the amount expended was no more than $11,806,124.26. They counterclaim for 45 per cent of the difference between that sum and $13,000,000, which is $537,244.08. Alternatively they claim that they were misled and deceived by the plaintiffs as to the relevant expenditure, for which they should be awarded damages under s 82 of the Trade Practices Act 1974 (Cth).
- The difference between the respective amounts comprises what the plaintiffs contend was the alleged expenditure for five of their employees or consultants. Most of this difference consists of an amount of $2,700,000, which they say is the sum which is unpaid but owing by the first plaintiff (“QCoal”) to Mr Christopher Wallin who, at all relevant times, has been its only shareholder and director. The defendants’ case is that the alleged expenditures for these five people cannot be claimed either because the relevant amount was not actually paid, or at least paid prior to completion of the contract of sale, or because it was not an expenditure for the purpose of advancing the Sonoma Project.
- Apart from the s 52 case, the issues are largely ones of the proper interpretation of the contract of sale. But before going to its terms, it is convenient to discuss the evidence relating to each of these five employees or consultants.
- Mr Wallin is said to be owed $2.7 million under a written contract with QCoal dated New Year’s Day 2004. Mr Wallin signed for each party. The agreement recited:
“QCoal Pty Ltd (“QCoal”) is interested in developing the Sonoma coal deposit into a profitable mine. It recognises the need for skilled and experienced guidance over a range of areas.
To do so will require:
- further drilling to increase the resources and reserves;
- detailed mine planning;
- pre-feasibility and feasibility studies;
- rail transport agreements;
- port agreements;
- off-take agreements with overseas steel mills and power stations;
- setting up management and marketing departments to progress the project;
- obtaining finance for development;
- obtaining suitable joint venture partners;
- obtaining all government approvals including mining leases, environmental authorities, etc.”
The work which Mr Wallin agreed to perform for his company was expressed as follows:
“Christopher Wallin will assist QCoal during the development and negotiation processes to achieve the above requirements by advising on the most appropriate exploration, engineering and financial transaction plans. At the proper time in the negotiations, Christopher Wallin is also prepared to supervise and co-ordinate with QCoal the activities of all consultants. Christopher Wallin will advise QCoal on all aspects of the Project and will prepare the necessary reports and analyses as requested and when appropriate. Christopher Wallin will participate in the negotiation process and will advise QCoal on valuation, price and negotiation tactics and will provide other advisory services as necessary or when requested.
The consideration for these services was to be a so-called “Transaction Fee” which was to be:
“paid on [sic] connection with each completed direct or indirect acquisition of shares in the Sonoma Coal Project, or merger, joint venture or financing that involves the Project Development and QCoal.”
The “Transaction” was to occur upon these events:
“(i)grant of mining lease for the Sonoma Coal Project; and
(ii)joint venture parties contribute funds to the project or finance is raised sufficient to meet the liability of $2.7 million.”
It was agreed that the Transaction Fee would be:
“equal to A$2.7 million provided the Transaction Value exceeds $50 million and proportioned down for lesser amounts.”
The “Transaction Value” was to be:
“based on any amounts paid or committed for stock or assets … plus the value of any interest-bearing debt and on-interest-bearing long-term liabilities assumed by the buyer and any current assets retained by the seller as part of the consideration.”
The Transaction Fee was to be paid “in cash at the same time as shares or ownership titles transfer on the closing date”.
- The defendants accept that the Transaction Value, having regard to elements of their transaction by which they will invest further funds above the purchase price, exceeds $50 million so that the Transaction Fee would be A$2.7 million. More generally they accept that this written agreement is authentic and that it gave rise to a contract intended to have effect according to its terms. This is notwithstanding that it was an agreement made by Mr Wallin with a company represented only by himself, and that none of QCoal’s employees who gave evidence, including its CEO Mr Ever, had seen this agreement until after shortly before, or sometime after, the signing of the contract of sale. As it happens, although the ‘Transaction’ has occurred (the last of the mining leases was granted on 13 September 2007), Mr Wallin has not yet caused any of the $2.7 million to be paid to him.
- Secondly, there is an agreement in almost identical terms for a transaction fee to be paid to a company which provided geological services to QCoal, which is called GeoContext Pty Ltd. This is a three-page document dated 29 January 2004 signed by Mr Wallin and by the principal of GeoContext. Unlike the agreement for Mr Wallin’s services, this provided not only for the so-called Transaction Fee but also for regular payments for the provision of services and out of pocket expenses. In particular, it provided that:
“fees are daily or hourly payments in advance of the completion of the Project. GeoContext Pty Ltd will be entitled to Professional Fees for services rendered at a rate agreed between the parties with reference to market rates.”
