CATCHWORDS CONTRACT - loan to company to defray prospectus and stock exchange listing expenses - lender having option to be issued shares and options to subscribe for further shares as repayment instead of cash - portion of those shares to be held "in escrow" - whether new agreement entered into - whether representation concerning alternative arrangements misleading or deceptive conduct - no point of principle. Trade Practices Act 1974 (Cth) ss.51A, 52, 82 Fair Trading Act 1987 (W.A.) s.9 FAR WEST SCALLOPS INDUSTRIES PTY LTD v. CAMBRIDGE GULF EXPLORATION NL No. WAG 94 of 1994 CARR J. PERTH 23 JUNE 1995 IN THE FEDERAL COURT ) OF AUSTRALIA ) WESTERN AUSTRALIA ) No. WAG 94 of 1994 DISTRICT REGISTRY ) GENERAL DIVISION ) B E T W E E N: FAR WEST SCALLOPS INDUSTRIES PTY LTD ACN 009 469 390 Applicant and CAMBRIDGE GULF EXPLORATION NL ACN 059 458 374 Respondent CORAM: CARR J. PLACE: PERTH DATE:23 JUNE 1995 MINUTE OF ORDERS THE COURT ORDERS THAT: 1. The application is dismissed. 2. The applicant pay the respondent's costs of the application. NOTE: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules IN THE FEDERAL COURT ) OF AUSTRALIA ) WESTERN AUSTRALIA ) No. WAG 94 of 1994 DISTRICT REGISTRY ) GENERAL DIVISION ) B E T W E E N: FAR WEST SCALLOPS INDUSTRIES PTY LTD ACN 009 469 390 Applicant and CAMBRIDGE GULF EXPLORATION NL ACN 059 458 374 Respondent CORAM: CARR J. PLACE: PERTH DATE:23 JUNE 1995 REASONS FOR JUDGMENT Introduction In this application Far West Scallops Industries Pty Ltd ("Far West") claims damages from Cambridge Gulf Exploration NL ("Cambridge") for breach of contract or in the alternative under s.52 (when read with ss.51A and s.82) of the Trade Practices Act 1974 (Cth) ("the Act") and s.9 of the Fair Trading Act 1987 (W.A.). The alternative claims are on the basis that Cambridge, by making certain false representations in a facsimile which is said to evidence part of the contract, engaged in misleading or deceptive conduct. The contract concerned a loan from Far West to Cambridge to help defray its expenses in relation to a prospectus and the subsequent listing of certain securities on the Australian Stock Exchange. The prospectus was for an issue of 20 million shares and the same number of options The principal question to be decided is whether under the arrangements between the parties, Far West became contractually entitled to be issued with 400,000 shares in Cambridge together with 400,000 options to subscribe for further shares. The alternative question is - did Cambridge represent that it would issue those securities to Far West and if so, did it thereby engage in misleading or deceptive conduct? Factual matters not in dispute Cambridge was at all material times a corporation within the meaning of the Act. In early 1993 a company by the same name, which subsequently changed its name to Cambridge Gulf Holdings NL ("Holdings") was planning a public issue and stock exchange listing of shares and options over shares in Cambridge. Mr Brian Conway was managing director of both Cambridge and Holdings. The directing mind and will of Far West was that of Mr James Ch'ng. At a meeting in March 1993 between Mr Conway and Mr Ch'ng, Mr Conway explained his plans for Cambridge and asked Mr Ch'ng for a loan of $50,000 to assist in the costs of printing the prospectus for the proposed issue of shares. As a result of that meeting Far West agreed to lend and did in fact lend Holdings $50,000. That transaction was evidenced by a document which was signed by Mr Ch'ng on behalf of Far West and executed under the common seal of Holdings. It was a short document and its terms were as follows: RECEIPT AND ACKNOWLEDGMENT Cambridge Gulf Exploration NL (ACN 009 274 122) of 18 High Street Fremantle Western Australia (name currently being changed to Cambridge Gulf Holdings NL) ("CGH") hereby acknowledges that Far West Scallops Industries Pty Ltd ("Far West") of 35 Macleod Road Applecross Western Australia has provided Fifty Thousand Dollars ($50,000.00) loan funds ("the funds") to CGH. At the discretion of Far West, the funds shall be convertible into Two Hundred Thousand (200,000) ordinary 25 cent shares and Two Hundred Thousand (200,000) options in a new company which has been formed and which is called Cambridge Gulf Exploration NL ("CGE"). It is the intention of the Directors of CGE that the company will be listed on the Australian Stock Exchange on or before 30 May 1993. CGH also undertakes to provide Far West with the right to subscribe for a further Eight Hundred Thousand (800,000) shares and Eight Hundred Thousand (800,000) options in CGE at par value upon the issue of a Prospectus for CGE. Far West shall have the right to subscribe for the abovementioned Eight Hundred Thousand (800,000) shares and Eight Hundred Thousand (800,000) options upon the issue of the CGE Prospectus. Dated this 17th day of March 1993 In fact Cambridge had not yet been incorporated; it was incorporated on 23 March 1993. On or about 31 March 1993, certain discussions took place between Mr Ch'ng and a Mr Michael Furlong, the Company Secretary of both Cambridge and Holdings. On that date Mr Furlong sent Mr Ch'ng a fax, the relevant portion of which read as follows: "To follow is a copy of the Reciept (sic) & Acknowledgment letter as discussed. The main difference between this Agreement & the previous Agreement is that this Agreement is with Cambridge Gulf Exploration & not Cambridge Gulf Holdings. As Cambridge Gulf Exploration is the company that will be listed on the Stock Exchange, I need your Agreement to be with Cambridge Gulf Exploration & not Cambridge Gulf Holdings." The document referred to and transmitted with the above fax message was in the following terms: RECEIPT AND ACKNOWLEDGMENT Cambridge Gulf Exploration NL (ACN 059 458 374) ("CGE") of 18 High Street Fremantle Western Australia hereby acknowledges that Far West Scallops Industries Pty Ltd ("Far West") of 35 Macleod Road Applecross Western Australia has provided Fifty Thousand Dollars ($50,000.00) loan funds ("the funds") to CGE to assist with payment of CGE's formation expenses and costs relating to the issue of a Prospectus by CGE. The funds will be repaid by CGE within a period of 3 months from the date of issue of a