FEDERAL COURT OF AUSTRALIA Hayle Holdings Pty Ltd v Australian Technology Group Ltd [2000] FCA 1242 TRADE PRACTICES – misleading and deceptive conduct – alleged representations during negotiations for, and after completion of, agreement for provision of venture capital – whether, but for the alleged misleading and deceptive conduct, the applicants would not have entered the agreement – whether, but for the alleged misleading and deceptive conduct, the applicants would have gone to the United States in April or November 1995 in search of alternate venture capital – whether the third applicant acted in reliance upon the representations made by the respondent – whether concealment of, or failure to disclose that a condition of the deal had not been withdrawn constitutes misleading and deceptive conduct for the purposes of s 52 DAMAGES – loss of opportunity – damages for loss of a chance - causation – whether, had the applicants gone the United States in November 1995, they could and would have obtained alternate venture capital, and established a successful business in the United States – whether the opportunity to obtain alternative venture capital has been lost, by reason of the respondent's misleading and deceptive conduct DAMAGES – damages for trading losses incurred as a result of the postponement of the decision to close down the Sydney operation Trade Practices Act 1974 (Cth) ss51A, 51A(2), 52 R v Murphy [1985] 4 NSWLR 42 referred to Watson v Foxman (Supreme Court of NSW, McLelland J, 3 August 1995, unreported) applied Christofidellis v Zdrilic [1999] FCA 39 cited Paramedical Services Pty Limited v Ambulance Service of NSW [1999] FCA 548 cited Jaldiver Pty Limited v Nelumbo Pty Limited (1993) ATPR (Digest) 46-097 cited Lam v Ausintel Investments Australia Pty Limited (1989) 97 FLR 458 applied Demagogue Pty Limited v Ramensky (1992) 39 FCR 31 applied Poseidon Limited v Adelaide Petroleum NL (1991) 105 ALR 25 referred to Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 applied Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 applied Bennett v Minister of Community Welfare (1982) 176 CLR 408 applied HAYLE HOLDINGS PTY LTD & ORS v AUSTRALIAN TECHNOLOGY GROUP LTD & ANOR NG 1136 OF 1998 HELY J 5 SEPTEMBER 2000 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 1136 OF 1998 BETWEEN: HAYLE HOLDINGS PTY LTD FIRST APPLICANT PANCO ENTERPRISES PTY LTD SECOND APPLICANT NEVILLE JAMES BROWNE THIRD APPLICANT AND: AUSTRALIAN TECHNOLOGY GROUP FIRST RESPONDENT BARRY WESTLAKE SECOND RESPONDENT JUDGE: HELY J DATE OF ORDER: 5 SEPTEMBER 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. There be judgment for the applicants in the sum of $488,270. 2. There be reserved for further consideration the question of whether any relief should be granted to parties other than Hayle Holdings Pty Ltd in relation to the incurring of a liability to ATG in the sum of $300,000 pursuant to the agreements of 29 January 1996. 3. There be hearing of argument on the question of costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 1136 OF 1998 BETWEEN: HAYLE HOLDINGS PTY LTD FIRST APPLICANT PANCO ENTERPRISES PTY LTD SECOND APPLICANT NEVILLE JAMES BROWNE THIRD APPLICANT AND: AUSTRALIAN TECHNOLOGY GROUP FIRST RESPONDENT BARRY WESTLAKE SECOND RESPONDENT JUDGE: HELY J DATE: 5 SEPTEMBER 2000 PLACE: SYDNEY REASONS FOR JUDGMENT 1 At all material times the third applicant ("Mr Browne") controlled the corporate applicants. It is not necessary for the purposes of these proceedings to distinguish between the applicants or to examine the corporate structure. Where appropriate I shall refer to all or any of the applicants simply as "Hayle". 2 Hayle devised the "HayleSystem", which it promoted as the world's most advanced exercise training and monitoring system. The system involves the prescription, administration and remote audit of a personalised exercise program. It uses a pager-sized heart-monitor (called the "HeartWatch") to assess the client's heart rate and prescribe a heart rate based exercise protocol. The client exercises (normally brisk walking) while wearing the individually programmed HeartWatch. The HeartWatch guides and monitors performance of the protocol. After the client has finished exercising, the HeartWatch communicates, by the telephone, with a remote-coaching centre where a professionally qualified physiologist considers the information thus transmitted and leaves a voicemail message for the client commenting on the progress achieved. A detailed written report is submitted monthly. A promotional brochure produced by Hayle includes the following: "The HayleSystem™ is like having your own personal trainer living at home ... showing you what to do, helping you do it, and giving you all of the feedback and encouragement you'll need to stay motivated." 3 By November 1994 Mr Browne had personally invested more than $3M in Hayle. He had been the only source of funds for the project. His sole source of income at that time was the interest which he earned on cash deposits of about $1.5M, which was not sufficient to meet his personal and business commitments. 4 Prior to November 1994 two attempts had been made to launch the HayleSystem in Sydney. The first was an attempt to market the system through the medical profession. That was a failure. The second was an attempt to market the system directly to the public. The marketing campaign was reasonably successful; the technology was working well, the clients were happy, but there were insufficient clients to cover operational costs. Hayle was advised by its sales and marketing consultants that a substantial advertising budget would be needed to recruit additional clients. 5 Around mid-November 1994, in the light of those circumstances, Mr Browne says that he made the following decisions: - he would not fund a new sales and marketing campaign; - for the next few months he would aggressively seek venture capital in Australia and the United States; - he would keep Hayle operating hand-to-mouth for a few months in the hope that venture capital could be found. At the same time he would try to increase the client base without allocating any meaningful sales budget; - if by the end of April 1995, the client base had not increased to break even, or he had not attracted venture capital, he would close down operations and continue to seek venture capital or a licensing deal; - on no account would he invest any more of his personal funds into keeping Hayle operating. 6 Whether Mr Browne made or adhered to the last of those decisions is one of the many factual issues which arise in these proceedings. 7 Business Plans were drawn up for both the Australian and the USA markets. The funding which was being sought was $AUD4.8M for the Australian side of the business and $US8M for the United States. Mr Browne hoped to secure this funding in exchange for a maximum of 49 per cent equity. 8 On 27 November 1994 Mr Browne travelled to the USA to investigate the opportunities there. On this visit he met (amongst others) Dr Robert Cooper, a successful author and consultant who specialised in "personal-wellness" programs, and Mr Alan Dalfen who was the semi-retired ex-president of the world's largest manufacturer of "personal fitness" equipment. In mid-December 1994 Hayle entered into a consulting agreement with Dr Cooper. Dr Cooper undertook to endorse the HayleSystem and contribute to launching of the HayleSystem in the USA. 9 On 21 January 1995 Mr Browne returned to the USA. He had a series of meetings with executives of the 3M company. The object of the meetings was to persuade 3M to fund a trial of the HayleSystem over a twelve month period involving 1,000 employees. The trial was expected to take place at 3M's premises in St Paul. 10 In February 1995 Mr Browne approached around twenty Australian venture capital sources. Interest in the proposal varied, but by the end of February 1995 it was apparent to Mr Browne that none of the Australian venture capital sources were interested in investing in Hayle. Investment in the USA market would have involved closing down the Australian operation, and concentrating exclusively on the USA market. It would be necessary for Mr Browne to move to the USA. He did not have an insuperable objection to doing so, but, given a choice, he would rather not. His family situation at that time was an obstacle to his relocation to the United States, but it was an obstacle which he claims was capable of being overcome. 11 The first respondent ("ATG") is a technology commercialisation company investing in early stages of business development of Australian technology, ultimately for commercial use within Australia and internationally. ATG provided early stage financing to businesses which lacked capital, in return for receiving equity for such investment. The principal shareholder of ATG is the Australian Government. 12 Mr Browne approached ATG to discuss the possibility of ATG investing in Hayle. He met with Dr Jessup of ATG on 2 March 1995. Between about March and November 1995 the parties carried on negotiations for ATG to provide equity capital to Hayle to enable it to exploit the HayleSystem commercially. As a result of those negotiations, a Shareholders' Agreement was entered into on 13 November 1995 whereby ATG agreed to inject up to $2 million of equity into Hayle in four tranches. By January 1996 the relationship between the parties had broken down and the November agreement was effectively determined. Only the first of the tranches ($300,000) had been advanced. It will be necessary to return to the detail of these events later in these reasons. 13 In very general terms, it is Hayle's case that in the period between 2 March 1995 and January 1996, numerous representations were made to it by officers of ATG which both individually and collectively amount to misleading and deceptive conduct. Hayle's case is that if the misleading and deceptive conduct had not occurred, Hayle would have gone to the USA in April 1995 or November 1995, obtained venture capital funding and established a successful business in the USA. The Sydney office would have closed much earlier than when it actually closed in February 1996. The pullout of ATG, just ten weeks after agreeing to the project, created an insuperable obstacle to obtaining venture capital in the USA. Hayle claims damages for misleading and deceptive conduct. The other causes of action pleaded in the Second Further Amended Statement of Claim ("2FASC") were not pursued. It will be necessary to return to the detail of the damages claim, but it includes loss of profits expected to be derived from the USA business, and loss of the capital value of that business, or alternatively, the loss of the chance to derive such profits and capital value. Losses incurred in connection with the maintenance of the Sydney office until its closure in February 1996 are also claimed. The respondents' business structure 14 In 1995 ATG employed a number of highly qualified people who were called "Business Development Directors". The role of a Business Development Director in 1995 was to identify investment projects, work on the development of those projects and assist with the presentation of an Investment Proposal to the Management Committee and the Board. Amongst the Business Development Directors were Dr Jessup and Dr Westlake. It was necessary to obtain the approval of the Business Development Director handling a particular project before ATG would contemplate investment in that project. The Business Development Directors, the Finance Manager (Stephen Robinson) and the Managing Director (Dr Harbour) formed a committee known as the Management Committee which met regularly to discuss existing and proposed investments. A proposed investment would not be put to the Board of Directors of ATG unless there was a consensus among the Management Committee that the proposal should be put to the Board. If that consensus was obtained then a proposed investment would be put to the Board for its approval. Apart from the Managing Director, the Board consisted of non-executive Directors. Whilst its members were persons of commercial experience, they were not venture capital specialists (other than the Managing Director). One of the representations on which Hayle relies is a representation that if the Management Committee approved a proposed investment, the approval of ATG's directors was only a "rubber stamp". 15 I turn then to the chronology of events insofar as they relate to the dealings between Hayle and ATG which form the basis of the present proceedings. The first representation: 2 March 1995, 2FASC par 6 16 It is common ground that before ATG would agree to fund a project, a Business Plan acceptable to ATG would need to be prepared and agreed to, ATG would also need to perform a "due diligence", and be satisfied with the results. 17 Paragraph 6 of 2FASC alleges that on 2 March 1995 Dr Jessup made the following oral representations to Hayle: (a) ATG would not look to the applicants to provide any more funding; (b) ATG would definitely be able to fund by 30 June 1995 provided: (i) everything was as Browne had told them it was, (ii) there were no skeletons in the applicants' closet, and (iii) Browne gave ATG the go-ahead by the end of March, (c) if ATG decided to go ahead it would make a clear and definite equity funding commitment of $2 million on day one; (d) if ATG's Management Committee approved the application then the deal was done and the approval of ATG's Board of Directors was only a rubber stamp. 18 2FASC par 8 alleges that in reliance on these representations, Hayle continued to negotiate with ATG and did not pursue alternative sources of finance available to it. In fact, between 12 and 17 March 1995 Mr Browne toured the United States of America with Dr Cooper and Mr Dalfen seeking, amongst other things, to ascertain the level of interest on the part of US venture capitalists. One of the reasons for this visit was so that Mr Browne could weigh the option of obtaining venture capital in the USA against the option of doing so in Australia. 19 The meeting between Mr Browne and Dr Jessup on 2 March 1995 was the initial meeting between Hayle and ATG. Mr Browne explained how the HayleSystem operated, and gave some explanation as to why it was that he was seeking venture capital. There was no specific funding proposal which was the subject of discussion at the meeting. It was a "getting to know you" meeting, rather than a meeting at which a negotiation took place. 20 The alleged representations are grounded in the following conversation which, on the evidence of Mr Browne (Affidavit 29/5/99 par 43), occurred on this occasion: "(d) I said: 'There are three things that are absolutely critical to the deal. The first and most important is that I do not want to personally invest any more into the business. I'm down to my safety nest-egg. I will not be involved in any finance which has any form of personal guarantee involved, or requires any further investment from me. That is an absolutely inflexible position.' (e) He said: 'ATG is a venture capital company and we wouldn't expect any personal guarantee. We're used to the fact that the entrepreneur already has everything in the deal ... his house, the lot. So we're not looking for any more funding from that direction.' (f) I said: 'But I'm a little different. I still have available resources but I want it absolutely clear that I will not risk any more on this project.' (g) He said: 'Fair enough. I guess you wouldn't be here talking to us and be willing to give up equity unless you had reached that conclusion.' (h) I said: 'I just want it absolutely clear that I will not risk any more of my personal funds. The second critical point is timing. The business can only survive for another few months so I need to know that a deal with ATG can be funded in that time. If there's any chance that you can't do it that quickly please tell me now while I still have the time to pursue the alternatives.' (i) He said: 'When it comes to the timing, we are in a position to act faster than any other source of funding you might be considering. Although we are owned 99% by the Federal Government we have complete autonomy when it comes to investment decisions. I am a member of a very small Management Committee at ATG. Once you've decided to work with us, I'll conduct a mini-due-diligence and convince myself that the deal is doable. I'll then work with you to clean up the Business Plan and submit the investment application to the Management Committee. If the Management Committee approves the application then the deal is a done deal. It still will require formal Board approval but that is only a rubber stamp. They never have rejected any deal which has been approved by the Committee. The whole process is non-bureaucratic and entrepreneurial and could be completed in no more than six to eight weeks.' (j) I said: 'Does that mean that if I give you the go-ahead by end-March then the funding could be completed by the 30th of June at the latest?' (k) He said: 'Absolutely! You have told me that your balance-sheet is very clean and debt-free, and you have no skeletons in your closet, so, providing everything is as you say it is, then we would definitely be able to fund by June 30th. Because we are such a small infrastructure with a "rubber-stamp" Board of Directors we can move lightening fast.' (l) I said: 'It's not just the cash-flow that makes timing so important. There's also the Business Plan for the Australian side of the business. On the assumption that we'll get the funding we're gearing up to launch again this Spring. When you read the Plan you'll see what we have in mind. It's essential to launch any exercise product in September or early October in order to catch the right market mood. We'll need to have the funding commitment locked in place by end June so that the Spring launch will be possible. A summer or winter launch would be a big problem.' (m) He said: 'Like I said, I really don't see a problem with timing providing you give us the go-ahead by