There was provision for the Transaction Fee in the same terms as in Mr Wallin’s agreement except that the fee was $200,000. This fee has been paid, although it was paid on 14 May 2007 after the completion of the contract of sale so that the defendants say that it was not “expended” by that date.
- Thirdly, there is a like contract with a Mr White, who provided engineering and management services. As with GeoContext, Mr White was entitled to professional fees and expenses as well as the Transaction Fee, which in his case was $100,000. He was to be paid “Professional Fees for services rendered at the rate of $1,200 per day as per Services Agreement dated 21 February 2005.” That was a reference to a letter of that date from QCoal to Mr White which is expressed to set out the terms of their agreement for the provision of Mr White’s services. Although that document refers to the daily rate of $1,200 it makes no reference to the Transaction Fee. Just why two documents were prepared and signed on the one day in order to record the agreement between QCoal and Mr White, and why one of them makes no reference to the Transaction Fee, is not clear. But as with the agreements for Mr Wallin and GeoContext, the defendants do not challenge the authenticity of the documents or that Mr White became entitled to be paid his Transaction Fee. It was paid on 17 May 2007, that is, after the date of completion.
- Next there is an amount of $400,000 claimed for Mr Ever. He was appointed CEO of QCoal on 1 July 2006, so that he was in that position for about nine and a half months before completion. Prior to that appointment he worked as an independent consultant to QCoal. At the time this was first claimed, Mr Ever said that he and Mr Wallin quantified it on the basis that no more than one-half of what he was paid by QCoal should be attributed to the Sonoma Project, because he also worked for QCoal on other matters. However, his evidence was that in fact less than ten per cent of his time was spent on other work.
- There is no documentary proof that he was paid at least $800,000. The plaintiffs rely upon only his testimony that he was paid “from memory … a bit more than $850,000” and expenses “of about $50,000”. But that is inconsistent with the documentary evidence. On QCoal’s letterhead there is a “Pay Advice”, which sets out the calculation of the amount of a cheque paid to Mr Ever on 29 June 2007. It records that his monthly salary was $18,666.66. It refers to his gross income for that year as $323,999.92, which is the equivalent of 12 months at that monthly figure plus $100,000. Another pay advice, dated 21 June 2007, records the payment of that bonus of $100,000. He was paid that amount on 21 June 2007, more than two months after the completion of the contract of sale.
- I find that during the relevant nine and a half months when he was employed as QCoal’s CEO prior to completion, his gross earnings were limited to his monthly salary of $18,666.66. For the 293 days involved that represents $179,813. I do not accept his evidence that no more than ten per cent of his time was spent on other work. That is inconsistent with his evidence that he and Mr Wallin arrived at the figure of $400,000 by halving what he asserted had been paid. I am not persuaded to allow more than the 50 per cent which he originally put forward. The onus is upon the plaintiffs in this respect. I am satisfied that $89,906.50 could be attributed to this project. As to the bonus, it is not proved that the plaintiffs were liable to pay the bonus, or at least had become liable by the date of completion.
- Then there is the period of his consultancy prior to July 2006. He was paid US$140,000 which the parties agree was the equivalent of A$186,598.74. I accept that 50 per cent of that could be attributed to this project which is an amount of $93,299.37. The result is that I am unpersuaded that more than $183,205.87 of what was paid to Mr Ever is attributable to this project from which it follows that the plaintiffs’ claim (that $400,000 was attributable) is overstated by $216,794.13.
- Lastly, there was included within the plaintiffs’ calculation an amount of $120,000 for another employee, Mr Kanamori. His salary was in fact $120,000 per annum and he was employed from July 2006. He was also paid a bonus of $120,000. Mr Ever’s evidence was that he was unaware of any agreement or understanding reached with Mr Kanamori about this bonus in advance of when it was paid. Mr Kanamori’s evidence was that he did not have a “formal agreement” as to the bonus but that when he joined QCoal it was “indicated that I would be paid a bonus depending on my achievement”. Again that far from establishes a liability to pay the bonus. I am unpersuaded that the plaintiffs were liable to pay the bonus before it was paid. As to when it was paid, Mr Kanamori said that Mr Wallin and Mr Ever told him “in late 2007” that he would be paid the bonus. He said that he could neither “remember the exact timing” of this event, nor whether it was after the defendants became joint venturers in the project. The result is that the plaintiffs have not proved that they paid or were liable to pay the bonus by completion, or by 13 June 2007 when they made their claim for an adjustment of the price.