Prospectus by CGE. Repayment of the loan funds by CGE will be satisfied by the issue of Two Hundred Thousand (200,000) ordinary 25 cent shares and Two Hundred Thousand (200,000) options in CGE which will represent full and final satisfaction of the loan funds provided by Far West. CGE also undertakes to provide Far West with the right to subscribe for a further Eight Hundred Thousand (800,000) shares and Eight Hundred Thousand (800,000) options in CGE at par value upon the issue of a Prospectus by CGE. Far West shall have the right to subscribe for the abovementioned Eight Hundred Thousand (800,000) shares and Eight Hundred Thousand (800,000) options upon the issue of the CGE Prospectus. Dated this day of 1993 On 2 April 1993 a document in the above terms was duly executed under the common seals of Far West and Cambridge respectively. Depending upon how one defines the word "main", Mr Furlong's description of the difference between the two documents may not have been entirely accurate. It will be noted that there was no reference in the second document to Far West having any discretion concerning whether the loan would be repaid in cash or in shares and options. However, nothing turns on this alteration and in cross-examination Mr Ch'ng said that at that time he was happy with it. On 21 April 1993, there were further discussions between Mr Furlong and Mr Ch'ng, following which Mr Furlong sent by fax to Mr Ch'ng what he described, in the covering letter as a "letter of variation". That document, under Cambridge's letterhead, was signed by Mr Furlong as Cambridge's Company Secretary and executed under the common seal of Far West. Omitting formal parts, the letter read as follows: "Dear Sir Re: Loan - $50,000 We refer to the Receipt and Acknowledgment dated 2 April 1993 wherein it was confirmed that this company would repay the loan of $50,000.00 owing to you within a period of three months from the date of issue of a Prospectus by this company to be satisfied by the issue of 200,000 ordinary 25 cent shares and 200,000 options in the company. We agree that at your election the repayment of the sum of $50,000.00 may be satisfied by the payment of cash in lieu of the issue of the shares and options. If you wish the company to repay the sum of $50,000.00 rather than issue the shares and options in satisfaction of the repayment of the such (sic) amount then you may give notice in writing to the company to that effect at any time after the date of issue of the Prospectus whereupon the sum of $50,000.00 will be repayable by the company within fourteen days of the date of the closing of the issue pursuant to the Prospectus and the company will no longer then be obliged to issue the shares and options in satisfaction of the loan funds. If you do not give notice that you require the loan funds to be repaid in cash then the loan funds will be satisfied by the issue of the shares and options provided that: (a) shares and options to be issued in satisfaction of the loan funds may be the subject of escrow requirements by the Australian Stock Exchange; and (b) it will be a term of the option that the expiration period of the options will expire one month before the date of exercise of any options issued by the company pursuant to the Prospectus. In all other respects the terms of the Receipt and Acknowledgment dated 2 April 1993 shall continue to apply. If you agree to the terms of this letter as varying the Receipts (sic) and Acknowledgment dated 2 April 1993 would you please sign a copy of this letter and return it to us as soon as possible." Cambridge issued its prospectus on 1 May 1993. The prospectus provided that the closing date for lodgment of applications for shares was 22 May 1993 but that the Board of Directors of Cambridge had the right to close or extend the issue at any time after 1 May 1993. The closing date was extended to 20 June 1993. The issue was significantly over-subscribed and there was no provision in the prospectus to enable acceptance of over-subscriptions. It will be noted that under the terms of the letter dated 21 April 1993 Far West once again had an election to have its loan repaid in cash or satisfied by the issue of 200,000 shares and 200,000 options. Furthermore, for the first time, there was reference to the fact that the shares and options might have to be the subject of escrow requirements by the Australian Stock Exchange Limited ("ASX") and a stipulation concerning the time at which the options would expire. It emerged in evidence that an ASX officer had at that time told Mr Furlong that these two requirements in relation to the loan from Far West might be imposed by ASX as conditions for the listing of the shares and options which were to be the subject of Cambridge's prospectus. Between 7 June 1993 and 15 June 1993 Mr Ch'ng arranged for some of his family, friends and associates to lodge applications for shares in Cambridge pursuant to the prospectus. The parties appear to have treated this as being in accordance with Cambridge's commitment to provide Far West with the right to subscribe for a further 800,000 shares and 800,000 options upon the issue of the prospectus. The total amount applied for by Mr Ch'ng's family, friends and associates was about 1.7 million shares together with the same number of options which were attached to the shares. Cambridge accepted all of those applications. On 18 June 1993 Far West lodged an application for 200,000 shares to be issued pursuant to the Prospectus. Accompanying that application was a cheque drawn by Far West in favour of Cambridge in the sum of $50,000 as subscription moneys. Cambridge did not accept that application for reasons which are in contention. That matter is dealt with later in these reasons. On 1 July 1993 ASX notified Cambridge that it required some of the shares and options, which might be issued to Far West by way of repayment of its loan, to be subject to escrow conditions. On the same date Cambridge sent a letter to Far West which, omitting formal parts, read as follows: "The Australian Stock Exchange Ltd ("ASX") has advised Cambridge Gulf Exploration NL ("Cambridge") that any shares and options issued pursuant to the loan agreement between Cambridge and Far West Scallops