end March.' (n) I said: 'The third and final issue that's really crucial is having a partner who is clearly committed to the project and the Business Plan. We're looking for $4.8 million to fund the Plan in Australia and we would want you locked in for the full amount up front. There's no point having a piece-meal commitment. We want to be able to employ staff, enter contracts and other commitments, and generally be able to plan long-term with the assurance that we have a partner in it for the long haul.' (o) He said: 'Are you saying that you would expect ATG to fund the full $4.8 million up front?' (p) I said: 'The actual funds would only need to be provided as needed but the commitment would have to be up-front ... no escape hatches. I don't want to be in a "suck-it-and-see" relationship. A business can't survive if it lives in constant fear of abandonment.' (q) He said: 'First, I'm sure I'll convince you that both of us are better off if Hayle only gets $2 million from ATG and the balance from another round of financing. You'll keep more equity that way and the approval will be a lot easier for ATG if it is kept to $2 million. When it comes to ATG's commitment for the $2 million, I can assure you that if we decide to go ahead with you, we will make a clear and definite commitment for the full amount up-front. Our only way out will be if we discover that you're a crook or that you failed to disclose something critical to us about the business. In other words, if you've played it straight with us, we'll be locked in for the full $2 million.' (r) I said: 'I have no problems with that. If we go ahead with this deal you'll find out in the due-diligence that we're squeaky clean and everything I've told you will prove to be accurate and truthful. It would seem that ATG can handle my three concerns: no further personal investment, funding by end June, and a locked-in commitment. ATG is certainly an attractive option but I'll need some time to weigh up the alternatives before agreeing to give you exclusivity and cut off other possibilities.' (s) He said: 'That's understandable. We don't want to invest any time in investigating the project unless we have an exclusivity arrangement with you. Why don't you go to the US next week as planned and give me a call when you get back.'" 21 Dr Jessup denies the making of the pleaded representations (Jessup Affidavit 26/7/99 pars 9-10). His evidence with respect to the three "critical" matters can be summarised as follows: first, Mr Browne did not inform him at this meeting that he did not wish to invest further funds in the project. At another meeting, at least a month later, in response to an enquiry made by Dr Jessup, Mr Browne said that he was not funding the project because he had a specific level of wealth which he wished to retain, and he did not wish to go below that. Second, he did not give the timing assurances for which Mr Browne contends. "If Mr Browne had said words to the effect of 43(h) I would have told him that ATG could not meet his timetable" (Jessup Affidavit 26/7/99 par 10.4). Normally it takes about three months to complete a deal after a Letter of Intent is signed, and some time would be consumed in getting to that stage. Third, he did not tell Mr Browne that ATG would be prepared to invest unconditionally the total sum of its intended investment. ATG's philosophy, when investing in this type of project, was to insist on milestones and tranching. It was his practice, at initial meetings with investment sources, to inform them of this policy: "I would have said to Mr Browne words to the following effect: 'When investing in these types of projects it is normal for ATG to insist upon milestones being met at various stages of their investment and to invest by tranches'. He said: 'We will need the money up front.' I said: 'Well it's just not negotiable from ATG's point of view. ATG will insist on this type of arrangement.'" (Jessup Affidavit 26/7/99 par 10.7) Mr Browne denies this conversation, and says that the first hint of tranching occurred when Dr Jessup sent his "Expression of Interest" letter on 28 April 1995 (Browne Affidavit 21/10/99 par 15). Dr Jessup says (T 800-801) that had the issue of a commitment for the funds up front arisen at this meeting, "it would have been a huge problem to me at that stage, and if he had [raised it] I would have totally rejected it." 22 ATG's "Management Business Plan" contains a section on funding. It includes the following: "Depending upon the requirements of the investee, the ATG prefers to allocate funds on an incremental basis, with cash injections based upon achievement of agreed business milestones." (AB 1/69) Dr Jessup's evidence was (T 789) that in fact ATG's practice was more rigid than the document suggests. Except in the case of a small investment, there is no way a proposal would get past the Management Committee without milestones. 23 Dr Jessup's evidence on the issue of "rubber stamp" is: "At no stage would I have said the Board would merely rubber stamp any investment." (Jessup Affidavit 26/7/99 par 10.5) Dr Jessup was aware that the Board customarily took a "hands on approach" and might insist on changes to proposals recommended by the Management Committee. Whether or not Mr Browne was told that the Board was a rubber stamp may have some bearing upon timing and risk. Mr Browne does not suggest that had he been informed that the Board was not a rubber stamp, he would have terminated his negotiations with ATG and sought to raise finance in USA (T 387). 24 Dr Jessup made a file note of this meeting about one month later, on 1 April 1995. It includes: "Wants · financial partner; · help with running business; · operational partner. Actions NB will visit US; GJ to visit Hayle." 25 I propose to defer resolution of credibility issues and conflicting testimony until the completion of the chronology. 26 Mr Browne's affidavit evidence is that the statements made by Dr Jessup at 2 March 1995 meeting were "very significant" to him. In particular: - it was "fundamental' that ATG accept his requirement that he would not be called upon personally to contribute further funding to the venture in any way; - it was of "critical importance" that the ATG funding could be completed by 30 June 1995; [but, as a businessman, Mr Browne was used to making an allowance for slippage in timetables (T 210)]. - it was of "vital importance" that Dr Jessup understood and agreed in principle to the concept that Hayle needed to have the full $2 million committed up front. (Affidavit 29/5/99 par 44) 27 But for the representations by Dr Jessup at this meeting, Mr Browne claims in par 44(g) of his first affidavit that he would have closed Hayle's Sydney operations and pursued venture capital in the USA, as it was his belief that he had otherwise exhausted all possibilities in Australia. At that time there was no identified source of venture capital funds in USA available to Hayle. The March 1995 Business Plan for USA (AB 1/255) indicates that Hayle had not then decided whether to proceed using venture capital or some other financing arrangement. 28 Mr Browne's letter of 2 March 1995 to ATG, written after this meeting, simply says (1/279): "After our initial meeting it would seem that we may be able to work together. I have enclosed the copies of the patent documents and our promotional video. I will send you a copy of the latest US Business Plan next week. I will give you a call after I return from New York on March 22nd. Thank you for your time and best regards." 29 Whilst Mr Browne says that he relied upon the matters referred to in par 26 above to shape his own conduct (T 197), there is no reference to any of those matters in the somewhat bland letter of 2 March 1995. The letter is consistent with Dr Jessup's evidence that it was "a very much preliminary, do I like the product; do I like the market type of meeting" (T 793). 30 On 20 March 1995 Mr Browne wrote to Mr Dalfen enclosing business cards received on the USA trip (AB 1/283). He said he was "going to let the dust settle for a couple of weeks before suggesting our next move". A couple of short lists should be developed, one for venture capital sources, another for strategic partner sources. Second representation: 24 March 1995, 2FASC par 9 31 Paragraph 9 of 2FASC alleges that on 24 March 1995 Dr Jessup made the following oral representation to Hayle: "ATG saw no problem with funding by the end of June 1995". It is alleged that in reliance on that representation Hayle continued to negotiate with ATG, and did not pursue other sources of finance. 32 The evidence of Mr Browne on which this representation is based (Affidavit 29/5/99 par 50) is a phone conversation on 24 March 1995 when the following conversation took place: "(a) Browne: 'I'm confident I could get funded in the US but it would mean closing Sydney and I'd prefer to get Australian finance and keep Sydney operating. But timing is everything. Are you certain we can fund by June 30th?' (b) Jessup: 'I've looked through all of the material you sent to me and it all looks fine. I'd like to visit you at the Hayle office next Friday and go over everything. I've already briefed the Management Committee and they are supportive so I really don't see any problem with funding by end-June.'" 33 In par 51 of his affidavit, Mr Browne describes this conversation as an assurance by Dr Jessup that funding could be completed by 30 June 1995. That strikes me as an exaggeration of what Dr Jessup is alleged to have said. Mr Browne says that the assurance was vital to him. It reaffirmed to him that the option of funding through ATG continued to be very viable and it encouraged him to keep Hayle's Sydney operation going. It also convinced him to lessen the focus on the USA option and to continue to devote time and resources to pursuing the ATG deal. Without that assurance as to timing, he says that he would have closed Hayle's Sydney operations, and pursued venture capital available in the USA, as he believed that he had otherwise exhausted all the possibilities in Australia. But there was an element of negotiating posture (T 209) in his assertion that timing was everything. At that time Mr Browne did not have any other negotiations for venture capital going on. Apart from ATG all he had (T 218) was "a couple of expressions of sort of very tentative prima facie interest" in the USA. 34 Dr Jessup denies the making of this representation. He says it would be impossible to commit to funding within a three month period. He says that he never commits to a date, as distinct from working towards a date (T 805, 807). Third representation: 31 March 1995, 2FASC par 12 35 Par 12 of 2FASC alleges that on or about 31 March 1995 Dr Jessup made the following oral representation to Hayle: "ATG would go ahead on the basis of providing equity funding commitment of $2 million on day one." The context in which this representation is said to have been made is that on 31 March 1995 there was a meeting between Mr Browne and Dr Jessup at the Hayle office in Double Bay. There was a discussion of issues which needed to be resolved before ATG could issue a Letter of Intent. Those issues were: - the Hayle Business Plan called for $4.8M investment but Dr Jessup wanted ATG to commit to $2 million only, and have another round of financing later on for the remaining $2.8M; - Dr Jessup needed to know how much equity Mr Browne was prepared to give up in return for ATG investment of $2 million; - Dr Jessup would like Hayle to fully capitalise all of the outstanding loan accounts of $4.536M. Mr Browne alleges (Affidavit 29/5/99 par 52) that the following conversation then occurred: (c) Browne: 'You've convinced me that it is in both of our interests to split the $4.8 million funding requirement into two tranches, an initial $2 million from ATG and the next $2.8 million from other sources. I can see that I will lose less equity that way. I will agree to ATG reducing its commitment of $2 million but only if the full $2 million is committed on day-one. It's vital that ATG is clearly making an unequivocal commitment to the project. If this happens we won't have any trouble getting the additional finance.' (d) Jessup : 'Normally we would want to split our investment into a couple of tranches but I guess we're already splitting the $4.8 million so I understand the point you're making about needing to show a clear commitment and I can't see any great problem committing the full amount up front.' (e) Browne: 'OK. We seem to be on the same wave length. I'll get back to you next week about the loan-capitalisation issue and the business valuation.'" Mr Browne described the statement which he attributes to Dr Jessup in (d) above as "Jessup's assurance ... that the full $2 million would be committed up front" (Affidavit 29/5/99 par 53). Again, that strikes me as an exaggeration of what Dr Jessup is alleged to have said. Mr Browne says that this "assurance" continued to encourage him to pay little attention to the USA option, and he claims that he kept the Sydney operation going on the basis of the second and third representations, but for which he would have closed Hayle's Sydney operations, and pursued venture capital available in the USA. 36 Dr Jessup denies the making of this representation. He says that had Mr Browne asked for a commitment of the full amount up front, "it would have been a huge problem to me at that stage", which he would have totally rejected (T 801). 37 Mr Browne always knew that until ATG had committed to a transaction with Hayle there was a risk that ATG would reassess the whole deal and either decide not to go ahead at all, or only on terms different from those which Mr Browne wanted (T 391-392). But he gave the following evidence at T 392: "If you had been told at the outset well I am happy to think about commitment for $2 million on day one but that's going to depend upon consideration and we'll have to talk about it, don't count on it. You wouldn't have walked away from ATG then would you? --- I believe I would have, yes. ... ... So that the notion that you would have on 31 March started to close down the operation already being drip fed in Sydney and go to America because you were told that you couldn't count on a commitment of $2 million day one that that would have to be thought about and considered. That is just unrealistic, uncommercial and not true, do you agree? --- No, I don't." 38 On 1 April 1995, Dr Jessup prepared a file note of the meeting of 31 March 1995 (AB 1/294). That file note includes the following: "Financial Prepared to modify plan to reflect a $2 million investment. Will capitalise the $4 million loan (approx $3.5M in cash and rest in salary) but wants to hold loan for up to $500K spent this year. Not sure about salary but agrees should be conservative. Will think about valuation. Would like to offer 15% of US company to Robert Cooper for his help in US (he set up key meetings). Action: Call next week concerning valuation and salary." 39 On 1 April 1995 Dr Jessup wrote to Mr Browne (AB 1/297) as follows: "Our brief meeting was most productive and I think we should be able to proceed into due diligence if we have a similar view as to valuation. I look forward to your thoughts on this. I hope to be able to confirm our interest in writing by the end of this week. As discussed, I will be requesting a period of exclusivity during which we can conduct due diligence since we incur significant expense during this period. Enclosed are the papers you lent me. ..." Included in those papers was the Hayle Business Plan as it then stood with respect to Australia, and the Business Plan as it then stood in relation to the USA. The Business Plan for Australia was predicated upon a much larger investment than the AUD$2 million which was the subject of the discussions between Dr Jessup and Mr Browne. 40 On 4 April 1995 Hayle wrote to Dr Jessup and raised the issue of repayment of loans (AB 1/298). There were two loans which he did not wish to capitalise: first, funds invested between 1 January 1995 and the closing date (on 4 April this fund then stood at $US450,651, with the last $US150,000 going in on 31 March 1995); second, unpaid salary expected to be around $1,250,000 by 30 June 1995. This letter also stated that when seeking the original $4.8 million for the Australian operation, Mr Browne was willing to lose 30 per cent of the equity, but he intended to keep the foreign scene separate. He now accepts that ATG's investment must apply to both the Australian and international operations. He suggests that ATG should lift its initial investment to $2.75 million which, using the $4.8M = 30% equity formula, would mean that ATG's equity would be 17 per cent. This letter contemplated a closing date for the proposed transaction of 30 June 1995, but contains a statement that Mr Browne "would need estimate a likely closing date" which is a curious statement if the first and second representations were made. 41 On 28 April 1995 Dr Jessup wrote to Mr Browne listing factors on which the parties would need to agree prior to ATG entering into due diligence. The letter included the following: "ATG would potentially invest up to a A$2 million in equity in the company. Normally we would tranche such an investment over a period of time with subsequent tranches being committed subject to milestones being achieved. (emphasis added) We understand the company requires more than this and I would propose that the initial $2 million be used to prove the product in the market and then seek further funding at an increased value. This would minimise dilution for the shareholders and ATG would be keen to assist in this process. We prefer to have a modest salary for executive shareholders so their financial gains come as a shareholder rather than as an executive. I propose a package of $150,000 for yourself as Managing Director. On the issue of loans, we have difficulties with repayment of shareholder loans as a principle. This cash has produced a value which is reflected in the valuation of the company. Unless there are urgent cash flow considerations, we are prepared to negotiate a structure which will increase your equity as long as the company has met certain milestones. (emphasis added) The letter also noted that ATG had based its structure on a 35 per cent equity. ATG and Hayle will prepare a Business Plan incorporating five year summary financial forecasts prior to any investment by ATG. Hayle agrees to provide ATG an exclusive period of three months from the date of acceptance of the Expression of Interest. If ATG decides not to proceed with an investment ATG will bear its own expenses. If Hayle rejects a firm offer by ATG to invest made by ATG within the spirit of this letter, then Hayle will bear ATG's expenses. ATG's investment will be conditional on completion of satisfactory due diligence including agreement of a final Business Plan and approval from its Board of Directors. 