- Mr Kanamori said, and I accept, that he did no work other than on this project. Therefore I accept that the equivalent of 293 days at his annual salary, which is $96,328, is attributable to the project up to the date of completion. Because the plaintiffs had claimed $120,000 in his case, the claim was overstated in that respect by $23,672.
The contract of sale
- I go then to the contract of sale. In broad terms the transaction involved the sale by QCoal of a 100 per cent interest in the assets involved in the proposed coal washplant and a 8.33 per cent interest in the mining tenements.
- It was agreed that upon completion of the contract of sale, the parties, together with certain others, would enter into a joint venture agreement in the terms annexed to the contract of sale. The second defendant was to become the sole owner and operator of the washplant but its interest in the joint venture was to be 45 per cent. The joint venture was to commence on completion of the contract of sale. Under the joint venture agreement, a company called Sonoma Mine Management Pty Ltd was to be the operator and it was to perform its obligations on a “cost recovery basis”. Those costs would be borne by the joint venturers in proportion to their respective interests.
- This explains the figure of 45 per cent in the provision for pre-completion expenditure upon which each side makes its claim. That provision was cl 6.9 as follows:
“6.9Adjustment to Purchase Price post Completion
(a)Within 30 Business Days after Completion, QCoal will provide a statement to the Purchasers setting out:
(i)the amount expended by the Vendors to advance the Sonoma Project to its position at Completion including (but not limited to) the following:
A.exploration and development costs;
B.costs incurred in making the Mining Lease Applications and all accompanying documentation and consents;
C.amounts paid under the Compensation Agreements (other than the amount payable under clause 3.1(b) of the Supplementary Compensation Agreement with the Watts);
D.amounts incurred to prepare the Cultural Heritage Management Plan and any amounts paid under that plan; and
E.amounts paid under each of the Mining Contracts, Service Contracts and Tarnsportation Contracts,
(“Final Pre-Development Costs”); and
(ii)the difference between the Final Pre-Development Costs and $13,000,000.00 (“Final Calculation”).
(b)The Parties agree that if the Final Pre-Development Costs is:
(i)more than $13,000,000.00 then the Purchase Price is increased by an amount equal to the JV Sale Interest of the Final Calculation; and
(ii)less than $13,000,000.00 then the Purchase Price is decreased by an amount equal to the JV Sale Interest of the Final Calculation,
(c)If requested by either the Purchaser or the Washplant Purchaser (“Requesting Party”), QCoal must provide the Requesting Party and its Representatives (at the Requesting Party’s cost) with access to its Records and employees for a period of 90 days (“Review Period”) after receipt of the Final Calculation to:
(i)inspect the Records used to prepare the calculation of the Final Pre-Development Costs and Final Calculation; and
(ii)speak with employees of QCoal for the sole purpose of reviewing the Final Pre-Development Costs and the Final Calculation.
(d)In carrying out its inspection and speaking with employees of QCoal in accordance with clause 6.9(c), the Requesting Party must, and must ensure that its personnel, act reasonably in seeking information including by limiting the number of requests so as to not unreasonably burden QCoal.
(e)Within 5 Business Days of the end of the Review Period:
(i)if the Final Pre-Development Costs are more than $13,000,000.00, the Purchasers must pay the Adjustment Amount to the Vendors; or
(ii)if the Final Pre-Development Costs are less than $13,000,000.00, the Vendors must pay the Adjustment Amount to the Purchasers.”
- The statement of expenditure required by cl 6.9 does not appear to have been provided within 30 business days after completion, because it was provided on 13 June 2007. Neither side suggests that anything comes from that point.
- The critical words from cl 6.9 are within subclause (a)(i):
“the amount expended by the Vendors to advance the Sonoma Project to its position at Completion…”
The defendants argue that only amounts which were paid, and paid by completion, could be included. On this basis, they say that the Transaction Fees for Mr Wallin, GeoContext and Mr White could not be included because Mr Wallin is yet to be paid and the others were paid only after completion. The same argument would apply to amounts paid to Mr Ever and Mr Kanamori after completion, although in those cases the relevant amounts are not within cl 6.9 because prior to completion, there was not even a liability to pay them.
- Secondly, the defendants argue that none of the Transaction Fees or the bonuses met the description of something which was “to advance the Sonoma Project to its position at Completion”. They argue that these were rewards for the person’s contribution to the completion of a sale of some of QCoal’s interest, rather than for his contribution towards advancing the Sonoma Project, which was defined to mean “the coalmine to be developed on the Sonoma Mining Leases”.