Pty Ltd will be subject to escrow on the basis of the following formula: VR = N -(N x IP ) ( MP ) where, VR = the number of Shares and Options held in escrow for 12 months or until expiry, as the case may be; N = the number of Shares and Options; IP = 25 (being the number of cents of the issue price); MP = the number of cents being the sum of the Market Price of a fully paid ordinary share in Cambridge and a quoted 30 June 1994 option. "Market Price" means the average weighted price per share or option traded on market in the 5 business days prior to the exercise of the right to receive the Shares and Options. If there has been no trading in one or both of these securities in the previous 5 business days then the price of the last trade in the relevant security is to be used as the market price. The ASX has also advised that the election to seek repayment of the outstanding loan funds by the issue of shares and options is non transferable and that there will be an escrow period of 12 months from the date of the Cambridge Prospectus, being 1 May 1993. Should you elect to receive shares and options as repayment for the outstanding loan funds then the ASX will require you to enter into an escrow deed in regard to those shares and options." The evidence was that the application of the above formula would have resulted in Far West being able to sell shares and options to a value equivalent to the amount of its loan to Cambridge ($50,000) but that any remaining shares and options would have had to be held for the twelve month period of the "escrow". On or about 12 July 1993 certain discussions took place between Mr Furlong and Mr Ch'ng concerning the escrow conditions imposed by the ASX in respect of shares to be issued to Far West. Far West relies upon the oral exchange between Mr Furlong and Mr Ch'ng as constituting part of the contract upon which it sues in these proceedings. I shall return to that matter below. On 5 July 1993 Cambridge refunded to Far West the sum of $50,000 in repayment of the subscription moneys which had accompanied its unsuccessful application dated 18 June 1993. On 12 July 1993 Mr Furlong on behalf of Cambridge sent a fax to Mr Ch'ng on behalf of Far West which read as follows: "James To follow is a letter from Far West advising Cambridge Gulf that you will require payment of the loan funds in cash. After we have repaid the $50,000 we will arrange a placement of 400,000 shares to you at 25 cents each which will cost $100,000. At the same time I will also arrange a placement of shares to Mr Trott. Could you please seal & sign the following letter & return to me by fax. Thank You Mike." The letter referred to in the fax was executed under the common seal of Far West, dated 12 July 1993 and, omitting formal parts read as follows: "Further to the Agreement between Cambridge Gulf Exploration NL and Far West Scallops Industries Pty Ltd dated 21st April 1993, Far West Scallops Industries Pty Ltd hereby advises Cambridge Gulf Exploration NL that the loan funds are required to be repaid in cash." On 13 July 1993 Cambridge released the following statement to the Australian Stock Exchange: "Pursuant to Section 3A(1) of the Australian Stock Exchange Listing Rules, Cambridge Gulf Exploration NL ("Cambridge") hereby advises the Australian Stock Exchange Ltd that Far West Scallops Industries Pty Ltd ("Far West") and William John Timsbury Clarke ("Clarke") being parties who have provided loan funds to Cambridge have both elected to receive repayment of their loan funds in cash. As is outlined by the Cambridge prospectus dated 1 May 1993, Far West and Clarke provided loan funds to Cambridge and had the right to convert the loan funds into Cambridge shares and options or have the loan funds repaid in cash." On 20 July 1993 Far West received and cashed a cheque drawn by Cambridge in its favour for $50,000 being repayment of the loan funds, as requested in Far West's facsimile of 12 July 1993. On 17 August 1993 Mr Furlong sent a fax to Mr Ch'ng which read as follows: "To follow is a copy of the letter sent to you yesterday. I trust that the letter is sufficient & look forward to finalising the arrangement with Far West as soon as possible." The letter referred to in that fax was in the following terms: "Further to our discussion on Friday, 6 July 1993 in relation to participation by Far West Scallops Industries Pty Ltd ("Far West") or nominee in the Cambridge Gulf Exploration NL ("CGE") employee incentive scheme, I hereby confirm the basis of our discussion as follows: . Far West has provided certain services to CGE and in return for providing those services, is entitled to participate in CGE's employee incentive scheme. . The level of Far West's participation in CGE's employee incentive scheme shall be $100,000. . CGE will proceed with an issue of securities to Far West under the terms of the employee incentive scheme as soon as all statutory requirements for the employee incentive scheme have been satisfied. James, CGE acknowledges its obligation to Far West and will honour that obligation. If a more favourable structure for repaying CGE's obligation to Far West can be identified then CGE will proceed with an issue of securities to Far West on those terms." 6 July 1993 was a Tuesday but 6 August 1993 was a Friday. It was not really in contention that the reference to Friday 6 July 1993 in the first line of the above fax was intended to be a reference to 6 August 1993. It was common ground that the subject matter of this letter was a proposal that as part of an arrangement to provide Far West with some shares in Cambridge which were tradeable, an employee incentive scheme would be set up and Far West would be invited to participate in that scheme by subscribing for such shares. Mr Ch'ng gave evidence that he told Mr Furlong at the time that this would not work. Nothing came of the proposal. On 16 September 1993 Mr Mark McNamara, a solicitor employed by Cambridge sent a memorandum to Mr Conway. I set out below some extracts from that memorandum: MEMO "To: BRIAN CONWAY From: MARK McNAMARA cc: MICHAEL FURLONG Date: 16 SEPTEMBER 1993 Re: JAMES CH'NG - POSSIBLE PLACEMENT _______________________________________________________________________________ The manner in which I see the proposed placement proceeding is as follows: 1. You will need to consider how many shares or options CGE wishes to allot and issue to Mr Ch'ng and the price payable for those shares or options. In this regard, whilst it is possible for CGE to issue shares or options to Mr Ch'ng for nil consideration it would, in my view, be difficult to justify to existing shareholders and the market generally. I would, therefore, envisage that any such placement would need to be made at not less than 80% of the market price for the shares or options at the date the placement is arranged. 