42 The letter further noted that the Shareholders' Agreement would include a provision (the "Adverse Trading Event condition") whereby ATG could assume control of the company if the monthly management accounts project a negative cash flow in the following three months which cannot be met from existing sources of committed finance, and the Board cannot agree on a financing and Business Plan to redress the situation which is acceptable to ATG. 43 On 5 May 1995 (AB 1/305) Mr Browne responded to that Expression of Interest stating his thoughts on the key points. In that letter Mr Browne expressed a hope that ATG did not mean that it intended to tranche the first $2 million. Mr Browne said that he believed that the co-authored Business Plan, combined with the controls which ATG would have through the Shareholders' Agreement (ie the Adverse Trading Event option), would more than mitigate any need to tranche the initial investment. There was no protest that tranching was inconsistent with the first and third representations. Mr Browne stated that he wanted ATG to consider allowing two loan accounts to survive: $1,250,000 representing unpaid salaries as at 30 June 1995 and $630,000 approximating the funds loaned so far in 1995. Apparently $630,000 is the AUD equivalent of the $US450,651 referred to in the letter of 4 April 1995. 44 The points made in the Expression of Interest letter in relation to the Shareholders' Agreement (which contained the Adverse Trading Event condition) seemed OK, but Mr Browne saw no point in getting into the detail "until the basic deal points are agreed." 45 The letter of 5 May 1995 also included the following: "5. EXCLUSIVITY: We would need to agree a 'drop-dead' closing date of 1/7/95. There are a number of reasons for this: a new financial year is a great time to change equity: Spring is the ONLY time to launch a health and fitness product; it is not healthy for the business to be in limbo for extended periods; we cannot afford to be in a non-negotiating mood for too long ... it would take time to revive the alternative sources of capital." (emphasis added) The letter described ATG as being the most attractive of the current options. It sought a response. "Both of us need to know if we have a deal so that we can get moving ... one way or the other!". 46 Mr Browne does not seek, by the letter of 5 May, to call in aid the first and second representations, on the faith of which Mr Browne says that he did not pursue venture capital opportunities in USA, as reasons why there was a need to agree upon a "drop dead" closing date of 1 July 1995. If those representations were made, one would have expected Mr Browne to have invoked them in support of the supposed need to agree upon a "drop dead" closing date. 47 By the time of this letter, the basic deal points had not been agreed, and neither party could know whether a deal would eventuate. Mr Browne knew that there was a risk that ATG would reconsider the matter (whether in the light of further information or not) and decide to do the deal or do it on different terms to those discussed on 5 May (T 394). He also knew that there was a risk that ATG would walk away from a "deal" if it was not legally binding (T 189). The fourth representation: 5 May 1995, 2FASC par 13 48 Paragraph 13 of 2FASC alleges that soon after 5 May 1995 Dr Jessup made the following oral representations to Hayle: (a) the only way to get the deal done quickly was to split the $2 million into two $1 million tranches; (b) there would be a very simple milestone for the second tranche; (c) ATG would only not pay the second tranche of $1 million if there was something it had been misled about by the applicant. Dr Jessup accepts (T 780) that he told Mr Browne that milestones were essential to ATG's investment processes. Otherwise he denies the representations alleged. Mr Browne says that he did not regard the suggestion that the funds be split into two tranches as a meaningful departure from Dr Jessup's earlier assurances that the full funding would be committed up front (Affidavit 29/5/99 par 60). Mr Browne did not walk away from ATG, yet the evidence referred to in [37] above suggests that he would have walked away if not assured of a commitment for $2 million on day one. 49 May was a very preliminary stage of the negotiations. The Board of ATG did not then have before it all the facts and circumstances in relation to the proposal which were germane to an assessment of ATG's best interests (T 394-395). Fifth representation: 12 May 1995, 2FASC par 16 50 Par 16 of 2FASC alleges that on 12 May 1995, by letter of that date, ATG represented to Hayle that: (a) tranche milestones would be set which were readily achievable, and (b) the first tranche milestone for $1 million would be upon completion of documentation and the agreed Business Plan. 51 The letter of 12 May 1995 contained Dr Jessup's comments on Mr Browne's letter of 5 May. It was consequential upon the phone conversation shortly after 5 May 1995 which concluded with Mr Browne suggesting that Dr Jessup should put something in writing (Browne Affidavit 29/5/99 par 59). The letter included the following: "INVESTMENT TRANCHES As discussed, we need to tranche according to milestones, but these milestones should be set so they are readily achievable. I suggest the following: Tranche Amount Milestone 1 $1 million Completion of the documentation Final agreed Business Plan 2 $1 million Hire marketing director Sign US distributor with orders for 5,000 units Sales is within 30% of the final agreed Business Plan Profit is within 30% of the final agreed Business Plan The timing will depend on the cash flow in the final agreed Business Plan" 52 The letter also indicated that retention of the $630,000 loan account was probably acceptable from ATG's point of view. Dr Jessup suggested that the initial tranche of $1 million would be for 20 per cent equity and the second tranche of $1 million would be for between 15 and 5 per cent equity depending on the financial performance of the company. 53 Under the heading "Exclusivity" the following appears: "I would plan to go to the July Board meeting so could aim to commit by mid July. Documentation could take 2-4 weeks." Thus ATG did not agree to the "drop-dead" closing date of 1 July 1995 referred to in the letter of 5 May 1995. Dr Jessup regarded this requirement as simply a negotiating stance (T 811). That is consistent with Mr Browne's own approach. At T 225, he gave the following evidence: "So when you used the expression 'bluff' and 'chickened out' do you mean that having bluffed that you would walk away from negotiations if he did not agree to a drop dead closing date of 1 July '95, he having refused to give that agreement, you chickened out and moved away from a position which you had described as a drop dead one? --- That's correct, yes. You would agree, would you not, as an experienced businessman and negotiator, that that sent a message to Dr Jessup at ATG about your determination to stick to things which you had maintained were absolutely critical? --- It is always dangerous to say something and then not carry it out, yes. That's exactly what you did by your language, hyperbolic or otherwise of drop dead on 5 May, isn't it? --- Yes." 54 ATG claims that insofar as the letter of 12 May 1995 contains representations as to future matters, there were reasonable grounds for making them, in that nothing was known to Dr Jessup at that stage of the negotiations which would indicate that the milestones would not be readily achievable. 55 Dr Westlake says that it was not ATG's normal practice to set milestones that are easily achievable, but based on the Business Plan, the milestones referred to in this letter were achievable (T 573). 56 Over a period including April and going into May 1995 it became apparent to Mr Browne that funding by 30 June 1995 was not going to happen (T 219). In the letter of 12 May 1995 the timing was expressed in somewhat tentative language (T 220), and Mr Browne appreciated that there was a risk of slippage (T 220). By 12 May 1995 Mr Browne knew that funding was not going to occur by 30 June 1995 (T 222). 57 As at 12 May 1995 the US venture capital market was still an available option (T 226). However, Australia was the more attractive of the two options for both business and personal reasons (T 227), including the cachet of Australian Government support. 58 Even though Mr Browne knew as at 12 May 1995 that funding by 30 June 1995 would not occur, he continued his negotiations with ATG directed towards reaching an agreement in preference to making an approach to the American venture capital market. 59 On 16 May 1995 Mr Browne wrote to ATG (AB 1/309). The letter asserted that the idea of splitting the $2 million into two tranches came as a bit of a shock. The letter stated: "When you explained that holding back half of the $2 million would expedite the due diligence, I could see the logic of your suggestion. Even though the second million would be needed quite soon, you would have the equivalent of another due diligence period to ensure our representations to you had been accurate. Obviously that would speed up the initial due diligence. Because I know we are 'squeaky clean' I have no problems with doing everything possible to give you comfort regarding the representations we have made, and will be making, to you. Now that I have received your FAX I am worried that you not only see the tranching as an ongoing due-diligence but also as an opportunity to re-assess risk and I'm not sure if that is appropriate. Frankly, if we had an order for 5,000 units from the US, we wouldn't need to use equity to raise funds. Instead, we would be talking to a bank about working capital finance. Hiring a Marketing Manager is not a problem. We are in total agreement on the need and it falls into the category of a representation we would have made to you and one which is completely within our control to honour. Likewise, being within 30% of the Business Plan is really not a problem either. The milestone-test will be applied so soon after we co-author the plan I can't imagine being too far out. I'm not sure such a milestone means too much. If we were talking about a few years down the track I could understand, but the second million will be needed within several months of the first. In summary, I can live with a few 'milestones' needing to be met between the first and second tranches but I'd prefer the concept to be that you are using the two tranches for additional comfort regarding our representations and warranties so that the deal can be expedited." 60 Other points made in the letter included that: - the $630,000 loan could be repaid as suggested without any problems; - loans made to Hayle in the period between signing the Letter of Intent and receiving the ATG funds should be considered as bridging loans and repaid at closing. An upper limit could be agreed upon. This was a new requirement; - ATG's $2 million should buy 20 per cent of the business, but the equity jumps to 35 per cent if performance milestones are hit within three years. 61 Under the heading "Timing" the following appears: "Would the following timetable be workable? (a) Agree the main points (points in this letter) by May 18th. (b) Agree the other points in your FAX 28/4/95 by May 25th. (c) Sign Letter of Intent by May 31st. (d) Complete due-diligence by June 23rd. (e) Complete revised Business Plan by June 23rd. (f) Obtain Board approval on July 7th. (g) Complete Letter of Offer by July 11th. (h) Complete documentation & fund 1st tranche by July 31st. Sixth representation: 16 May 1995, 2FASC par 19 62 Paragraph 19 of 2FASC alleges that soon after 16 May 1995 Dr Jessup orally represented to Hayle that: (a) it would not set milestones for tranching unless it was certain the applicants would meet them, because milestones were only necessary to satisfy ATG's internal processes and were not meant to be a genuine trigger for funding; (b) it was certain that their agreement with the applicants would be concluded by 31 July 1995. Dr Jessup denies these representations. He claims to have told Mr Browne that he needed the milestone concept to be included in the proposal to obtain Management Committee approval (Jessup Affidavit 26/7/99 par 17). 63 Mr Browne says (Affidavit 29/5/99 par 65) that Dr Jessup assured him that the $2 million was really being committed up-front, that the two tranches were only necessary in order to expedite the approval process, and that he was certain of funding by 31 July 1995. Based on those assurances Mr Browne says that he was no longer considering the USA option, and he kept the Sydney operation going in preparation for executing the Australian side of the Business Plan once the ATG funding was available. 64 On 25 May 1995 Dr Jessup wrote to Mr Browne setting out what he described as ATG's "final position" on the outstanding issues (AB 1/312). The letter stated: "1. We are interested only in 35% equity for $2 million investment. On reflection, the idea of having a varying value for the second tranche is theoretically possible in some cases, but the speed of tranching (that is very fast) will not provide any real assessment of progress in the case of Hayle. 2. The loan of $630,000 being repaid over 36 months is acceptable subject to tax advice of both parties. 3. All of the loans should be capitalised. 4. We are prepared to agree to an immediate repayment of loans up to an agreed limit after the time of signing a Letter of Intent." Dr Jessup said that he hoped Mr Browne might still be interested, but understood that he may be less than happy with this approach. 65 On 1 June 1995 Mr Browne wrote to Dr Jessup (AB 1/323). The letter confirms Mr Browne's understanding that tranching is only being used as an extension of the due diligence, and not as a means of reassessing risk. Statements were made in relation to the loan accounts, and business valuation, on which the parties were still "stuck". Concern was expressed about timing as the Spring launch is "critical". The launch strategy will differ depending on whether or not ATG is Hayle's partner. Hayle needs to know one way or the other so it can decide upon strategy and put it in motion. A timetable is proposed ("is the following agreeable to you") commencing with the reaching of agreement on all points of the Letter of Intent by 6 June, and concluding with funding of the first tranche by July 31. Dr Westlake (T 575) rejected a suggestion that what Mr Browne was saying in this letter was that ATG needed to make up its mind about whether to invest or not, and that ATG should not allow subsequent events to influence whether the money would continue to flow. Dr Jessup said: "I believed he was trying to negotiate to the milestones where they are effectively meaningless and that was not acceptable to us, but I regarded that as a negotiation." (T 814) Seventh representation: 5 June 1995, 2FASC par 22 66 Paragraph 22 of 2FASC alleges that on or about 5 June 1995 Dr Jessup orally represented to Hayle that: (a) there would be two $1 million tranches but the milestones for the second $1 million tranche would be very easy to achieve and was not really a milestone but a way of extending the due diligence process so ATG could expedite the funding of the first $1 million; (b) the deal would be concluded and funded by 31 July 1995; (c) the approval of the ATG Board of Directors would be a rubber stamp of the Management Committee's decision. 67 There was a meeting between Mr Browne and Dr Jessup on 5 June 1995 at which Dr Jessup indicated that ATG wanted 35 per cent for its $2 million investment, but that he was prepared to recommend a formula whereby ATG's equity decreased if Hayle performed better than the Business Plan, and increased if Hayle did not perform up to the plan (Browne Affidavit 29/5/99 par 68). In his affidavit, Dr Jessup denies making each of the representations alleged (Jessup Affidavit 26/7/99 par 18). Dr Jessup said that whilst he had the "most memory" of the first and second meetings with Mr Browne, after that he did not remember a lot of specifics, just general conversations (T 783). He did not have a specific recollection of the meeting of 5 June 1995 (T 814), but maintained that he did not see how he could have said matters which were attributed to him (T 815). The following was put to Dr Jessup (T 815): "I suggest you said to him, that so far as the second tranche was concerned, it was 'really just a way of extending the due diligence process, so we could expedite the funding of the first million'. That's right, isn't it? --- I would never say that, and I have never said such a thing." 68 Mr Browne says that it was at this point that he made the decision to pursue the ATG funding option to the exclusion of funding in the USA, and it was Dr Jessup's assurances, particularly as to the commitment of the full $2 million up front and the 30 June, and subsequently 31 July timing, coupled with his requirement of exclusivity, which finally convinced Mr Browne not to pursue the USA option. 