- The first question then is what was meant by the expression “amount expended”. According to the Shorter Oxford English Dictionary, the word “expend” means:
“Spend (money); devote (care, time, effort); employ for a given purpose. Formerly also, spend completely, consume (resources) in outlay …
Use up (material, strength, etc) in any operation. Formerly also consume (provisions).”
According to the Macquarie Dictionary, the word means:
“To use up; to pay out; disburse; spend.”
- Yet the plaintiffs argue that on the ordinary meaning of the word “expended”, the clause would include amounts for which there was an unpaid liability. The plaintiffs point to the word “incurred” where it appears in items B and D of cl 6.9(a)(i) as indicating a wider meaning of the expression “amount expended”. They say that, for example, the reference to “amounts incurred to prepare the Cultural Heritage Management Plan” must include amounts for which there was an unpaid liability.
- But the word “incurred” can be used in relation to either an actual expenditure or a liability. So in New Zealand Flax Investments Ltd v Federal Commissioner of Taxation, in discussing the expression “loss or outgoing actually incurred” in s 23(1)(a) of the Income Tax Assessment Act 1922-1934 (Cth), Dixon J said:
“To come within that provision there must be a loss or outgoing actually incurred. “Incurred” does not mean only defrayed, discharged, or borne, but rather it includes encountered, run into, or fallen upon. It is unsafe to attempt exhaustive definitions of a conception intended to have such a various or multifarious application. But it does not include a loss or expenditure which is no more than impending, threatened, or expected.”
Therefore the “costs incurred” in item B and the “amounts incurred” in item D need not be unpaid liabilities. If considered alone, they might be thought to include amounts which were unpaid but for which the vendors were liable. But in the context of cl 6.9(a)(i), they must be understood as instances of expenditure. In other words, by agreeing that within the amount expended by the vendors there would be certain costs or amounts which had been incurred, the parties were expressly including certain kinds of expenditure. This must be so when item D is considered because the parties have agreed that what will be included are amounts incurred in the preparation of the Cultural Heritage Management Plan as well as amounts paid under that plan. There would be no sensible basis for an agreement to include only amounts paid under the plan but to include unpaid liabilities of its preparation, where the preparation of the plan would necessarily precede any payment under it.
- The plaintiffs also rely upon item C by which there was included:
“amounts paid under the Compensation Agreements (other than the amount payable under clause 3.1(b) of the Supplementary Compensation Agreement with the Watts).” (emphasis added).
- Clause 3.1(a) of that agreement required $500,000 to be paid to Mr and Mrs Watts within five business days of the satisfaction of certain conditions and cl 3.1(b) required a balance of $8,750,000 to be paid within 50 business days of the grant of the relevant mining lease. By cl 14 of the contract of sale, the first defendant agreed that on and from completion, it would be bound by each of the compensation agreements (including that Supplementary Agreement with the Watts) to the extent of its Mine Sale Interest (which was 8.333 per cent), but that any obligation under cl 3.1(a) of that agreement would have to be “paid by the Vendors whether that obligation arises before or after Completion”. The amount under cl 3.1(b) is an exclusion from the category of amounts paid under the compensation agreements. It is difficult to see that by this exclusion, the plain meaning of the word “paid” could be affected. The expression “amount payable under cl 3.1(b)” was used to identify an amount which might be paid by the relevant date for cl 6.9 and which in that event would otherwise be within that clause. In other words it was to exclude any amount paid under the Watts’ agreement which was in discharge of what was then payable under cl 3.1(b). The evident reason for this exclusion was to preclude the possibility that by a payment of that amount before the relevant date for adjustment of the price under cl 6.9, QCoal would be able to claim 45 per cent of the payment rather than the defendants’ contribution being 8.33 per cent under cl 14. More generally, by using the word “paid” in item C, and also in item E, the parties have confirmed that “the amount expended” was to include only that which had been paid.
- There is nothing at odds with the commercial purpose of cl 6.9 in giving the word “expended” its ordinary meaning. It was within the vendors’ ability to secure their entitlement to a contribution to these development costs by paying for them. It is more likely to attribute to the purchasers the intention that they would contribute to amounts in fact outlayed by the vendors, rather than making an immediate contribution to a liability which might not have to be discharged for some time. In my conclusion the expression “amount expended” within cl 6.9 means only the amount of expenditure, the amount paid.
“Expended” by when?