2. Once you have settled on the size and price of the placement, you will need to convene a meeting of the board and obtain a board resolution agreeing to the proposed placement. 3. As soon as possible after the board resolves to make the placement, the Company is obliged under Listing Rule 3E(5) to formally notify the Stock Exchange. The form of that notice is set out in the Listing Rules and will, in essence, give details of: . . . Of the above requirements, I would imagine that most importance should be placed on the stated purpose of the issue. Depending on the size of the placement, it is going to look rather strange so soon after the listing if the reason which is given is the raising of additional capital. Very serious consideration should, therefore, be given to this matter by the board of directors so that if the matter is ever raised by shareholders there is a plausible and justifiable reason for the placement occurring. 4. At least 5 business days prior to the placement occurring, we are required under Listing Rule 3E(7) to supply to the Stock Exchange 2 copies of drafts of the documents we propose to send to the proposed placee. However, this obligation is excused if the relevant documents in fact constitute a prospectus (see below for my comments on this). 5. Potentially, the issue of further shares or options in the Company brings the prospectus provisions of the Corporations Law into play. . . . . . . 7. As Mr Ch'ng is looking for a readily tradeable commodity it will also presumably be necessary for us to apply to the Stock Exchange for official quotation of the additional shares or options. The form of this application is set out in the Listing Rules and is relatively straightforward. To give you an idea of the additional listing fees involved in officially quoting the shares, if you were to decide to allot and quote a further $100,000 worth of shares, the Company would be liable to pay a further $520 in additional Stock Exchange fees. The final issue to consider relates to the timing of the proposed placement. This is a matter I would like to discuss with you and Michael when you have an opportunity. . . ." The copy of this memorandum which was tendered in evidence contained a handwritten endorsement by Mr Conway which read: "Mark. James has already stated he does not wish to aquire (sic) shares at 80% of market price i.e. 60c per share. The other problem is if you wait until Xmas I believe the shares will be much higher than 80c. It should be taken into account that James Chung (sic) is a major and important shareholder and should be dealt with in the manner we indicated we would. I believe your discussion should be with him to establish if what we propose is suitable and as a matter of urgency." On 3 December 1993 further discussions took place between Mr Ch'ng and Mr Furlong. Following those discussions, on 6 December 1993 Mr Furlong sent a fax to Mr Ch'ng setting out three alternative proposals for the issue of shares to Far West. The first proposal was that Holdings would transfer to Far West shares and options in Cambridge for a consideration of 25 cents per share (with nothing payable for the options). Those shares and options were to be subject to ASX escrow conditions because they comprised a tranche of 580,000 shares and options to be issued to Holdings pursuant to a preliminary expenses agreement between Cambridge and Holdings. Holdings had the right to nominate the recipient of those shares ("the Holdings shares"). The second alternative was a placement of shares to Far West at 80% of market value coupled with an "assumption" that Holdings would provide Far West with so many further Cambridge shares as would bring the total placed or transferred to Far West under this proposal to 200,000 Cambridge shares and options. The letter further stated that, as part of this alternative proposal, Holdings might also be prepared to provide Far West with contributing shares in place of the free options which, so it was said, would reduce the average cost for Far West to well below 25 cents per share. The latter part of this proposal would take place at the conclusion of the escrow period applicable to Holdings' shares in Cambridge. A third alternative was that a major shareholder would transfer 200,000 and options to Far West in return for $50,000. At the meeting, Mr Ch'ng had expressed a preference for the third alternative, but in his letter of 6 December 1993 Mr Furlong stated that this proposed transaction had been discussed with a major long-term shareholder who indicated that he did not wish to participate and that this alternative was unlikely to develop any further. In respect of the first alternative, Mr Furlong's fax included the following paragraph: "CGH can nominate Far West to receive the above mentioned shares and options in return for payment of $0.25 cents per share and Nil cents per option. Should Far West wish to progress with this opportunity the (sic) Far West would be required to execute an escrow deed with ASX. In addition, Far West would be required to provide payment to CGE by Friday 10 December 1993 and written notice that Far West is prepared to be nominated to receive the shares and options is required to be received at the offices of CGE by 12.00 noon Tuesday 7 December 1993." Far West did not give Cambridge written notice of such nomination either by the stated deadline of Tuesday 7 December 1993 or at all. Mr Ch'ng telephoned Mr Furlong later that week and said that Far West would like to accept the first proposal but was told that the shares had already been otherwise dealt with and were no longer available. The Pleadings