69 By mid June 1995 Mr Browne knew that funding was not likely to occur by 31 July 1995 (T 254). His evidence in cross-examination was that if he had known on 1 June 1995 that ATG could not be sure of completing on 31 July 1995, he would have gone to the United States of America (T 255). Nothing had happened in the intervening fortnight to make America less attractive, but he did not go to USA in mid June in search of venture capital. 70 Mr Browne rejected a suggestion that his failure to go to America in mid June indicates that on 1 June, he did not rely on 31 July being achieved as something which put him off going to America (T 255). But apart from making statements such as "I was just married to try and make this happen" and "I'll hang in there because they are saying very positive things", he could not explain why he did not then go back to America (T 256). Eighth representation: 16 June 1995, 2FASC par 25 71 Paragraph 25 of 2FASC alleges that on or about 16 June Dr Jessup made the following oral representations to Hayle: (a) ATG's Management Committee had approved the deal and that was good news; (b) Dr Jessup had been replaced by Dr Barry Westlake to work on the project on behalf of ATG but this would only delay completion of contracted funding for a week or two. Dr Jessup asserts (Jessup Affidavit 26/7/99 par 23) that what he said to Mr Browne was that the Management Committee is agreeable to undertaking due diligence. "However, I am too busy to assist with that process. It is proposed that Barry Westlake be the new Business Development Director involved with your project. He is an experienced and good manager. He used to have his own business. He already has a good understanding of the deal and the business anyway." Mr Browne said that he was worried about there being any delays, to which Dr Jessup responded: "there may only be a minor delay but [ATG] still had to go through due diligence. [Dr Westlake] will have more time than me to deal with the matter". 72 Dr Jessup says that at this stage "we didn't have a deal structured yet", and all that the Management Committee could decide, and had decided was that the matter should be proceeded with (T 816). Dr Westlake said (T 589) that the Management Committee: "had approved for us to continue down our process. Dr Jessup accepts (T 816) that he may have told Mr Browne something along those lines. At this stage, a Business Plan applicable to ATG's proposed investment had not been prepared, and Mr Browne never believed that ATG would commit itself before it was content with the Business Plan (T 249). 73 At this point, Mr Browne contends (Affidavit 29/5/99 par 71) that he understood that the Management Committee had approved the deal, and bearing in mind that the Board was only a rubber stamp, he now believed that the ATG deal would definitely happen. Ninth representation: 21 June 1995, 2FASC par 28 74 After 16 June 1995 Dr Westlake took over the matter on behalf of ATG. It is common ground that about this time Dr Westlake said to Mr Browne that he was not happy with the Business Plan which had been presented to Dr Jessup, and that it needed to be reworked. The plan presented to Dr Jessup was based on a direct marketing plan to consumers whereas Dr Westlake wanted a Business Plan based on marketing to corporate customers in the USA for the benefit of their employees. Dr Westlake wanted the Australian operations to be confined, with the major part of the business to be conducted in the USA. Substantial amendments needed to be made to the Business Plan. In his affidavit of 13 August 1999 (par 4) Dr Westlake claims to have said to Mr Browne: "Any deal must be approved by the Working Committee and then presented to the Board of ATG for approval. The Working Committee won't present a deal we expect the Board to knock back. Anything we are doing or discussing will ultimately be subject to due diligence and Board approval. I'll need also to first obtain approval of the Working Committee." There is no specific denial by Mr Browne of this conversation. The "Working Committee" is the Management Committee. 75 Dr Westlake accepts that he was enthusiastic about the project, that he got on well with Mr Browne, that up until the Board meeting of 6 October 1995 his expectation was that there would be no difficulty in securing Board approval, and that he was "positive" to Mr Browne about his Investment Proposal (T 584). He also accepts that he knew Mr Browne was anxious to get the deal funded as soon as possible (T 590). 76 Mr Browne accepted that it "comes with the territory" that ATG would be reconsidering the risks of the proposal as it went along (T 263). There was a risk that the involvement of persons apart from Dr Jessup might alter ATG's views (T 263). On 26 June 1995 it was clear to Mr Browne that Dr Westlake had a different approach from that of Dr Jessup, and that at least initially, he was less optimistic than Dr Jessup, and was in need of re-education (T 264). 77 Mr Browne did not then give consideration to the American option because he says he was married to making the ATG deal happen (T 265). It was his perspective that Hayle's commercial interests would be better served by trying to bring the deal to fruition in Australia, rather than starting again in America (T 266). 78 Paragraph 28 of 2FASC alleges that on or about 21 June 1995 Dr Westlake orally represented to Hayle that ATG would be able to do the funding by the end of August 1995. In his affidavit, Dr Westlake denies making any representation to that effect. 79 According to Mr Browne's affidavit (par 74) he said to Dr Westlake: "How do you see the timing now?" Dr Westlake's response was: "There's a lot we can get done over the next few days to get things moving. We can meet again next Tuesday for a brain-storming session on revising the Business Plan. You can then work on making the agreed changes and have the new Plan ready for my review when I return to Sydney in mid-July. Assuming the new Plan makes sense, I'll be able to get you a formal Expression of Interest by July 21st and due diligence can start immediately. We'll be able to get this funded by the end of August." Dr Westlake contends that he said to Mr Browne: "If the Business Plan can be finalised by 21st July and a formal Expression of Interest signed off then it is likely due diligence will take approximately six weeks. We will thereafter need to obtain approval of the Working Committee and the Board. You will need to satisfy the due diligence process and also Board approval." (Westlake Affidavit 13/8/99 par 17) Dr Westlake accepts (T 591) that there was a communicated expectation that a Business Plan could be prepared and worked upon so as to allow funding to occur by the end of August. Mr Browne accepts (T 270) that he did not rely upon the end of August estimate to deter him from going to the USA. 80 On 26 June 1995 Mr Browne wrote to Mr Dalfen (AB 1/327). The letter included the following: "Negotiations with the Australian venture capital source are dragging on and on but I'll have a clear picture before the end of July. Hopefully the Australian side will then be well funded and I will be able to concentrate on developing the US." There is a marked contrast between the tone of this letter, and the eighth and ninth representations. It was Mr Browne's position that as at 26 June 1995 he had a deal with ATG (T 274), but there was no done deal (T 276). 81 On 26 June 1995 Dr Westlake wrote to Mr Browne confirming the strategy meeting to be held on 27 June (AB 1/328). The letter included the following: "The aim of the meeting will be to produce agreement between ATG and Hayle as to the tenets of the Business Plan. This will allow you to refine your Business Plan so that ATG and Hayle can develop an agreement to move forward into due diligence on my return in mid-July." 82 A meeting between Mr Browne and Dr Westlake took place on 27 June 1995. Dr Westlake was going on vacation for the next two weeks. Mr Browne agreed to redo the Business Plan along the lines discussed, and have it on Dr Westlake's desk before he returned on July 17. 83 On 28 June 1995 Dr Westlake wrote to Mr Browne (AB 1/329). The subject matter of the letter was the points which should be addressed by the outline Business Plan agreed to be prepared at the meeting on 27 June. The letter stated: "I would like to confirm that ATG remains very interested in pursuing an ongoing relationship with Hayle and to this end I need to see an outline Business Plan as soon as possible after my return from vacation on 17th July." 84 On 14 July 1995 Mr Browne submitted a revised Business Plan to Dr Westlake (Browne Affidavit 29/5/99 par 80). That plan was premised on the assumption that the Australian operation would be confined to a break-even-test-bed with the focus being on the US market, particularly the corporate sponsor segment. This represented a major change in the strategy of the Business Plan (T 261). 85 On 17 July 1995 Hayle submitted an itinerary to Dr Westlake for a visit to America between 18 and 25 August. The letter stated that the possibility had been left open for a postponement to October if it was thought that the end of August was too rushed (AB 1/368). Tenth representation: 25 July 1995, 2FASC par 31 86 Paragraph 31 of 2FASC alleges that on or about 25 July 1995 Dr Westlake orally represented to Hayle that: (a) the approval of ATG's Board of Directors would be automatic once the deal had the recommendation of ATG's Management Committee; (b) ATG would close and fund the deal by the end of September 1995 at the latest. In his affidavit, the making of these representations is denied by Dr Westlake (Westlake Affidavit 13/8/99 par 23). In cross-examination, Dr Westlake accepts that he told Mr Browne in July that he would be ready to submit to the Board in mid-September, although at that stage, he did not have a Business Plan (T 604). He told Mr Browne that it was his expectation that he would be closing the deal around end September 1995 (T 613). Dr Westlake maintained his position that he "would never say" that Board approval would be automatic to a proposal recommended by the Management Committee (T 604). By this time Mr Browne says (Affidavit 29/5/99 par 82) that he felt fully committed to ATG, and in his mind, funding in the USA was no longer a viable option. Mr Browne says he continued to operate the business in reliance on the representation that ATG would close and fund the deal by end September (T 301-302). He simply believed it was going to happen. 87 On 26 July 1995 Mr Browne wrote to Dr Westlake as a result of the meeting on the previous day (AB 1/371). The letter commented on issues discussed at the meeting. It concluded: "We now have a clear picture of the timing involved with the ATG decision. This Friday you will decide whether or not to proceed. If the answer is 'yes', you will present us with a formal Terms Sheet around the 2nd of August. The terms will be based on those already agreed with George. [Jessup] We will sign the Terms Sheet and you will start due diligence by August 15th. This should take about four weeks meaning that you can seek Board approval by mid September. After that, documentation will only take a few days. This means the deal can be closed by end September." 88 On 2 August 1995 Mr Browne wrote to Timex Corporation (AB 1/379). Timex Corporation was a proposed supplier of HeartWatches to the project. The letter included statements that: - the venture capital deal is going ahead and should close by end August; - ATG have decided to invest in Hayle. A copy of that letter was sent to Dr Westlake. The statement: "ATG have decided to invest in Hayle" was based upon a conversation with Dr Westlake prior to the Management Committee meeting at which he confidently asserted that approval would be forthcoming (T 314-315). All that could accurately be said at 2 August was that Mr Browne thought ATG were very interested in the possibility of funding (T 317). On 11 August Mr Browne told Dr Cooper that "if all goes well, the deal will close before September 14th" (AB 1/391). Eleventh representation: 3 August 1995, 2FASC par 34 89 On 3 August 1995 Dr Westlake sent an "Expression of Interest" letter to Hayle. Paragraph 34 of 2FASC alleges that by that letter ATG represented to Hayle that: (a) ATG was interested in entering into detailed due diligence with the purpose of investing $2 million in Hayle Holdings in two tranches of $1 million, the first upon execution of the Shareholders' Agreement and the second at the end of twelve months on achievement of appropriate milestones to be set out in the agreed Business Plan; (b) Hayle Holdings agreed to provide ATG with an exclusive period of one month in order to conduct due diligence and make a firm offer to invest during which time Hayle Holdings would not negotiate with any other party to raise capital and would commit all reasonable resources required by ATG to assist ATG to carry out its due diligence; (c) should ATG invest, the first tranche of the capital invested would be used to fund Hayle Holdings' reasonable operating expenses from the date of acceptance of the letter, but not more than $80,000 per month or $160,000 in total. 90 The representations contained in the letter of 3 August are alleged to be false, misleading and deceptive in that: (a) ATG was not interested in investing $2 million in Hayle Holdings in two tranches of $1 million as stated or at all, or there was a risk that that would not occur, and it did not occur; (b) Hayle Holdings' reasonable operating expenses of not more than $80,000 per month up to $160,000 would not be reimbursed out of the first tranche, or there was a risk that they would not be, and they were not; (c) insofar as they related to future matters, there were no reasonable grounds for making them. ATG contends that there were reasonable grounds, in that the letter represented ATG's position at that stage of negotiations, and it knew nothing to suggest that it would not be able to maintain that position. 91 The letter confirmed ATG's interest in entering into detailed due diligence of the business of Hayle as presented in the ATG Business Plan dated July 1995. The investment contemplated was of $2 million to be made in two tranches of $1 million, the first tranche to be made available on the execution of the Shareholders' Agreement, and the second tranche at the end of the first twelve months on the achievement of appropriate milestones that would be set out in the Agreed Business Plan. After the investment ATG would own 35 per cent of the capital of Hayle. Hayle agreed to provide ATG an exclusive period of one month from the date of agreement to the conditions of the letter in order to allow ATG to conduct due diligence and to make a firm offer to invest in Hayle, and agreed not to enter into negotiations with any other party to raise capital during this period. In the event that ATG decides not to proceed with an investment, ATG was to bear its own expenses. If Hayle rejects a firm offer to invest made by ATG within the guidelines of the letter, Hayle will bear all ATG's out-of-pocket expenses. 92 The key issues to be addressed during the due diligence, and appropriately incorporated into the Business Plan, were set out in the letter. The letter then included the following: "12. Commitment ATG's investment will be conditional on the completion of satisfactory due diligence, including the agreement to a Business Plan, and approval from ATG's Board of Directors. ATG may decide to cease due diligence at any time if, in ATG's sole opinion, a satisfactory Business Plan is unlikely to be agreed. 13. Disclaimer Prior to making an investment ATG is working on its own behalf, first to determine whether or not to invest in Hayle and then to make its best endeavours to ensure that the investment has an appropriate return to ATG. ATG does not accept responsibility for any advice and representations made by it including, but without limitation, any representations with regard to valuation, business advice, strategic marketing or success of the venture." 93 The letter also included the Adverse Trading condition, to which Mr Browne took no objection. He accepted the risk that the operation might come to a grinding halt in the future if a need for money arose which he was not prepared to put in (T 333). 94 By letter dated 4 August 1995 Mr Browne advised that Hayle was willing to proceed on the basis outlined in the Expression of Interest letter (AB 1/390). He did so even though, for the first time, it was proposed that the second tranche of $1 million would not occur until twelve months after the first, and it would depend upon achievement of "appropriate" milestones, as distinct from "easily achievable" quasi milestones. Mr Browne knew that there was no commitment by ATG at this point, and that there was a risk that ATG would decide ultimately not to invest. He continued to negotiate with ATG because he had real confidence and belief in the HayleSystem (T 321). What was stopping him from going to USA at that time was that he was optimistic and confident that he would get a deal with ATG (T 343). Twelfth representation: 3 August 1995, 2FASC par 35 95 The Expression of Interest letter stated that should ATG invest in accordance with the spirit of the letter, the capital invested would be used to fund Hayle's reasonable operating expenses from the date of acceptance of the letter, but in any case would not be greater than $80,000 per month or $160,000 in total. 96 Paragraph 35 of 2FASC alleges that on 3 August 1995 Dr Westlake orally represented to Hayle that the letter meant that Hayle's reasonable operating expenses up to $160,000 would be reimbursed out of the first tranche. Dr Westlake accepts that he said something to that effect, but claims that it was prefaced with the words: "Subject to Board approval, and due diligence." (Westlake Affidavit 13/8/99 par 25) At T 617 Dr Westlake accepts that an undertaking was given to Mr Browne that ATG would fund his company for two months from 2 August. 