- The question then is whether it includes only that which was spent prior to completion or instead includes expenditure made by the time of the statement which was to be provided under cl 6.9. Upon that second view, the expenditure would still have to have been to advance the project to its position at completion.
- Clause 6.9 does not plainly limit the expenditure to that which has been made prior to completion. Nor is there any reason for an implication to that effect. It would be consistent with the commercial purpose of this provision that the statement of expenditure include expenditure made to the date of the statement as long as it was for something which had advanced the project to its position at completion.
- It could not be suggested that the expression “expended … to advance the Sonoma Project” should be understood as referring only to instances where the project was advanced by the expenditure itself, rather than by whatever it was for which a payment was made. Probably in most cases an expenditure would occur after the provision of the benefit for which it was made. So there were likely to be expenses for benefits derived shortly prior to completion but which had not been paid until the month following completion. Under this second interpretation cl 6.9 would then allow the vendors to make those payments within the 30 business days before their provision of the required statement of expenditure, and to recover the purchasers’ contribution.
- In my view the required statement of the amount expended by the vendors permitted the inclusion of amounts expended to the date of the statement, as long as the amounts had the requisite connection with the advancement of the project to its position at completion. Upon this interpretation, the amounts paid to GeoContext and Mr White could be included although they were payments made after completion, if they did have that connection with the advancement of the project. Of course the amount yet unpaid to Mr Wallin is not recoverable.
Expended “to advance the Project”
- The next issue is whether the Transaction Fees were amounts expended to advance the Sonoma Project. The question here is not whether these amounts were necessarily expended, but whether they were expended in consideration for the provision of a service which was acquired for the advancement of the project. On the face of the three agreements, in each case the Transaction Fee was payable in consideration for the provision of services which had that purpose. The fact that the fee was payable only in the event of a “transaction” did not mean that it was not paid for that consideration. It was not expressed to be paid as a fee for simply causing that transaction to occur, such as would be the case with a selling agent’s commission. The defendants point out that there was no articulated basis for the calculation of these fees and that they were to be paid in the agreed amounts regardless of the amount of time for which the employee or consultant was engaged. If considered alone, that might be some indication that the fee was not paid in consideration for the provision of the services, but instead for the party’s contribution to the making of the transaction itself. But that is not how the matter is expressed within these agreements, which the defendants concede had effect according to their terms.
- Accordingly, the Transaction Fees for GeoContext and Mr White were within cl 6.9. A further submission by the defendants was that Mr Wallin’s fee was different because at all times he has been the only director and shareholder of QCoal, and that “there could be no suggestion that the Transaction Fee was part of an inducement for his work in advancing the Sonoma Project”, which he would have undertaken in any event. It was submitted that the purpose of the fee in his case was not to advance the project but to make the project more lucrative for him. But it is more lucrative for him only because of the terms of this contract of sale, if his fee is within cl 6.9. As the defendants accept the authenticity of Mr Wallin’s agreement, which is dated years earlier than the contract of sale, this could not have been its purpose, and they must accept that its purpose was as the agreement expressed.
The result under the contract
- The result is that upon the proper interpretation of the contract of sale:
- the amount of $2,700,000 claimed for Mr Wallin should not have been included in the vendors’ statement;
- the amounts of $200,000 for GeoContext and $100,000 for Mr White were correctly included;
- the amount included for Mr Ever was overstated by $216,794.13 and the amount included for Mr Kanamori was overstated by $23,672;
- the amount claimed by the vendors in their notice as the total to be apportioned was overstated by $2,940,466.13 and that total should have been $12,385,658.13;
- the defendants are not liable to the plaintiffs but instead the amount payable under cl 6.9 is by the plaintiffs to the defendants, in the sum of $276,453.82.
- According to cl 6.9, that sum, the so-called Adjustment Amount, should have been repaid within five business days of the end of the so-called Review Period. By cl 4.5 of the contract, if a party failed to pay any sum in accordance with the contract it was required to pay interest at “the Agreed Rate” from the due date for payment. Counsel agreed that the interest should be calculated after I determined how much was owing under cl 6.9. Accordingly, by this judgment the plaintiffs’ claim will be dismissed and upon the counterclaim there will be a declaration that the plaintiffs are liable to pay to the defendants as the Adjustment Amount under cl 6.9 of their contract the sum of $276,453.82 together with interest on that sum pursuant to the contract.