Far West pleads its claim first in contract. It says that by a partly written and partly oral agreement made on 12 July 1993 Far West released Cambridge from further performance of its obligations under what it described as the deed dated 2 April 1993 as varied by the letter of 21 April 1993 in consideration of Cambridge promising to: . repay the loan to Far West; . arranging a placement to Far West of 400,000 shares at 25 cents each together with 400,000 attaching options; and . arranging a placement of 100,000 shares at 25 cents each together with 100,000 attaching options to Mr Ch'ng's son's father-in-law, Mr Trott. Far West particularises the written part of the agreement as consisting of the two page facsimile dated 12 July 1993 from Cambridge to Mr Ch'ng and Far West's fax letter to Cambridge of the same date. Far West pleads that insofar as part of the contract is oral, it consists of a telephone conversation between Mr Ch'ng and Mr Furlong on 12 July 1993 during which the promise to repay the loan and arrange the placements was discussed. It says that the substance of that conversation was that Mr Furlong explained to Mr Ch'ng that Cambridge still could not perform its obligations under the loan agreement as varied and that the terms providing for placement of shares were designed to ensure that Far West would not be disadvantaged in consequence of consenting to repayment of the loan by way of cash. There is a degree of inconsistency in this reference [in particular numbered (3) of paragraph 7 of the statement of claim]. The applicant's case was conducted on the basis that the reference to Cambridge's inability to perform was its inability to issue to Far West shares which were freely tradeable. There was no such obligation in the agreement as varied by the letter dated 21 April 1993. In fact, as can be seen from the extracts of that letter set out above, the agreement contained specific references to the fact that the shares and options might be the subject of escrow requirements by ASX. In its defence Cambridge says that: . by telephone conversation on or about 12 July 1993 between Mr Ch'ng on behalf of Far West and Mr Furlong on behalf of Cambridge, Far West elected to have repayment of the loan funds in cash and informed Cambridge that it was considering offering to purchase 400,000 of the 580,000 shares and options which were to be issued to Holdings pursuant to the prospectus and that Mr Trott might offer to purchase 100,000 of the shares and options, which shares and options would be subject to escrow conditions; . on the same date Cambridge sent by facsimile transmission a draft letter to be executed by Far West giving notice in writing that it (Far West) elected to be repaid the loan funds in cash; . on the cover sheet of that facsimile transmission Cambridge confirmed that it would arrange for the placement of the shares and options referred to above; . Far West executed and returned to Cambridge the letter referred to above; . on or about 19 July 1993 Cambridge delivered to Far West a cheque in the sum of $50,000; . by letter dated 6 December 1993 [the letter referred to earlier in these reasons] Cambridge informed Far West that Cambridge could nominate Far West to receive the 580,000 shares and options referred to above provided that written notice was received from Far West by 12 noon on 7 December 1993 that Far West wished to be nominated to receive those shares and options; . neither Far West nor Mr Trott offered to purchase or gave any notice that they wished to be nominated to receive the shares and options referred to above and Cambridge therefore took no further steps to arrange the placement of such shares and option; . it otherwise denies the allegations made by Far West concerning the contract and its alleged breach. In the alternative, Far West originally pleaded that "by entering into" the agreement on 12 July 1993 Cambridge impliedly represented to Far West that it (Cambridge) could and would: (a) arrange a placement to Far West of 400,000 shares at 25 cents together with 400,000 attaching options; and (b) arrange a placement of 100,000 shares at 25 cents together with 100,000 attaching options to Mr Ch'ng's son's father-in-law, Mr Trott. By an amendment made during final addresses this plea was changed by deleting reference to the agreement and substituting "by sending the fax" [dated 12 July 1993]. Far West further pleads that those representations were false in that Cambridge: . never intended to arrange a placement of 400,000 shares to Far West at 25 cents per share together with 400,000 attaching options; . had no reasonable grounds to believe that it (Cambridge) would be able to arrange a placement of 400,000 shares to the applicant at 25 cents per share together with 400,000 attaching options; . never intended to arrange a placement of 100,000 shares at 25 cents together with 100,000 attaching options to Mr Ch'ng's son's father-in-law, Mr Trott; and . had no reasonable grounds to believe that it (Cambridge) would be able to arrange a placement to Mr Trott of 100,000 shares at 25 cents together with 100,000 attaching options. Far West pleads that the above representations were with respect to a future matter which the respondent did not have reasonable grounds for making and were misleading by virtue of s.51A of the Act and s.9 of the Fair Trading Act 1987 (W.A.). It pleads reliance upon those representations and says that by making those representations Cambridge has engaged in conduct in trade or commerce that was misleading or deceptive or likely to mislead or deceive contrary to s.52 of the Act and s.10 of the Fair Trading Act. Finally Far West pleads that it has suffered loss and damage. In its schedule of damages Far West says that if Cambridge had performed its obligations and arranged the placement of 400,000 shares and 400,000 options to Far West within a reasonable time (which it says would mean before the end of July 1993) it would have sold the shares and options at or from the beginning of August 1993 for an average price of at least $0.98 per share and $0.40 per option. This would, on Far West's case have yielded after brokerage fees (calculated at 0.75%) $547,860. After deducting $100,000 for subscription