97 Between 4 August and 3 November 1995 Mr Browne arranged for $146,000 to be lent by Panco Enterprises Pty Ltd (as trustee of the Neville Browne Family Trust) to Hayle upon the basis that the funds so lent would be reimbursed out of the first tranche (Browne Affidavit 29/5/99 par 87). 98 On 6 August 1995 the due diligence process commenced. 99 On 11 August 1995 Mr Browne wrote to Dr Cooper (AB 1/391). The letter contained the following statements: - if all goes well the deal will close before September 14; - assuming the deal proceeds Mr Browne would visit the US on 22 October with Dr Westlake; - Mr Browne would not go into the detail of the strategy for establishing in the US "until I know for sure that the deal is on". Mr Browne said in cross-examination (T 191) that on 11 August: "I was sure the deal was on, I knew it hadn't been consummated. I was very confident the deal was on." But the risk always existed in Mr Browne's mind that ATG would not fund on terms acceptable to Mr Browne. Thirteenth representation: 24 August 1995, 2FASC par 42 100 On 24 August 1995 Dr Westlake telephoned Mr Thompson of 3M in the presence of Mr Browne. Mr Browne's affidavit (29/5/99 par 89) describes the conversation as follows: "(a) Westlake said: 'We're close to funding Hayle so that they will be in a position to run the HayleSystem trial involving 1,000 of your employees and as part of the due-diligence process we'd like to get your confirmation that you will sponsor such a trial.' (b) Thompson said: 'We haven't worked out the exact details but we are agreed in principle to the idea of a funded trial involving around 1,000 people.' (c) Westlake said: 'We should be closing the deal around the end of September so Neville and I will come and work out the details with you some time in October.' (d) Thompson said: 'I'll look forward to seeing you then.'" Dr Westlake's affidavit does not contradict this conversation. In cross-examination (T 613-614) he accepted the substance of it. 101 Paragraph 42 of 2FASC alleges that during the course of that conversation Dr Westlake represented to Hayle that: "(a) The deal should be closed and funded by the end of September; (b) In October Dr Westlake and Mr Browne would attend on the 3M Corporation in the USA to work out the details of the 3M Corporation's agreement in principle to a HayleSystem deal involving 1,000 of 3M's employees." 102 Paragraph 43 of 2FASC pleads that these representations were false, misleading and deceptive in that: "(a) the deal would not be closed and funded by the end of September, or there was a risk that it would not be, and in fact it was not closed and the first tranche was not funded until 13 November 1995 or thereabouts as hereinafter pleaded; (b) Westlake and Browne would not attend on 3M Corporation in October to work out the said details, or there was a risk that they would not, and in fact they did not do so until December as hereinafter pleaded; (c) Insofar as they related to future matters, there were no reasonable grounds for making them." Due Diligence 103 There is conflicting evidence as to when the due diligence process was completed. The better view is that the due diligence process was finished by the end of August. Dr Westlake's monthly report for August 1995 (AB 1/395-399) contains the following notation in relation to Hayle: "Obtained full agreement on Term Sheet and began due diligence on 4th August. Due diligence gone extremely well, including iteration to a very good Business Plan. Should be presented to Staff Review 8th September and to Board review before October Board mtg." 104 Mr Browne's affidavit records a conversation which he said he had with Dr Westlake around the end of August 1995 as follows: "(a) Westlake said: 'I told you that due-diligence would only take three or four weeks'; (b) Browne: 'And I told you we were "squeaky clean'; (c) Westlake: 'Yes I must agree that everything was just as you said it would be ... no unpleasant surprises. I'm very pleased with the way it went. We're all set to present to the Board. I have to prepare the Board submission and that will take a few days but we're on track for funding by end September as promised. It will go before the next Board meeting on September 8th.'" Dr Westlake denies par (c) above, and says that whilst the corporate governance element of the due diligence process was satisfactory, the due diligence process itself identified a number of problems in ATG investing in Hayle (Westlake Affidavit 13/8/99 par 27). Those problems included a history of high spending on matters which did not enhance the return to the company, the Australian operation was spending cash at an alarming rate, the financial controller, Kyle Amadio was shown to be incompetent, the development of a completely new accounting system needed to be implemented, the HeartWatch was too cumbersome and a smaller unit was required, the HeartWatch needed to be significantly cheaper to manufacture and the Business Plan, finalised just before completion of the due diligence, showed that cash flow would be very tight and the development of the project would be extremely sensitive to any delays. 105 On 1 September 1995 Dr Westlake requested Abbott Tout to prepare a draft Shareholders' Agreement based on the 3 August expression of interest (AB 2/400). 106 On 6 September 1995 a preliminary draft due diligence report was prepared, apparently by Dr Westlake (AB 2/406). A copy of it appears to have been sent to Mr Browne on 11 September 1995. It includes the notation: "May need special Board Review around early September." 107 On 7 September 1995 Mr Browne forwarded an incomplete draft of the Business Plan to Dr Westlake. Also on 7 September 1995 Mr Browne wrote to Dr Cooper indicating that Barry Westlake had a meeting in Europe on 22 September and that it was hoped to sign the deal before he leaves Australia. Mr Browne had no genuine belief at that time that it was likely a deal would be done by end September, hence what he said to Dr Cooper was misleading, but not intentionally so (T 374). Fourteenth representation: 8 September 1995, 2FASC par 45 108 In his affidavit (29/5/99 par 92) Mr Browne deposes to a conversation which he said he had with Dr Westlake some time early in September 1995. In the course of that conversation Dr Westlake said: - he was off work with the flu; - they would miss the Board meeting to be held on September 8; - he can call a special Board meeting as soon as he is back on deck; - he was going to get the lawyers working on the documentation immediately rather than wait for Board approval. Normally he waits for the Board to sign off on the deal in case they make any last minute changes to it. 109 In the affidavits it is common ground that Dr Westlake said that he was going to get the solicitors working on the documentation immediately, rather than wait for the Board's approval. Then in their respective affidavits, Mr Browne asserts (par 92), and Dr Westlake denies (pars 28-29), that the following ensued: (b) Browne: "I'm glad you're proceeding with the documentation, but you and George have always told me that the Board will automatically rubber stamp the deal once it's approved by the Committee. What do you mean by 'last-minute changes' the Board might make?" (c) Westlake: "Sometimes the Directors like to justify their existence by tweaking the deal but don't worry I have it all under control. I might want you to meet the Board personally as part of my presentation. That's going to make a telephonic Board meeting impossible but I feel it would be a good idea for them to meet you." (d) Browne: "This is sounding less and less like a rubber stamp. Does this mean we'll have to wait until the October Board meeting? What happened to the September 30 deadline?" (e) Westlake: There's not much I can do about getting ill, but you have my word that I'll do everything I can to get it through as soon as humanly possible." 110 Paragraph 45 of 2FASC alleges that during this conversation Dr Westlake represented to Hayle that normally ATG waited for the Board to sign off on the deal in case they made any last minute changes, that sometimes the Directors liked to justify their existence by tweaking the deal, that the applicants need not worry and that Dr Westlake had it under control. Dr Westlake accepts that he may have said "it's all proceeding OK" or "it's going where we want it to go" (Westlake Affidavit 13/8/99 par 28). Dr Westlake says that he always made it plain to Mr Browne that the Board "would exercise its right to make some adjustments" (T 658), but stated that he would have provided words of comfort to Mr Browne that there did not seem to be any reason why ATG would not go ahead with the investment (T 658). Dr Westlake says (T 659) that having worked with and reported to boards for much of his business life he would never regard boards as rubber stamps and never treat them that way (T 659). The practice of the Board had been to make minor changes around the edges, and it is likely he told Mr Browne that (T 663). Fifteenth representation: 13 September 1995, 2FASC par 48 111 Paragraph 48 of 2FASC alleges that on or about 13 September Dr Westlake orally represented to Hayle that: (a) it was best to wait for the next Board meeting on 8 October 1995 to approve the deal because if the meeting was called earlier the negative votes might win the day; (b) Mr Browne should be relaxed about the situation instead of saying he had been completely misled by ATG because Dr Westlake had everything under control. 112 Dr Westlake does not deny having a conversation with Mr Browne on 13 September in which he said that it was best to wait for the next Board meeting on October 6 and that it was too risky to call a special meeting because all of the Directors might not be able to attend the special meeting, and the "negative" votes might win the day. He also accepts that he said "everything should be OK. We're doing everything we can to get the deal approved as soon as possible". It was the aim of the Management Committee never to have an Investment Proposal rejected by the Board (T 666), and Dr Westlake probably conveyed to Mr Browne his expectation that there was a high likelihood that the Board would approve the deal at the meeting scheduled for 6 October (T 667). 113 On 13 September 1995 Dr Westlake prepared an internal Investment Proposal dated 14 September 1995 in relation to Hayle (AB 2/433). This was not a document made available to Mr Browne. A footnote to the draft states as follows: "ATG had been working with Hayle to develop a Terms Sheet since February 1995 and had led Hayle to believe that an investment could be made much earlier than is now perceived. This is because my analysis of the business risks indicated that the Business Plan should be completely revised to focus on the corporate-sponsor market. Hayle had, on ATG's verbal undertaking, not proceeded with other possible investment sources. This undertaking was agreed to by the ATG staff prior to issuing the Terms Sheet on an exclusive basis." A handwritten alteration to the draft suggests the possibility that instead of the investment being in two tranches of $1 million each, it would be structured in two tranches of $500,000 each and one of $1 million. The "verbal undertaking" was ATG's undertaking to pick up expenses of up to $160,000 from 2 August 1995 (T 672). Sixteenth representation: between 13 and 25 September 1995, 2FASC par 51 114 Between 13 and 25 September 1995, whilst Dr Westlake was in Europe, a first draft of the Shareholders' Agreement was sent to Mr Browne. The draft provided for two tranches, each $1 million, twelve months apart, with a second tranche based on achieving agreed milestones. Apparently, there was a pencilled notation on the draft to the effect that it might be a good idea to split the first tranche into smaller tranches in order to make the deal "more attractive to the Board" (Browne Affidavit 29/5/99 par 96). 115 Paragraph 51 2FASC alleges that by sending the first draft of the Shareholders' Agreement, ATG represented to the applicants that ATG would provide funding of $2 million in two $1 million tranches, but that it might be a good idea to split the first tranche into smaller tranches in order to make the deal more attractive to ATG's Board of Directors. 116 This representation is said to be false, misleading or deceptive in that: (a) ATG would not provide funding of $2 million in two $1 million tranches, or there was a risk that it would not do so and it did not do so; (b) insofar as it related to future matters, there were no reasonable grounds for making it. 117 By letter dated 25 September 1995 Mr Browne sent his comments to Dr Westlake on the draft agreement (AB 2/456). They included the following: "You have noted on the draft that you are thinking of splitting the first tranche. I really hope you can find a way to stay with the original plan." At this time Mr Browne's assessment was that the ATG deal was "too close to happening" to make resort to America a viable alternative (T 404). 118 On 25 September 1995 a second draft of the Investment Proposal was prepared by Dr Westlake (AB 2/463). This draft provided for the investment to be made progressively through three tranches based on commercial milestones: - the first tranche $500,000 on completion of documentation and conditions precedent – 12 per cent equity; - the second tranche for $500,000 on the successful finalisation of a pilot project with a Fortune 100 corporation (probably 3M) – a further 10 per cent equity taking ATG's stake to 22 per cent; - a third tranche for $1 million on the successful completion of the trials, the finalisation of the US rollout plan and the finalisation of an agreement with a US-based strategic partner. This will obtain an additional 13 per cent equity taking ATG's stake to 35 per cent. This tranche may be shared with the strategic partner, or, the strategic partner may introduce further equity in order to accelerate the rollout. Neither the idea that there should be three tranches, nor the tranche conditions had been the subject of discussion with Mr Browne at this stage. 119 This draft noted that a minimum commitment of 2,000 employees would be sought from 3M. The footnote contained in the first draft, to which I referred in [100] above, has been omitted. The draft was not made available to Mr Browne. 120 On 26 September 1995 Stephen Robinson, the Finance Comptroller of ATG, sent a memorandum to Dr Westlake (AB 2/494). He expressed the view that some of the key assumptions in the Business Plan were bullish, and that the model presented is not "a base case". He undertook a number of sensitivity analyses based upon a PE ratio of 10. He expressed the view that there was little margin for error in the cash flow but "if we get it right" the business is very profitable. 121 On 26 September 1995 Dr Westlake responded to that memorandum (AB 2/498). He expressed the view that the model is already a base case which does not warrant a further significant reduction. His conclusion was that the figures presented by Hayle are a conservative case, and he would be proceeding on that basis with the Investment Proposal. 122 On 29 September 1995 a third draft of the Investment Proposal was prepared (AB 2/500). It was similar to the second except: - the third tranche is conditional upon: · the successful completion of the trials which would include a commitment to a significant internal rollout of the HayleSystem, and; · a commitment to the HayleSystem for at least four additional Fortune 500 companies, and; · the management accounts and forecasts showing a negative variance in EBITD and cash flow of no more than 10 per cent from the Business Plan. A section of the Investment Proposal was headed "Key Risk Factors". In this draft, for the first time, an identified risk was "run out of cash", because the cash budget is very tight, especially in the first twelve months (AB 2/511). Dr Westlake's evidence (T 684) is that the Management Committee required the insertion of this item. The action to address this risk is described as follows: "A key focus for this business needs to be the control of cash flow. Consequently, it has not been considered prudent for ATG to establish tranches and milestones which give the company too much free cash. This cash tightness will be managed by requiring Neville Browne to provide a temporary facility of $250,000 to handle any short-term cash deficiencies caused by milestone delays. It will also be agreed with the principals that should the company have a cash deficiency after ATG's $2,000,000, then further equity raising will be permitted." It was ATG's then contemplation that Mr Browne would be asked to enter into a contractual obligation to that effect. It was contemplated that appropriate terms would be included in the Shareholders' Agreement (T 681). 123 It is the applicants' case that this requirement represents a fundamental departure from the whole basis on which the negotiations between Hayle and ATG were conducted. It is in the applicants' case, that from the outset until 27 October 1995, Hayle and ATG dealt with each other upon the basis of a common understanding that Hayle would not be required to invest any further funds in the project. From time to time during the course of the evidence this was referred to as "the line in the sand" which Mr Browne had drawn, and which he had told ATG that he would not cross. 124 Dr Westlake's monthly report for September 1995 includes the following in relation to Hayle: "Finalised due diligence and prepared Investment Proposal. Also draft legals have been produced and Neville has agreed in general with them. A couple of worthwhile points were raised and these will be sorted out with Abbott Tout this week. Project went through Staff Review on 29th September with financials wound down from Hayle's Business Plan in years 2 to 5 to get a final IRR of 49% using a P/E of 10. (Hayle's Business Plan gives 82%.) It will be presented to Board on October 6th. If approved, I will be going to USA at end of October for meetings with 3M, Timex and others." 