The damages claim
- There remains the defendants’ counterclaim for damages. This is pleaded on the premise that upon the proper interpretation of the contract of sale, the Transaction Fees for Mr Wallin, GeoContext and Mr White (described in the counterclaim as the “Disputed Fees”) were properly included by the plaintiffs in their statement under cl 6.9. I have disallowed the plaintiffs’ claim in relation to the highest of those disputed fees. Nevertheless it is necessary to discuss this damages claim in respect of the other fees or in case I am wrong about Mr Wallin’s fee.
- The counterclaim is for damages for breach of warranty or under s 82 of the Trade Practices Act 1974 (Cth), and is effectively the same under either basis. It is alleged that in the negotiations leading to the contract of sale, the plaintiffs warranted and represented that what were described as pre-development costs in documents which they were given were expenses which had been paid, and that the plaintiffs did not disclose anything of “the contingent nature of, or the quantum of, the disputed fees”. The character of the Transaction Fees is said to be so extraordinary that the plaintiffs’ non-disclosure of them was misleading or deceptive or likely to mislead or deceive.
- By the contract of sale the vendors warranted that:
“Except for any predictions or projections into the future, all information given by the Vendors or any Vendors’ Representatives to the Purchasers or to the Purchasers’ Representatives in the course of negotiations leading to this Agreement and Completion …(was) correct and not misleading as at the time of giving such information.”
In this way the claim for breach of warranty extends no further than the claim for a breach of s 52 of the Act. Under each basis the alleged loss and damage is the same: the defendants’ case is that they lost a chance, which was the chance to negotiate a contract under which the Transaction Fees would be excluded from the operation of cl 6.9 or under which the price would be decreased to bring about the same result.
- It is necessary then to discuss to some extent the course of the negotiations, which began in October 2006 with the provision of a so-called information memorandum by the plaintiffs to Cliffs. It included a financial model which set out historical and expected costs. Relevantly it included an item for “pre-development costs” already incurred of $7.1 million. That figure was also represented in the course of a presentation by the plaintiffs’ representatives on 9 October 2006. A few days later, in answer to a request from Cliffs’ Mr Spoors for some detail of these pre-development costs, the plaintiffs’ Ms Bhatia (Mr Wallin’s daughter and then employed by QCoal) provided a document which set out various amounts for categories of “pre-development expenses” which totalled $7,070,708. This included $1,776,933 against an item called “Geological” and $1,964,186 against an item called “Project Management & Administration”. She then told Mr Spoors that Mr Wallin’s “time” and that of Mr Pattison (of GeoContext) was within “geological” and “project management” and that Mr White’s time was within the latter category. But none of the contracts providing for the Transaction Fees was specifically mentioned or produced. That remained the case until after the signing of the contract of sale.
- Thereafter the plaintiffs provided further documents setting out what were represented to be updated figures for pre-development costs. On 22 December 2006 the parties produced a document called a “Terms Sheet” which was intended to record their proposed transaction. Within that document, against the description “reimbursement of pre-development expenses”, the plaintiffs wrote that QCoal would be reimbursed for the purchasers’ share
“of the A$7.1 million of project pre-development expenses and other bona fide project expenses that have been incurred by QCoal (i.e. A$3.2 million based on the purchasers’ 45% interest)”.
- Thereafter the plaintiffs continued to provide further documents representing, amongst other things, the extent of pre-development expenses and the defendants’ representatives continued to undertake their due diligence inquiries. On about 13 March 2007, the plaintiffs’ Mr Boyd provided a document which represented that the pre-development costs to 30 June 2006 had been “revised” to $8,511,899 by the addition of “management fees not previously booked”. He did this on Mr Wallin’s instructions.
- On 21 March 2007, Mr Ever emailed to the lawyers acting for the defendants what he said was a schedule of “expenses to date and expected expenditure going forward”. That represented that the figure for the purposes of cl 6.9 would be $15,121,642, of which the amount which predated July 2006 was $7,624,303. On 29 March 2007, Mr Ever emailed to the defendants’ lawyers what he described as a “summary of spend until end March”, about which he said that “[there] might be invoices trickling through”. That summary, itself headed “Total Costs incurred to date”, referred to a period from 13 October 2004 to 28 March 2007. It represented that the costs, “the spend” as Mr Ever described it in his email, amounted to $15,772,157. It included a component of $4,920,955 which was attributed to “internal geological research & management” which, it is now clear, was calculated by including the total of $3,000,000 of the Transaction Fees.
- The contract was signed a few days later, on 3 April. The defendants had not sought further information as to that figure of $4,920,955. I accept that the reason they did not do so was that they believed that they were well protected by the terms of the proposed cl 6.9, which would have the result that they would be obliged to contribute only towards expenses properly attributed to the project.