money Far West quantifies its damages claim at $447,860. Was a new contract made on 12 July 1993 and if so what were its terms? The first matter to be resolved is what took place during the telephone conversation between Mr Ch'ng on behalf of Far West and Mr Furlong on behalf of Cambridge on 12 July 1993. Did all that took place comprise: . an election by Far West to have its loan repaid in cash; . an indication from Far West that it would consider whether to purchase some of the 580,000 shares and options which were to be issued to Holdings and which would be subject to escrow conditions; and . a statement on behalf of Cambridge that if Far West wanted those shares it would arrange for them to be issued to it and would also arrange for a further portion of those shares to be issued to Mr Ch'ng's son's father-in-law, Mr Trott? Or, as Far West contends, did Cambridge, in consideration of Far West electing to have the loan funds repaid in cash enter into a contractual promise to allot 400,000 shares (together with the same number of options) to Far West for a total consideration of $100,000 and to allot 100,000 shares (and the same number of options) to Mr Trott for a total consideration of $25,000? As part of the contract is pleaded as being oral, I turn to the evidence from the two parties to that conversation, namely Mr Ch'ng on behalf of Far West and Mr Furlong on behalf of Cambridge. Mr Ch'ng, in evidence-in-chief, said that at the time when Far West executed the letter dated 21 April 1993 referring to escrow requirements he was not happy. Part of his evidence was as follows: "I wasn't quite happy with the - have to sign all this and there's a bit of a compromise. He [a reference to Mr Furlong] promised - some sort of promise been given to me that try to - he will try to arrange that things should be okay and we shouldn't have the problem with the escrow shares." In relation to the telephone conversation on 12 July 1993 Mr Ch'ng said that Mr Furlong telephoned him. His evidence was as follows: "He call me. He said "I'm just going to fax a letter to you and I will like you to sign that", and that's exactly what the letter say. He said "we will give you all these shares and everything is sweet" ..." When asked by the applicant's counsel to indicate what Mr Furlong said to him, Mr Ch'ng said that he received the fax dated 12 July 1993 before he telephoned Mr Furlong on that date. He said that he read it and tried to comprehend it. When he telephoned Mr Furlong, Mr Furlong said, according to Mr Ch'ng: "Read this and if you sign it we will give you 400,000 shares and you give us another - you give us $100,000, we will give you another 400,000 worth of shares". Mr Furlong's evidence of that telephone discussion was as follows: "... I had a telephone discussion with him where he called me and he said - he asked me if I was - you know, he said, "Are you sure I can't get free trading shares?". And I said, "No, you can't get free trading shares. Your shares are subject to escrow." And he said, "In that case, I'll take my money back, but could you try and find me some free trading shares?". And, as I said previously, Mr Ch'ng has been introduced to the company by a friendly party and he had helped us, and I thought it was appropriate to try and find some free trading shares if I possibly could. I mentioned to him - I told him that his shares were escrowed and there was nothing I do (sic) about that. I told him that there was an allocation of shares that were going to be paid to Cambridge Gulf Holdings or nominee in consideration for loan funds that Cambridge Gulf Holdings had advanced to Cambridge Gulf Exploration and that if he chose he could have 200 - he could have 400,000 of those, which was $100,000 worth, because he'd lent in his initial $50,000 which was - the Stock Exchange were going to escrow, and then he'd put in the application form for another $50,000 worth that we couldn't fill because of our spread problem. So he was chasing $100,000 worth of shares, and I told him that he could have 400,000 worth of those shares and options that were going to be issued .... . . . ... He could have 400,000 of those shares and options that were going to be issued to Cambridge Gulf Holdings if he wanted to, or nominee, but those shares were also subject to escrow - it's up to him - and I told him that I'd also try and find him some free trading shares if I could". Mr Furlong said that he then prepared a letter for Far West to request repayment of its loan in cash. It would seem that there is thus further conflict between Mr Furlong's evidence and that of Mr Ch'ng. Mr Furlong had the telephone conversation occurring before he sent his fax dated 12 July 1993, while Mr Ch'ng put the conversation as occurring after receiving that fax. It is of course quite possible that they had a telephone conversation shortly before and shortly after the fax was sent. I do not think that anything turns on that. I was impressed by Mr Furlong as a witness. I consider that he was a witness of truth. He had left Cambridge's employment one year before he gave his evidence and he was unshaken in cross-examination. To the extent that there is conflict between Mr Ch'ng and Mr Furlong about their telephone conversation on 12 July 1993 I prefer and accept the evidence of Mr Furlong. Mr Ch'ng was evasive in response to many matters which were put to him in cross-examination and on occasion I formed the impression that he deliberately "misunderstood" questions. Having said that, I do not consider that Mr Ch'ng set out deliberately to mislead the Court i.e. not to tell the truth. I have tried to make allowances for the fact that English is not Mr Ch'ng's original language. The conclusion to which I have come is either that Mr Ch'ng's recollection of events was unsatisfactory (and there were several occasions when he said that he did not remember things which one would have expected him to remember) or he misunderstood what was being discussed with Mr Furlong. The context of the telephonic discussion between Mr Ch'ng and Mr Furlong on 12 July 1993 can be summarised (and insofar as matters of fact are stated they are intended to be findings of fact) as follows: 1. Far West had been unsuccessful in its subscription for 200,000 shares and a like number of options which were the subject of its application dated 18 June 1993. Far West's application for these shares had been made fairly late in the piece at a time when it was apparent that there was heavy demand for the shares. I accept Mr Furlong's evidence that although Mr Ch'ng when handing him the application form and the cheque for $50,000 asked him to get him some shares, Cambridge was unable to do this because the issue was massively over-subscribed and there were spread problems. A spread is the ASX requirement to have a minimum number of shareholders holding a marketable parcel. 