125 A Business Plan for Hayle as at October 1995 was prepared (AB 2/537). It was endorsed on the front cover "ATG". An element of the plan was the conduct of a large scale, fully commercial trial with one of the Fortune 100 companies in USA, probably 3M in St Paul, Minnesota. Initial reliance was to be placed in the USA on the domino effect of the success at 3M. The plan included many pages of detailed assumptions on which the projections of the plan were based. 126 On 3 October 1995 the Investment Proposal was prepared for submission to the ATG Board. It was in substantially the same form as the third draft including the "key risk factor" of "run out of cash". The Business Plan was described as based on a conservative rollout to US corporations giving ATG an IRR of well in excess of 40 per cent per annum. The financial projections put to the Board were more conservative than those contained in the Business Plan. They are the figures which, in the Shareholders' Agreement, are styled "ATG's projections" (see178 below). There was substantial "blue sky" potential, which had not been incorporated into the projections of the Investment Proposal, or the Business Plan. 40 per cent per annum was the return, or minimum return, which ATG expected of its venture capital investments. The Investment Proposal showed an IRR of 49 per cent (AB 2/724). Seventeenth representation: 6 October 1995, 2FASC par 54 127 The Investment Proposal was considered at a meeting of the ATG Board held on 6 October 1995. 128 Mr Browne attended that meeting. He asked Dr Westlake whether he could get a copy of the Investment Proposal to read whilst waiting outside but was told that it was an internal ATG document which there was no need for him to see (Browne Affidavit 29/5/99 par 99). Mr Browne had not been informed, at this time, of the Key Risk Factor – "run out of cash" or of the "requirement" that cash tightness be managed in the manner specified in the Investment Proposal. Prior to the meeting, Dr Westlake told Mr Browne that he was confident he would get the Investment Proposal through (T 720). 129 In par 32 of his affidavit, Dr Westlake also says that prior to the Board meeting he had the following conversation with Mr Browne, which Mr Browne denies: "Westlake: As a result of due diligence ATG has assessed that there are still a large number of unknowns in the Hayle business which equate to business risks. There are many important factors such as graduate retention, trainee dropoff, achieved price and client to personal trainer ratios which are yet to be tested in the US market. Any of these can have a dramatic effect on the profitability and sustainability of the business. The Australian tests to date provide little insight into the performance of the business in the USA. There is currently no evidence of the ability for Hayle to set up a profitable operation in the USA as no contracts have yet been negotiated and acceptable pricing and detailed performance remain subject to testing and negotiation. Accordingly ATG is very much concerned by the significant exposure to risks it will have and also the limited return it may receive if the business is not successful or only mildly successful. The above risks need to be handled in a controlled and manageable fashion. Accordingly ATG will require that its investments be made by way of a number of small tranches and I will be formulating a proposal along those lines." This "conversation" follows the form of the preamble to the 19 October 1995 letter of offer (AB 2/765). Dr Westlake accepted in cross-examination (T 696) that he copied his account from that document. 130 The idea that it was as a result of the conduct of ATG's due diligence that the need to further split the tranches below 2 x $1 million also emerges in par 11 of Dr Westlake's affidavit of 13 August 1999. What is there said stands in contrast to Dr Westlake's monthly report for August (AB 1/396): "Due diligence gone extremely well, including iteration to a very good Business Plan. Should be presented to Staff Review 8th September and to Board review before October Board meeting." The then current proposal was for 2 x $1 million tranches. It also stands in contrast to the summary of due diligence contained in Dr Westlake's report of 11 October 1995 (AB 2/729). 131 In my view, the matters referred to in par 11 of Dr Westlake's affidavit were either not found out at all, or were known before due diligence started, or were discovered afterwards, or were not matters material to the decision whether or not to invest. 132 Whilst I have generally deferred assessment of credibility issues until the conclusion of the chronology, it is convenient to indicate at this point that I do not accept the conversation for which Dr Westlake contends in par 32 of his affidavit. The "conversation" is quite inconsistent with the excitement and confidence which Dr Westlake said that he had prior to the meeting (T 720), and with his communication to Mr Browne of his confident expectation that the Board would approve the proposal (T 667). In my view, the corresponding statements in the offer of 19 October 1995 were designed to justify the shift from two $1 million tranches to four tranches. This was not something which Dr Westlake required. At T 675 Dr Westlake agrees that the breaking up of the first tranche was something identified by staff as something that should be done, rather than something which occurred to Dr Westlake. 133 The minutes of the Board meeting are as follows: "The pre-circulated proposal was tabled and discussed in detail. A large number of issues were identified, and noted by the Managing Director for further consideration. The Managing Director presented an overview of the proposal and Barry Westlake proceeded to run a video on the product, followed by a slide presentation. At this stage, the principal of Hayle Holdings, Mr Neville Browne, joined the meeting and outlined the history of the company and responded to specific questions raised by Directors. The Chairman advised Mr Browne that the Board of ATG was giving serious consideration to an investment in Hayle, but at this point it was unable to give a firm decision, but would do so as soon as possible. At this stage, Mr Browne left the meeting. The proposal was discussed in further detail and it was agreed that further information was required before a decision could be made. It was resolved that the Managing Director would respond to the issues raised, and discuss these issues with Directors prior to the next meeting." 134 Mr Browne (Affidavit 29/5/99 par 100) contends that he was invited to meet the Board, he was asked a few general questions about the technical side of the HayleSystem when the Chairman, Mr Bourke, made the following statement: "The Board is very supportive of the investment. There are just a couple of small matters we would like the ATG management to check and report back to us on. This will only take a few days. I know you were expecting to get the approval today but don't be too disappointed ... the things we need to have checked will only take a day or two and the approval will come through very soon." Mr Bourke contends that what he said was: "Thank you very much for your presentation. We are attracted to the proposal but there are a number of matters that the Board has asked ATG management to check and report back to the Board before a final decision will be made. We would hope that this process will be handled quickly and we will get back to you as soon as possible." (Bourke Affidavit 28/7/99 par 2) 135 Paragraph 54 of 2FASC alleges that on or about 6 October Mr Bourke, at the ATG Board meeting, orally represented to Hayle that the ATG Board of Directors were very supportive of the investment but there were a couple of small matters which the Board would like ATG management to check and report back on and that this process would only take a day or two and that the approval would come through soon. Eighteenth representation: 9 October 1995, 2FASC par 57 136 Paragraph 57 of 2FASC alleges that on or about 9 October 1995 Dr Westlake orally represented to Hayle that: - ATG Board approval should be obtained before 20 October 1995; - Dr Westlake and Mr Browne could leave for the USA as planned on 20 October 1995 and meet with 3M Corporation on 26 and 27 October 1995 to obtain their formal commitment to sponsor the deal. It is common ground that during the course of a conversation on 9 October 1995 Dr Westlake informed Mr Browne that the Board was split, that Don Bourke and John Curtis were a bit negative, whilst the rest of the Board was positive. Dr Westlake said that he was confident that he could get the Board approval, hence the planned trip to 3M commencing on 20 October 1995 should not be cancelled. The representation that ATG Board approval should be obtained before 20 October 1995, is apparently implicit in the discussion of the non-cancellation of the 3M visit scheduled for 20 October 1995. 137 On 11 October 1995 Dr Westlake prepared a document styled "ATG Board Issues" following on the Board meeting of 6 October 1995 (AB 2/729). Issues identified during the due diligence process were all dealt with and incorporated into the final version of the Investment Proposal. After an extensive and thorough due diligence, the ATG team of Business Development Directors had been unable to find any evidence to suggest that this system does not work as well as claimed by Hayle. Steve Robinson reported on the accounts and indicated that the finance controller appeared to be competent and capable of preparing accurate and timely management and accounting information as well as being generally competent. An after tax P/E ratio of ten was described as being conservative (AB 2/736), growth potential was discounted below that in the Business Plan to produce a more conservative IRR of 49 per cent than the 82 per cent projected by the Business Plan. That is the basis for the financials presented in the Investment Proposal. The base case presented in the Investment Proposal is considered to be on the conservative side. The ATG Board had assessed that since the technology is sensibly developed and the Business Plan is in place, the dependence on Neville Browne is now relatively low (AB 2/739). Relocation of Browne and his family to the USA is not assessed as being a problem. "The Australian results have proven that the HayleSystem works and that it has given good results from a broad cross-section of Australians. It is essential that it now be used on a large sample of Americans and that this test be directly targeted at the corporate sponsor market" (AB 740). 138 On 18 October 1995 Dr Westlake forwarded a memorandum to Mr Curtis containing notes of his discussions with Mr Thompson of 3M, Dr Cooper and Paul Favrotto (Director of Kalamazoo in Sydney) (AB 2/755). Those notes included the following observations: - once one big corporation sold (Fortune 100 or so) enough conversion will on-sell it; - Dr Cooper's October 1994 first impression is more potential for USA than Browne realised; - thinks Hayle has potential to provide "missing link" for reducing medical costs, and absenteeism; - many experts would be prepared to get behind the product. Nineteenth representation: 19 October 1995, 2FASC par 60 139 On 19 October 1995 a further version of the Investment Proposal was prepared by Dr Westlake (AB 2/763). The proposal was for four tranches $250,000, $500,000, $250,000 (if requested by Hayle) and $1 million. 140 On 19 October 1995 a letter of offer from ATG was sent by fax to Hayle (AB 2/765). The letter stated: "As a result of due diligence ATG has assessed that there are still a large number of unknowns in the Hayle business which equate to business risks." There is then a discussion of the issues seen as major concerns followed by: "ATG does see that there could be strong potential for this business to provide excellent yield and 'blue sky' and wishes to be involved as an investor, but needs to handle the above risks in a controlled and manageable fashion." ATG offered to provide $2 million in four tranches: (i) $250,000 on completion of documentation and all conditions precedent – whereby ATG could obtain 6 per cent equity in Hayle; (ii) $500,000 on agreement to proceed with a pilot project with a Fortune 100 corporation in USA for 1,000-2,000 employees rolled out over six months (most probably 3M); - whereby ATG could obtain an additional 10 per cent equity in Hayle; (iii) $250,000 on request by Hayle and evidence that pilot trials had been operating for at least three months in accordance with the Business Plan and ATG agrees that the pilot should yield a successful result – whereby ATG could obtain an additional 4 per cent equity in Hayle; (iv) $1 million on successful completion of the trials including a significant internal rollout of the HayleSystem, a commitment to the HayleSystem from at least four additional Fortune 500 companies, the management accounts and forecasts showing a negative variance in EBITD and a cash flow of no more than 10 per cent from Business Plan – whereby ATG could obtain an additional 10 per cent equity in Hayle. "ATG does not wish to have an exposure of more than AU$250,000 before it is known that 3M (or equivalent) is prepared to trial the HayleSystem" (AB 2/766). 141 The letter set out in some detail the changes to the conditions of the term sheet of 4 August 1995 which were involved in the terms of the offer. Instead of two $1 million tranches there would be four tranches. Instead of operating expenses of up to $160,000 being paid from the first tranche, it would be delayed until the approval of the second tranche. The salaries of Mr Browne and his wife would not be paid until the second tranche, and then only at 50 per cent of the rate previously discussed until the third tranche. A prior arrangement that Mr Browne buy back 10 per cent of the equity is withdrawn, and ATG has a performance formula whereby they could get to own up to 49 per cent of Hayle if the EBITD performance fell below the Business Plan. There was no reference in the letter of offer to the "run out of cash" requirement. 142 Dr Westlake's perspective was that this offer represented a radical change to the deal, made at the last moment, and that it was inappropriate for ATG to behave in that way. He regarded the Board as having overruled his recommendation (T 731), and was critical of the Board for changing the deal at the last moment (AB 2/796). 143 Paragraph 60 of 2FASC alleges that the written offer made representations that ATG would provide funds of $2 million in four tranches, and the agreement in ATG's Expression of Interest letter dated 3 August 1995 to repay up to $160,000 of operating expenses from the first tranche was to change so that the repayment would not happen until the second tranche was approved and funded. There is no express allegation of falsity in relation to this representation. 144 Mr Browne spoke to Dr Westlake shortly after the offer was received. He indicated his dissatisfaction with the terms of the offer, but Dr Westlake said that he requires an answer "right now" if the planned USA trip is to proceed (Browne Affidavit 29/5/99 par 107). 145 On 20 October 1995 the proposal of 19 October was rejected by Mr Browne (AB 2/795). Twentieth representation: 20 October 1995, 2FASC par 61 146 Paragraph 61 of 2FASC alleges that on or about 20 October 1995 Dr Westlake made the following oral representations to Hayle: (a) the applicants had no need to worry about the tranches; (b) if the applicants did not meet a milestone ATG was not going to pull the plug; (c) ATG had not invested so much time in the deal to have a situation where they cancelled it on a technicality, they were not bureaucrats and the multiple tranches were just to get it past the Board after which it would be back in management's control. Dr Westlake denied the making of these representations, although he accepts in par 39 of his affidavit (but Mr Browne does not) that he said: "If the precise milestones aren't met we may be able to renegotiate the deal. We wouldn't normally just pull the plug." 147 Paragraph 62 of 2FASC alleges that those representations were false, misleading or deceptive in that: (a) the applicants had a need to worry about the tranches; (b) if the applicants did not meet a milestone, ATG was going to pull the plug or there was a risk that it would so do; (c) ATG had a situation where they could and would cancel it on a technicality or there was a risk they would so do, they were in substance bureaucrats, the multiple tranches were not just to get it past the Board, and it would not thereafter be back in management's control or there was a risk it would not be back in management's control and later it did not come back under management's control; (d) insofar as they related to future matters, there were no reasonable grounds for making them. 148 In cross-examination, Dr Westlake said that ATG had been very flexible in the application of tranches against milestones in certain circumstances (T 711). Dr Westlake agreed that he endeavoured to give Mr Browne comfort about the milestone conditions on the basis of ATG's past performance rather than guarantees. He assured him that ATG would not act in a foolish way; where milestones were missed ATG would not normally walk away from the deal, but would be happy to renegotiate (T 737-738). Dr Westlake did not remember precisely what was said in this conversation (T 738). There was no contemplation on his part that the 3M deal would fail (T 707). 