- In my view, at least that last email from Mr Ever was misleading or deceptive, or likely to mislead or deceive, in this way: it represented that the amounts set out in the document had been spent. He described them as “the spend until end March”. And this was in the context of Mr Ever’s email of 21 March, in which he had set out the “Capital Expenditure and Development Costs” month by month, both to that point and as proposed from April 2007 onwards. That schedule was described in the email as showing “the expenses to date and expected expenditure going forward” (emphasis added).
- However, that misrepresentation is of little moment, because had the disputed fees not been included within Mr Ever’s schedules of “expenses to date”, still the contract of sale would have been made in the same terms. The defendants were prepared to sign the contract in the belief that the amount under cl 6.9 could be as high as Mr Ever had represented. Had the Transaction Fees not been included then the represented amount would have been less than $13,000,000, which obviously would not have made the contract less attractive to them.
- Their real case is that the agreements for the Disputed Fees were so extraordinary that they had to be disclosed, for which they place particular reliance upon what was said by Black CJ in Demagogue v Ramensky:
“Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure: the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of “mere silence” or of a duty of disclosure can divert attention from that primary question. Although “mere silence” is a convenient way of describing some fact situations, there is in truth no such thing as “mere silence” because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.”
- What then was the circumstance which gave rise to such a “reasonable expectation” of disclosure in this case? The defendants emphasise that the disputed fees were payable contingent upon the successful completion of the very kind of transaction which Cliffs was considering entering into and, although in the case of Mr White and GeoContext the fees were payable to consultants who had worked on the project, they were lump sum fees which, at the least, required identification and explanation. They argue that in reality the fees were in the nature of bonuses or rewards rather than payments for services rendered. In the case of Mr Wallin’s fee, they argue that it had the further characteristic that it was payable to the sole director and shareholder of QCoal and that it was a substantial sum in comparison with the original amount attributed to pre-development expenses ($7.1 million) or even the figure ultimately appearing in cl 6.9 ($13 million).
- Again on the assumption that the agreements with GeoContext and Mr White were made on the dates which they bear and that they were enforceable contracts, I am not persuaded that they were so extraordinary as to make their non-disclosure misleading or deceptive. The quantum of the fees for GeoContext and Mr White does not seem to have concerned the defendants. Had the disputed fees been paid over the period of the service of these consultants rather than upon the completion of the transaction, the defendants apparently would make no complaint. Their unease as to the fees for these two parties appears to be that they are being asked to contribute towards the cost of selling a share of the plaintiffs’ interest rather than something which would have been an appropriate expense in developing the mine had it then been in the hands of the joint venture. However, given my conclusion that the fees were paid in consideration of services for the development of the project, I am unpersuaded that it was misleading or deceptive for the plaintiffs not to have volunteered the agreements with these two parties.
- But in the case of Mr Wallin’s agreement, as the defendants argue, there are additional features. The liability here hardly derives from an arms length transaction. It results from a meeting of Mr Wallin’s personal and corporate minds. And there is the feature that in this instance, the inclusion of Mr Wallin’s fee would be the commercial equivalent of adding $1,215,000 to the overall benefit to the vendors’ side of this transaction, because Mr Wallin was the sole shareholder of QCoal. This was not simply an agreement to pay for an employee’s services contingent upon there being a transaction which provided the funds to do so.
- The question here is not whether Mr Wallin was entitled to the benefit of what the defendants concede was his contract. Nor is it a question of whether the amount of the fee, if considered as a payment for Mr Wallin’s services over some years, was excessive. Although this was for services said to have been rendered by Mr Wallin, this was a sum which was payable to him only in the event of the completion of this sale. The transaction thereby advantaged the vendors’ side, and at the purchasers’ cost, in a way and to an extent of which the defendants were unaware. They were made to believe that they were paying, as a contribution to the pre-development expenses, a share of what the vendors had had to pay. In truth, they were also adding $1,215,000 to the net benefit of this transaction to the vendors’ side of it. I am persuaded that the defendants could have reasonably expected the disclosure of the facts and circumstances of Mr Wallin’s agreement, and that the plaintiffs thereby engaged in conduct which was misleading or deceptive or likely to mislead or deceive.
- The plaintiffs emphasise that in the due diligence process, the defendants were provided with such documents and records as they requested so that these agreements were not hidden from them. However that does not meet the defendants’ case, which is that Mr Wallin’s fee was such that by not revealing it specifically, the plaintiffs breached s 52.