2. The shares which were the subject of the prospectus had been heavily over-subscribed (I accept Mr Furlong's evidence to that effect), there was no provision for accepting over-subscriptions and in any event the issue had closed. 3. The shares were listed on 8 July 1993 at a premium of 15 cents on their issue price of 25 cents at the close of business on that day. The shares had risen another 9 cents (to 49 cents) on 9 July 1993 and on 12 July 1993 were trading in a range between 49 cents and 64 cents. There is no evidence of the price at which the options were trading during that three day period. 4. Far West had the option of either requiring repayment of the loan funds in cash or taking 200,000 shares and a like number of options instead. 5. If Far West elected to take those shares and options then during a period of 12 months from 1 May 1993 it could only sell so much of those shares and options as would return to it an amount equal to the $50,000 loan. The rest of the shares and options would have to be held in escrow under the conditions imposed by ASX. Far West was aware on 21 April 1992 of the possibility of those conditions being imposed and was informed on or about 1 July 1993 of the precise details of the conditions. I accept Mr Furlong's evidence that on or about 1 July 1993 he had a telephone conversation with Mr Ch'ng about the ASX escrow requirements, that during that conversation Mr Ch'ng said he was not happy about those requirements, that Mr Furlong said that there was nothing Cambridge could do about those requirements and referred to the alternative of repayment of the loan in cash and that Mr Ch'ng said that he would think about it. I find that during their telephone conversation on 12 July 1993 Mr Furlong told Mr Ch'ng about the 580,000 shares to which Holdings was entitled under the terms of the prospectus, that 400,000 of those shares and options would be made available to Far West and that Mr Trott could have a further unspecified quantity of those shares and options but that all of those shares and options would be subject to escrow conditions. It is possible that Mr Ch'ng already knew about the Holdings shares. In any event, he admitted in cross-examination (at p.45) that Mr Furlong told him about the Holdings shares entitlement and that those shares were also the subject of escrow. I further find that Mr Ch'ng told Mr Furlong that in those circumstances Far West required repayment of the loan funds in cash. I accept Mr Furlong's evidence that he told Mr Ch'ng that Cambridge would try and find Far West some shares in Cambridge which would be tradeable, but that the reference to the 400,000 shares in his fax of 12 July 1993 was not to those shares but to the Holdings shares. Far West argued that there was an inconsistency in the proposition that it might have been interested in acquiring 400,000 shares and options subject to escrow when Mr Ch'ng had made it clear that Far West did not wish to have its loan repaid in shares and options subject to escrow. I do not see such inconsistency. The proposal was that those shares and options (double the number referred to in the loan agreement) would be made available to Far West at a price of 25 cents each, at a time when the shares alone were trading on the Stock Exchange in the range 49 cents to 64 cents. Even allowing for what might happen during the remainder of the escrow period, the proposal might well have been attractive. In its letters dated 19 October 1993 and 25 March 1994 Far West indicated that it would consider accepting and was prepared to accept (respectively) just such a proposal. I do not consider that the parties intended to create legal relations, that is to enter into a contract in respect of the Holdings shares. Neither party, in my view accepted any legal obligation towards the other in respect of those shares. In the context of the discussion referred to above, in my opinion, the fax dated 12 July 1993 was intended to communicate Cambridge's willingness to arrange the alternative of two placements (including one for Mr Trott) from portions of Holdings' entitlement. The evidence was that Holdings also had an entitlement to be issued with a further 32 million shares in partial payment for mining tenements. The language used in the fax of 12 July 1993: "After we have repaid the $50,000 we will arrange a placement of 400,000 shares to you at 25 cents each which will cost $100,000. At the same time I will also arrange a placement of shares to Mr Trott" is obviously quite capable of constituting or evidencing a commitment of a contractual nature. Nevertheless, it did not in my opinion in the context of the oral discussions of the same date constitute such a contractual promise. Both parties, through their representatives, understood that the placement referred to was to be out of the 580,000 Holdings shares and that those shares were the subject of escrow conditions. It will be remembered that under the terms of the preliminary expenses agreement Holdings had the right to nominate the recipient of those shares. Arranging such nomination and issuing the shares pursuant to such nomination could, in my view, fairly be described as "arranging a placement". I accept Mr Furlong's evidence that during their telephone conversation and on subsequent occasions he told Mr Ch'ng that if it were possible to arrange matters so that shares could be issued to Far West which were immediately tradeable, then Cambridge would do what it could to that end. However, in my view, Cambridge did not accept a contractual obligation in that regard either. Even