149 On 20 October 1995 Mr Browne wrote to Timex and 3M, and sent a copy of the letters to Dr Westlake. The letters included the following: "We were given to understand that if the due diligence went smoothly, which it did, and if the ATG Investment Committee members unanimously recommended the deal, which they did, that Board approval would be virtually automatic." (my emphasis) "The management of ATG presented the Hayle proposal to the Board on October 6. We were told by the Chairman of the Board that they were very positive about the proposal but needed to have a couple of issues clarified before giving formal approval. He promised that these issues would only take a few days to resolve and he would then arrange a special telephonic Board meeting to handle the matter." (my emphasis) "ATG management requested that we keep the upcoming US itinerary in place. They were confident the deal would close before the scheduled departure date and we shared their confidence." "Discussions, however, are still underway. ATG remain very positive but they have suggested some changes to the structure of our relationship which we need time to consider. We have therefore decided to postpone our trip until the matter is clearly resolved. We cannot do justice to our meeting with you until the ATG position is clarified." 150 On 23 October 1995 Mr Browne wrote to Dr Westlake in relation to the "revised offer". He said that since May it had been his honest belief, reasonably held, that they were about to close a deal with ATG. At the time of ATG's Expression of Interest Hayle had "a very clear alternative" open to it which was rejected because of the terms offered by ATG. Under protest the letter accepted all of the changes contained in the offer, except the deferment of the pay of the $630,000 loan, and the repayment of which was intended to provide income for Mr Browne and his wife. The letter contained a section on "The tranching changes" as follows: "All along I've been against the principle of tranching. My concern has always been that it might be seen as a lack of long-term commitment on the part of ATG. I'm not talking about my own fears, but more a concern of how other people might perceive the tranching. Employees, present and future, would not get as much comfort from ATG's involvement if it was obvious that ATG had built-in 'escape-hatches' along the way. Likewise, potential strategic partners might not feel the same level of confidence as they would if the $2 million was a single investment, or at worst two $1 million tranches. One of the main reasons for preferring ATG over some of the other options was because of the strength which comes with ATG's imprimatur. Obviously this imprimatur is weakened to some extent by heavily-conditioned tranching. Despite this general criticism, the tranching does not bother me from a 'deal' point of view. I am a realist and I appreciate that we will not proceed without the multiple tranching you have suggested. I am so certain of Hayle's future that I am willing to accept the new arrangement." 151 The letter of 23 October 1995 asserts (AB 2/781) that when ATG expressed its interest in proceeding by the letter of 3 August 1995: "I had a very clear alternative open to me but I decided against that alternative because of the terms offered by ATG." Mr Browne's evidence in cross-examination was that he felt "trapped" into continuing to deal with ATG from around July onwards (T 429-430). The letter also refers to Mr Browne's understanding of the "politics" which caused last minute changes, and to his appreciation of the "above-and-beyond" effort which has gone on within ATG to keep the deal alive. Twenty-first representation: 27 October 1995, 2FASC par 65 152 On 27 October 1995 a revised letter of offer was sent to Mr Browne (AB 2/787). The first tranche was increased from $250,000 to $300,000, and the second tranche was to be for $450,000 instead of $500,000. The revised offer provided for a remuneration package of $150,000 and $60,000 for Mr Browne and his wife respectively which, subject to accounting and taxation advice, might be achieved by drawing down monthly an existing loan at the same rate. Otherwise the revised offer was substantially in accordance with the earlier offer. There was no reference in the document to the "run out of cash" requirement. 153 Paragraph 65 of 2FASC alleges that on about 27 October 1995 Dr Westlake orally represented to Hayle that the deal was now concluded on the basis that the applicants would never have to put in any more of their own money. That representation is denied. 154 Mr Browne's affidavit (par 114(a)) says that Dr Westlake hand delivered the 27 October offer to him and Dr Westlake said: "This is it. We finally have everything agreed. The Board will automatically approve this deal as is providing you can agree to just one more point. If for some reason the roll out is slower than expected and bridging funds were needed between tranches, I need you to agree that you will provide 50% of those funds and ATG will provide the balance." In Dr Westlake's affidavit he does not deny this part of the conversation, but in the course of cross-examination, asserted that his affidavit was incorrect in this respect (T 757). He denied par 114(a), said that he had no recollection of making the statement, but then said that he could not deny par 114(a) (T 757). 155 Mr Browne goes on in his affidavit to assert that he lost his temper at the making of this suggestion and said that all along he had made it 100 per cent clear that he had reached his "line in the sand" and would not invest any more in Hayle. Over the past two months ATG conned him into lending another $146,000 on the clear and definite promise that he would get it back the day the deal was signed, then ATG broke that promise. Mr Browne then threatened to call the deal off. In Dr Westlake's affidavit (par 41) he denied Mr Browne's account, but in cross-examination he mostly said that he could not deny it, but the tenor of his evidence was that he did not accept Mr Browne's account. 156 According to par 115(a) of Mr Browne's first affidavit, later in the day Dr Westlake phoned and said the following: "I've got good news. I guess I'm a better salesman than I thought. I've convinced them to go with the deal as is. It wasn't easy. You have to understand that ATG is used to dealing with entrepreneurs who have staked everything in their business. The house, the wife, the kids, the lot! You're very unusual. It's hard for the Board to understand that you have all this cash and you won't risk any more of it. It was a real hard sell but fortunately I got them to see your position. I had to make them understand that the only reason you talked to us in the first place was because you had decided to draw your 'line-in-the-sand', that you simply will never put in any more money. Fortunately they saw the light. The deal is a done deal!" The emphasis is mine. The words emphasised are the source of the pleaded representation. 157 Mr Browne maintains (Affidavit 29/5/99 par 116) that had Dr Westlake persisted in his requirement, he would not have proceeded with the deal. 158 Dr Westlake accepts that he knew from the beginnings of his dealing with Mr Browne that he did not want to put any more money into Hayle, and his position in that respect was well known to those in ATG (T 570, 686, 689). Dr Harbour was aware that Mr Browne's stated position was that he was not going to put any more money into the company, but he regarded this as "posturing" (T 909). The "line in the sand" was a negotiating posture. In Dr Westlake's view, Mr Browne was a high net worth individual, and a shrewd negotiator, who would not be prepared to commit up front to put more money in, but who would be prepared, in certain circumstances, to do so (T 925). 159 Mr Browne described his "line in the sand" as follows (T 236): "Isn't it correct to say that what you've called the line in the sand was in effect simply your very strong preference that your financial risk be capped at what you already had in the business? --- I think that's reasonable, yes. And like all very strong preferences it would depend upon circumstances whether it would drive your decisions or whether you would allow some compromise away from it; isn't that right? --- Yes." At T 334 Mr Browne said: "You, of course, understand today the difference between a very emphatic preference against a course of action and an absolute agreed prohibition on it being taken, you understand that don't you? --- Correct. And the highest you can seriously and honestly put it today is that you'd made clear your emphatic preference that you never be asked to fund this enterprise more than you'd already done, isn't that right? --- That's correct." 160 Dr Westlake did not like the "run out of cash condition" introduced into the Investment Proposal on 29 September 1995 because it went against the whole spirit of the dealings he had with Mr Browne. The contemplation within ATG was that a provision to that effect would be included in the Shareholders' Agreement (T 681). Dr Westlake did not think that Mr Browne would enter into a contractual commitment to perform the condition, but without the condition he would have had to tell Mr Browne that ATG would not proceed with the investment (T 689). Dr Westlake accepted (T 693) that Mr Browne would have been horrified by the "run out of cash" condition. 161 As earlier indicated, it was the Management Committee which was concerned as to the possibility of a cash shortage, even though, on the budgeted figures, the tranche payments should be adequate to fund Hayle's cash needs. Dr Westlake's evidence was that the Management Committee gave consideration to Mr Browne putting up $250,000 if a cash shortage occurred (T 704), whilst recognising that if he was not prepared to do so, ATG might have to provide additional funds. The proposition that ATG might provide an additional $250,000 if a cash shortfall emerged is undocumented (T 710). There is no evidence that the Board of ATG approved such a proposal (T 704, 876). It was not communicated to Mr Browne until much later in the piece. This was referred to by Dr Harbour in his evidence as the "emergency tranche". 162 Whether, when and how the "run out of cash" requirement was communicated to Mr Browne, and with what response, is the subject of controversy. Dr Westlake says that on some occasion between 6 October 1995 and 27 October 1995 he discussed the matter with Mr Browne, whose response was that he would not be contractually obliged to put any further money in, but if there were problems, he would not be silly about it (T 686). Mr Browne denies that any such conversation occurred (T 956). He says that the topic of his willingness to put more money into the venture was discussed on 27 October. Dr Westlake says (T 691) that he did not tell Mr Browne that he would be required to put $250,000 into the company, but he did explain what the implications of the adverse trading conditions would be. He claims (T 702-703) to have spent a lot of time with Mr Browne explaining the adverse trading situation, although these conversations are not to be found in his affidavit. 163 In Dr Westlake's affidavit (par 40) he said that at or before 27 October 1995 he had a conversation with Mr Browne: "Westlake: 'If we do not proceed with the 3M deal ATG will want to renegotiate generally. We think you'll not only require the $250,000 in the third tranche, but that the third tranche won't be enough to fund the operations up to the fourth tranche. What will we do, for example, if we run out of money before the fourth tranche?' Browne: 'While I don't wish to put any more money into the business, I won't be stupid about it.'" It is not clear whether this is the conversation in which Dr Westlake claims that he discussed the "run out of cash" requirement with Mr Browne. It was submitted by the applicants' counsel that it was inherently unlikely that this conversation took place. However, in Mr Browne's second affidavit of 21 October 1999, he deals with par 40 of Dr Westlake's affidavit, but does not join issue with Dr Westlake's account of this conversation. My attention has not been drawn to any cross-examination on this paragraph and I am not conscious of any. In those circumstances I cannot accede to a submission that it is inherently improbable that this conversation occurred. 164 Dr Westlake says he told Dr Harbour (T 721) that Mr Browne would not be contractually obligated to put in an extra $250,000, but, it was Dr Westlake's belief that, faced with an adverse trading situation, Mr Browne would not be stupid about it. Dr Westlake says that he did not tell Dr Harbour that Mr Browne would match any funds ATG had to invest out of the standby tranche (T 773). 165 Ultimately it was Dr Westlake's position that between 6 and 27 October 1995 he conveyed the "run out of cash" requirement to Mr Browne, Mr Browne rejected it, that rejection was reported to Dr Harbour, and the "run out of cash" requirement was effectively abandoned from a contractual point of view. At T 687 the following appears: "And you took the view that if there were to be any tightness in the cash position, that you, ATG, would be able to remind Mr Browne of the adverse trading event provisions and that once he had been reminded of them, he would cough up the money? --- I think yes, I'll answer yes to that question." That view was not conveyed to Mr Browne (T 691). 166 Dr Westlake disagreed with Mr Browne's account of the events of 27 October 1995. His position was that he had no recollection of Mr Browne ever losing his temper, and could see no reason why conversations of the type contended for by Mr Browne should occur on 27 October 1995, because Dr Westlake was then authorised by Dr Harbour to convey an offer in terms of the letter of 27 October 1995, which did not contain a "run out of cash" requirement. Dr Harbour's evidence was that if the "run out of cash" requirement was a "live" requirement of ATG on 19 or 27 October 1995, then reference would have been made to it in the offer or revised offer (T 918). At the Board meeting of 6 October 1995 the "run out of cash" requirement was part of the proposal considered by the Board, but Dr Harbour was "not sure" whether or how it got removed from the proposal prior to 19 October (T 921). 167 Dr Harbour agrees that at some time between 6 and 27 October 1995, Dr Westlake told him that he had spoken to Mr Browne, and that Mr Browne had said that he would not contractually commit to the $250,000 facility (T 894). He agrees that Dr Westlake never told him that Mr Browne had agreed to put up to $250,000 into the project (T 892). He was told by Dr Westlake that although he could not get Mr Browne to commit to the provision of these funds, it was Dr Westlake's belief that Mr Browne might invest further funds under appropriate circumstances (T 888-889). The position was that Mr Browne had the option to provide funding, but there was no requirement that he should do so, or agreement that he would do so (T 888). 168 Mr Browne gave evidence in reply. In the course of so doing he claimed: - that the topic of Hayle providing further funds had not come up since before June 1995 (T 960). He was certain that the issue was not raised with him in the period 6-26 October 1995. It was discussed on 27 October but not otherwise (T 956-957). - In the 27 October conversation, Dr Westlake was seeking Mr Browne's word (T 959) that he would provide funds if there was a cash shortage following the funding deal up to a maximum of $250,000 (T 960). - His agreement to, or word on, this matter was not to be recorded in the formal agreement. There was a strong inference that it was to be a gentleman's understanding (T 967). - The explanation for the failure to refer to the $250,000, in his affidavits is that he did not think it was relevant (T 962) or critical (T 963). - What was said was : "Dr Westlake said that there was just one more thing to put this whole thing to bed all this eight months of effort, and that was the Board needed me to agree that in the event that we run short of money that I would contribute on a 50/50 basis up to a maximum of $250,000 from my side to such an event, and I just said absolutely not." (T 964-965) 169 Dr Westlake and Dr Harbour both deny that there was any agreement on the part of Mr Browne in October 1995 to provide up to $250,000 by way of further funds. Dr Jessup lends some support to that position (T 817). Although the Chairman of Directors, Mr Bourke, was called as a witness, he was not asked any questions in relation to the "run out of cash requirement", or as to the basis on which the Board approved the deal. Yet internal documents prepared by Dr Harbour in February 1996 and sent to the Board refer to such an agreement, and rely upon Mr Browne's failure to perform it as a justification for termination of the relationship (AB 4/1208-1210). Further, there is shifting and conflicting evidence as to whether Dr Harbour asserted the existence of such an agreement in a conversation which he had with Mr Browne on 3 January 1996. These matters are referred to in more detail later in these reasons. 170 I will defer resolution of the conflicting evidence on this and other topics where there is a significant factual dispute until completion of the chronology. 171 Mr Browne responded to the revised offer by letter dated 27 October 1995 (AB 2/792). That letter stated: "We wish to advise that we are willing to proceed on the basis outlined in the above letter. We are looking forward to an exciting, enjoyable and profitable relationship." There is no reference in this letter to the events described in pars 154-155 above. 172 Dr Westlake's monthly report for the month of October 1995 reported in favour of the payment of salaries to Mr Browne and his wife. Otherwise it was Dr Westlake's belief that Mr Browne: "will pursue a 'slow down' approach to the business and carry the expenses until he can introduce a US-based venture capital company into the deal. Once 3M are signed up in the USA, the business should look inviting to such an investor". The report also included the following: "It is interesting to note that Neville was warned against dealing with Hambro-Grantham on the basis that: 'you can't trust them as they always change the deal at the last moment'. Yet this is what we have done in almost every one of our investments to date and have exceeded our norm in this case, I believe that this perception of Hambro-Grantham, if reflected onto ATG, will have serious impact on ATG should another venture capital organisation appear on the horizon." 