- Because of my conclusion that Mr Wallin’s fee is not within cl 6.9, that conduct is of no consequence. But if I am wrong about that, it is necessary to consider the question of damages. As I have said, ultimately the defendants limited their case to the loss of a chance to negotiate a contract which would have excluded the disputed fees from the operation of cl 6.9. Accordingly, they say that their case is of the kind discussed in Sellars v Adelaide Petroleum NL. In my opinion the case is not so clearly of that kind. Upon the premise that each of the disputed fees is within cl 6.9, the defendants’ complaint essentially is that by reason of the misleading and deceptive conduct, they made a contract which was unfavourable to them in that it obliged them to contribute to these fees. Their complaint is about something which did happen: the making of a contract in terms which allowed the plaintiffs to recover 45 per cent of these fees, rather than the loss of an opportunity. It may be then that it was for the defendants to prove that more probably than not, they would not have made a contract with that effect had they not been misled or deceived.
- However, there was no submission for the plaintiffs that the case should not be characterised as one of a loss of a commercial opportunity or chance. Rather they argued that there was simply no chance that the plaintiffs would have agreed to different terms. Mr Wallin gave evidence to that effect and claimed that his company was in a position to look to other parties in place of the defendants. He said that he would not have been willing to accept a joint venture partner who was prepared to question what he said were such relatively “trifling” fees. Mr Wallin explained that this was during a favourable economic climate in which to attract investors in a coal mine. Indeed, in August 2007, when the defendants complained about the inclusion of these fees under cl 6.9, the plaintiffs made an open offer to buy back their interest at the price which they had paid. The offer was not accepted and from this the plaintiffs say that the contract made in April 2007 would have been in no different terms had these matters been disclosed.
- Accepting that the vendors were not in a weak bargaining position, it does not follow that they would not have been prepared to give way to some extent. I do not accept Mr Wallin’s claim that it is certain he would have not gone ahead had Cliffs raised these fees in the course of the negotiations. After all this was a transaction in which Cliffs was not only agreeing to pay a price in excess of $35,000,000, but was agreeing to fund the construction of the washplant which, it was expected, would cost more than $100,000,000. It is unlikely that either side would have let this matter get in the way of a concluded contract. It is more likely that some compromise would have been reached. I find that there would have been little prospect that the plaintiffs would have agreed to exclude Mr Wallin’s fee in its entirety. But the defendants would have had some advantage in those negotiations from the fact that, as the plaintiffs’ accountant Mr Boyd explained, these agreements for fees were not reflected in the plaintiffs’ accounts, and were added relatively late to the reports of expenses provided to the defendants during the period prior to the contract.
- The defendants have proved that there was more than a theoretical chance of some adjustment to the terms of the contract, at least in relation to Mr Wallin’s fee. Any valuation of that chance is necessarily arbitrary. But on the premise that this is a loss of a chance case, I would have been prepared to allow ten per cent of the amount in question for Mr Wallin’s fee. So had I reached a conclusion that the fee was recoverable under cl 6.9, on that basis I would have allowed $120,000 as damages under s 82.
- The plaintiffs’ claim will be dismissed. On the counterclaim, it will be declared that the defendants by counterclaim are liable to repay as the Adjustment Amount under cl 6.9 of the contract dated 3 April 2007 the sum of $276,453.82 together with interest on that sum pursuant to the contract. There will be liberty to apply for a judgment for a money sum which is consistent with that declaration. I will hear the parties as to costs.
 Or those for GeoContext and Mr White which are discussed below.
 (1938) 61 CLR 179.
 (1938) 61 CLR 179, 207. See also Federal Commissioner of Taxation v James Flood Pty Ltd (1953) 88 CLR 492, 507.
 45 per cent of ($13,000,000 - $12,385,658.13).
 Clause 16.1 and schedule 4, cl 1.1(k).
 (1992) 39 FCR 31, 32. See also Warner v Elders Rural Finance Ltd (1993) 41 FCR 399, 401-2.
 (1994) 179 CLR 332, 355.
 Cf. Chappel v Hart (1998) 195 CLR 232, 260 (Gummow J).
 0.10 × 0.45 × $2,700,000, rounded down to $120,000.
- Published Case Name:
QCoal P/L & Anor v Cliffs Australia Coal P/L & Anor
- Shortened Case Name:
QCoal Pty Ltd v Cliffs Australia Coal Pty Ltd
 QSC 130
29 May 2009
|Event||Citation or File||Date||Notes|
|Primary Judgment|| QSC 130||29 May 2009||-|
|Appeal Determined (QCA)|| QCA 358||20 Nov 2009||-|