in Far West's letter dated 25 March 1994 (signed by Mr Ch'ng) to Cambridge there is reference to Far West obtaining shares and options "... in a manner that might not be subject to escrow." (my emphasis). Often when there is a conflict between the oral evidence of two sides, the touchstone for resolving such conflict is what has been written at the time. I was very conscious of that proposition when I read the fax dated 12 July 1993 and the subsequent documents, extracts from which I have set out above. However, I do not see any inconsistency between Mr Furlong's evidence and the contents of his fax dated 12 July 1993. It is true that Mr Furlong, in that fax, does not identify the source of the shares. Nonetheless, I am firmly of the view that in the course of the oral conversation between Mr Furlong and Mr Ch'ng, what Mr Furlong said occurred did in fact take place. The evidence of what took place after 12 July 1993 is at all times consistent with Cambridge being prepared to honour its obligations to arrange allocation of 400,000 shares from Holdings to Far West but at the same time seeking out alternative methods (including an employee incentive scheme) whereby Far West could be provided with some shares which would be immediately tradeable. That conduct is, of course, also consistent with a company seeking to meet a contractual obligation. Nevertheless, in my view there was no such contractual obligation. Although it is not inconsistent with the acceptance of such a contractual obligation, one relevant factor is that the shares were not Cambridge's to allocate - they belonged to Holdings. Holdings was, of course, part of the same corporate group. It might be said that in the circumstances of the shares not being Cambridge's to dispose of, that pointed to an issue of new shares. However, that would be totally inconsistent with the telephone conversation described above in respect of which I accept Mr Furlong's evidence. Accordingly, the contractual basis upon which the applicant claims must, in my view, fail. In paragraph 7 of its statement of claim the applicant pleaded that by the partly written and partly oral agreement made between the parties on 12 July 1993 Far West released Cambridge from further performance of its then existing obligations. In my view that is not what occurred. These obligations remained in existence and were discharged when Cambridge repaid the loan. The representations which the applicant says constitute misleading or deceptive conduct on the respondent's part were an implied representation that Cambridge could and would arrange a placement to Far West of 400,000 shares at 25 cents together with 400,000 attaching options and arrange a placement of 100,000 shares at 25 cents together with 100,000 attaching options to Mr Ch'ng's son's father-in-law Mr Trott. Insofar as the implied representations so pleaded are intended to refer to new shares (in the sense of being shares other than those referred to in the prospectus) in the capital of Cambridge, I find that no such representations were made. Insofar as the pleaded representations may refer to the shares to be taken out of the Holdings shares, I would make two observations. The first is that this is totally inconsistent with the case as maintained by the applicant at trial. Secondly, in my opinion, the evidence was that Cambridge in fact intended to arrange such placements through Holdings and had reasonable grounds for believing that it would be able to arrange such placement. I refer to Mr Furlong's evidence, to the close managerial and proprietorial connection between Cambridge and Holdings, to the endorsement made by Mr Conway on Mr McNamara's memo of 16 September 1993 and to the documentary evidence of efforts made by Cambridge during the latter months of 1993 to honour what I have held was a non-contractual obligation. At first impression, one might be somewhat sceptical about a corporation entering into a moral obligation and going to such lengths to honour such an obligation. However, it must be remembered that from the earliest stage Mr Ch'ng had supported the Cambridge group. To start with he loaned $50,000 to Cambridge free of interest. The only other comparable loan agreement in the context of this case was one whereby a Mr William Clarke of South Australia lent the sum of $20,000 to Cambridge to assist with payment of formation expenses and costs relating to the issue of the prospectus. Furthermore, during the life of the prospectus and at a time when it was not known whether the flotation was going to be such a success, Mr Ch'ng had organised his family, friends and associates into applying for some $1.7 million shares in Cambridge. I am prepared to infer that there was mutual benefit in that exercise. Far West had stipulated for the right to subscribe for 800,000 shares and a like number of options right from the outset, so it obviously felt that was a valuable right. Similarly I would infer (even though it turned out that the prospectus was over-subscribed) that Cambridge was grateful for the fact that Mr Ch'ng had drummed up such support for the company during the currency of the prospectus. This is reflected, in my view, in Mr Conway's handwritten endorsement of Mr McNamara's memorandum to him dated 16 September 1993. It is also consistent with the steps which Mr Furlong took to assist Mr Trott. Mr Trott's application for 20,000 shares in Cambridge had not been accepted and the issue (as mentioned above) was heavily over-subscribed. Mr Trott, through Mr Ch'ng complained to Mr Furlong about this. Without being under any obligation to do so, Mr Furlong, in an off-market transaction before the shares were listed, transferred his own 8,000 shares and options to Mr Trott at 25 cents per share. Conclusion For the above reasons the application will be dismissed with costs. I certify that this and the preceding twenty-nine (29) pages are a true copy of the Reasons for Judgment of Justice Carr. Associate: Date: 23 June 1995 Counsel for the Applicant: Mr M.M. Mony de Kerloy Solicitors for the Applicant: Mony de Kerloy Counsel for the Respondent: Mr M.L. Bennett Solicitors for the Respondent: Bennett & Co Date of Hearing: 18, 19 May 1995 Date of Judgment: 23 June 1995