173 A minute of the ATG Board of 2 November 1995 records that the majority of the Board confirmed the approval of the investment in Hayle on terms of the proposal of 3 October 1995, as varied by the addendum of 27 October 1995 (AB 2/802). Twenty-second representation: 13 November 1995, 2FASC 69, 69A 174 On 13 November 1995 a Shareholders' Agreement was entered into between the parties. It provided for the following tranches: Tranche Amount ATG equity 1 $ 300,000 7 per cent 2 $ 450,000 16 per cent 3 $ 250,000 20 per cent 4 $1,000,000 30 per cent The agreements specified the tranche conditions, and required the company to utilise equity capital subscribed by ATG strictly in accordance with the Business Plan. 175 The agreement provided that ATG would inject up to $2 million of equity as follows: - $300,000 within seven days of specified matters of a formal nature being concluded; - $450,000 on condition that Hayle Holdings had entered into an agreement with a Fortune 100 corporation in the USA to establish a pilot project for between 1,000 and 2,000 employees, with the project to have a six month implementation phase; - $250,000 on condition (inter alia) that Hayle provide ATG with satisfactory evidence that the pilot project in the USA had been operating for at least three months in accordance with the Business Plan and ATG was satisfied that the pilot project was likely to yield a successful result; - $1 million on conditions that the pilot project had been successfully completed, the corporation which undertook the pilot project had agreed to a significant internal rollout of the HayleSystem, Hayle had secured commitments from at least four additional Fortune 500 companies to establish pilot programs for the HayleSystem, and the management accounts did not show a negative variance in EBITD and the cash flow of more than 10 per cent from the Business Plan. 176 The agreement provides (Cl 8.3) that ATG could remove the Managing Director if it forms the view, on reasonable grounds, that the company is not performing in accordance with the Business Plan. Hayle's voting rights at directors' and shareholders' meetings are suspended until ATG is satisfied that the company is performing in accordance with the Business Plan (Cl 8.4). 177 The agreement also provided for an "Adverse Trading Event": if the management accounts for any month project a negative Free Cash Flow from operations within the next three month period which cannot be met from the company's existing sources of committed finance. ATG is entitled to assume board control if an adverse trading event occurs, and the Board fails within 30 days to formulate a plan reasonably acceptable to ATG to redress the situation. 178 The agreement contained two sets of financial projections styled "Hayle's projections" and "ATG's projections". "Hayle's projections" were those contained in the Business Plan which showed an IRR of 82 per cent which, according to Dr Westlake, was very high and very difficult for any business to achieve (T 544). "ATG's projections" provided a rate of return (49%) that was, in Dr Westlake's view, still very high, but more appropriate to the way that in his belief the business might ultimately run. In Dr Westlake's view, if he invested $2 million in a business that achieved an IRR of 82 per cent: "I would be an international hero in the financial services business. Almost nobody has ever achieved such a result" (T 716). 179 The agreement provided for the issue of ordinary shares and convertible shares to ATG on payment of each tranche. The ordinary shares would build up to 30 per cent of ATG's capital. Convertible shares were convertible at the "relevant time" (AB 3/824). If, at that time (expected to be 30 June 2000) Hayle's projections were achieved, then there is to be no conversion of the preference shares. If the performance achieved was at or below ATG's projections, then the shares were to be converted so as to give ATG 49 per cent equity. If the performance achieved was between those two benchmarks then there was to be proportional conversion. 180 Paragraphs 69 and 69A of 2FASC allege as follows: "69. ATG was prepared to enter, and concealed or failed to disclose to the applicants that ATG had only entered into the Shareholders' Agreement dated 13 November 1995, on the basis that any tightness in the cash budget would be managed by requiring Browne to provide a temporary facility of $250,000 to handle any short-term cash deficiencies caused by milestone delays. 69A. ATG was prepared to enter, and concealed or failed to disclose to the applicants that ATG entered into the Shareholders' Agreement dated 13 November 1995, knowing that: (a) there was no possibility that the applicant would enter into an agreement with a Fortune 100 corporation in less than several months; (b) the second tranche condition would not be met by 31 December 1995 or thereabouts to allow the applicant to keep operating; (c) ATG would not advance the second tranche without the second tranche condition being met; (d) the business of the applicant would fail on about 31 December 1995; (e) ATG would require the applicants to inject up to $250,000, failing which ATG would not provide additional funding; (f) ATG would have available a standby tranche of up to $250,000; (g) ATG would rely on the matters in (a)-(f) above to pressure Browne to inject further funds into Hayle Holdings, failing which ATG would rely on the matter pleaded in sub-par (d) above as an Adverse Trading Event within the meaning of the Shareholders' Agreement, which would enable ATG to take control of Hayle Holdings and remove Browne from the Board and, in order to put pressure on Browne to renegotiate the Shareholders' Agreement on terms more favourable to ATG. These claims are associated with the "run out of cash" requirement, referred to in relation to the twenty-first representation. 181 On 15 November 1995 Hayle issued a press release announcing the entry into the agreement. The release included the following: "If it were not for ATG, Hayle would have been forced off-shore." 182 On 24 November 1995 Mr Browne and Dr Westlake departed for the USA. On 29 November 1995 those gentlemen, Dr Cooper and a Mr Jacobs (President-elect for the Hayle operations in the USA) met with Mr Thompson at the 3M office in St Paul. 3M had just announced a radical corporate restructure involving the relocation, reassignment and retrenchment of over 10,000 of its staff (Browne Affidavit 29/5/99 par 120). This news came as a complete surprise to Mr Browne and his party, as nothing like it had occurred in 3M's 107 year history. It was the first time 3M had ever retrenched anyone. Mr Thompson said that it made it impossible to negotiate, at that time, a trial of the HayleSystem, but he suggested that an approach should be made to 3M in Austin, Texas who were insulated from the "blood-bath" and who were very fitness conscious (Browne Affidavit 29/5/99 par 121). Mr Browne accepts (T 186) that the inability of 3M to do a deal of the kind called for by the milestones was a completely unexpected and utterly new element in the joint business plans of Mr Browne and ATG as Mr Browne understood them to be on 13 November 1995. 183 On 30 November 1995 Mr Browne, Dr Westlake and others visited Mr McLennan, Staff Vice-President of Corporate Services of 3M at the 3M offices in Austin, Texas (Browne Affidavit 29/5/99 par 122). During the course of that meeting Mr McLennan said: "I have a lot of respect for Joe [Thompson of 3M, St Paul]. By sending you here it's obvious he wants to see a trial happen. I'm also impressed with what you've demonstrated here today. I'll OK the budget to run a trial but you won't get 1,000 participants. We only have 1,600 employees and a lot of them don't speak English too well. You can offer the trial to all staff but you'll be lucky to get any more than 300 to volunteer ... 500 at the most." Twenty-third representation: 30 November 1995, 2FASC par 73 184 Paragraph 73 of 2FASC alleges that on or about 30 November 1995 or thereafter Dr Westlake: (a) represented and agreed that it was ATG's fault that the 3M Corporation agreement required by the Shareholders' Agreement as the second tranche condition could not be met because ATG had delayed conclusion of its contract with the applicants as herein before pleaded; (b) waived the second tranche payment condition and represented and agreed that it would not insist on it on the basis that ATG would make the second tranche payment when Hayle Holdings had entered into an agreement with 3M Corporation or another Fortune 100 Corporation in the US to establish a pilot project for between 300 and 500 employees; (c) represented and agreed that Dr Westlake would fix the matter referred to in (b); (d) represented that ATG had flexibility in regard to the matter referred to in (b). These representations are said to have been made at Austin, Texas in a taxi on the way back to the airport. 185 Mr Browne's version of this conversation is as follows (Affidavit 29/5/99 par 123): "(a) Westlake: 'That was a close call. We could have had a real problem with the second tranche without the Austin deal.' (b) Browne: 'But you told me that the tranche conditions wouldn't be a problem because you had flexibility and anyway the Austin pilot will only be for 300-500 subjects and the milestone says 1,000.' (c) Westlake: 'You really do think we're a bunch of bureaucrats don't you. Obviously the failure of the St Paul deal had nothing to do with Hayle. In fact it was ATG's fault for stuffing you around. Don't worry, in the circumstances, the smaller Austin trial will satisfy the tranche condition. I'll fix it when I get back. We do have flexibility.'" 186 In his affidavit (par 42), Dr Westlake denies this account. He says that words to the following effect were said: "It's great to have the Austin deal. However, the milestone has not been reached. The Austin deal may be sufficient but ATG will want to renegotiate. 300 participants is better than nothing. Browne said: 'I don't like this tranching type arrangement.' Westlake: 'Well that's something you have to live with. Thank goodness we got the Austin deal.'" In cross-examination Dr Westlake accepted that he may have said to Mr Browne that the Austin deal may be sufficient to make ATG comfortable and he would try to fix it when he got back (T 764; 765). In cross-examination (T 764) Dr Westlake accepts that he may have said that these were delays caused by ATG. Twenty-fourth representation: 6 December 1995, 2FASC par 76 187 On 5 December 1995 Mr Browne wrote to Mr Dalfen, and to others in the United States (AB 3/969-972). The letters included the following: "Within the next three months our first U.S. operations centre, located in Los Angeles, will be up and running and our initial corporate trials will have commenced." 188 On 6 December 1995 Dr Westlake prepared a document styled "Overseas trip report", a copy of which he gave to Mr Browne (AB 3/979). That report listed the highlights of the USA visit including obtaining verbal agreement for a focused pilot as part of 3M's existing "wellness" program at their Austin, Texas facility, the pilot to start on 1 February 1996. It was agreed in principle to do a 500 person pilot (in fact, there was to be a start with 100 in March, building to 500 in July). The exact details are to be worked out over the next few weeks and Joe Thompson (3M St Paul) agreed to help to find the cash for it. The report concluded: "I believe that the trip exceeded my expectations and should lead to written orders, before Christmas 1995, for a 1,000 plus person pilot with 3M and Health Partners. The trip also served as a further due diligence on the capabilities of Neville Browne. I believe that Neville will live up to ATG's expectations." 189 There is no reference in the trip report to any need to renegotiate the tranche conditions. 190 Paragraph 76 of 2FASC alleges that on or about 6 December 1995 Dr Westlake orally represented to Hayle that: (a) there would be no problem in getting the second tranche funded; (b) the applicant should stop worrying and Dr Westlake had it under control. 191 This representation is grounded in a telephone conversation which Mr Browne alleges that he had with Dr Westlake upon receipt of his trip report, as follows (Browne Affidavit 29/5/99 par 131): "(a) Browne: 'I've just read your trip report. It sounds a bit optimistic.' (b) Westlake: 'I need to dress it up so that there will not be any problems getting the second tranche through. I've spoken to the Management Committee and explained what happened at 3M. They understand the situation and will have no problem getting the second tranche funded.' (c) Browne: 'We should start that process immediately. If I'm going to get Rob Jacobs on board and hire a General Manager for Sydney to get the Australian sales moving, and sign a lease with National Mutual, then I'll need to know for sure that the second tranche is in place.' (d) Westlake: 'Stop worrying. I've told you I have it under control. You just focus on closing the Austin deal. Tell Rob to keep onto Health Partners ... it would be nice to have them in the pilot too. We also need to start interviewing for the General Manager.'" 192 Dr Westlake in his affidavit denies the substance of this conversation. He says that at or about this time he said to Mr Browne Texas (Affidavit 13/8/99 par 46): "I've got to go back to the Board. I think we have a good case but the Board may wish to renegotiate. We need to push the pilot up above 300. Tell Rob to keep onto Health Partners." Twenty-fifth representation: 20 December 1995, 2FASC par 79 193 Paragraph 79 of 2FASC alleges that on or about 20 December 1995 Dr Westlake orally represented to Hayle, at a time when it knew Hayle Holdings' cash was rapidly running out, that they should not worry about the release of the second tranche payment and it was all under control. Mr Browne asserts the following conversation (Affidavit 29/5/99 par 132): "Browne: 'Our cash is rapidly running out. You need to release the second tranche immediately. We're right on target with our budget and you know exactly where things stand.' Westlake: 'Don't worry it's all under control.'" 194 Dr Westlake denies that he said (Affidavit 13/8/99 par 47): "Don't worry it's all under control." He claims to have said: "We have to go through the process. We have a strong case. We should be able to organise something to sort this out." 195 On 21 December 1995 Hayle forwarded details of the proposed pilot program, and its pricing to 3M (AB 3/986). Twenty-sixth representation: 22 December 1995, 2FASC par 82 196 Paragraph 82 2FASC alleges that on or about 22 December 1995 Dr Westlake orally represented to Hayle that: (a) there was no need to tell the prospective general manager for Hayle Holdings about the milestone concept before employing her because ATG was 100 per cent behind Hayle Holdings; (b) the applicants had to stop worrying about the funding. Dr Westlake had it under control and would have it sorted out by 28 December; (c) Dr Westlake had kept the Management Committee fully informed; (d) the applicants would have no trouble working with Bob Harbour, a member of that Committee, during Dr Westlake's absence on vacation from 30 December 1995. 197 Dr Westlake accepts that he said during the course of this conversation that ATG is supportive of Hayle, rather than "100 per cent behind" Hayle. He denies the representations (b), (c) and (d) (Affidavit 13/8/99 par 48). Twenty-seventh representation: 28 December 1995, 2FASC par 85 198 A Board meeting of Hayle was held on or about 28 December 1995. By this time Dr Westlake had been appointed to the Board of Hayle. If ATG invested venture capital in a company, it was usual for the Business Development Director in charge of the proposal to be appointed to the Board of the company. 199 Paragraph 85 2FASC alleges that on or about 28 December 1995 Dr Westlake orally represented to Hayle: (a) they had produced a cash flow projection through to June 1996 showing the second tranche payment and thereby impliedly represented that the second tranche payment would be made notwithstanding failure of the second tranche milestone with 3M Corporation; (b) the sum of $146,000 to be reimbursed from the second tranche payment had been excluded from the cash flow statement and would not be paid until some time after June 1996 when the business could afford it; (c) when the ATG Board approved the deal they had set aside an emergency fund or standby tranche of $250,000 in case there were any hiccups in the early days; (d) Hayle could relax about funding and meeting tranche conditions. 200 A report to the Board from Mr Browne dated 28 December 1995 includes the following (AB 3/997): "We need to get the second tranche approved despite the lack of closing the 3M deal. We need the commitment from ATG so that we can proceed with the following IN THE GOOD FAITH that we will be able to honour the commitments made." 201 Dr Westlake did produce a cash flow projection through to June 1996 showing the second tranche payment. He did say that Mr Browne had to help by delaying the $146,000 reimbursement until the cash flow can afford to pay it. As to (c) Dr Westlake contends that he said: "ATG understands that cash flow will be tight. As the first milestone hasn't been met, ATG will be prepared to renegotiate the deal. As long as you are flexible you shouldn't have to worry about ATG pulling out of the deal. In fact ATG has mentally set aside an extra $250,000 above the $1 million in the event that there are cash flow difficulties. You will need to negotiate with Bob Harbour in my absence." (Affidavit 13/8/99 par 52) Paragraph (d) is denied although Dr Westlake accepts that he said: "But relax and be flexible and we should be able to sort this out." 202 At the time of this Board meeting it was Dr Westlake's intention that ATG should begin to negotiate with Mr Browne on a basis which required him to put some money into the company, but he did not disclose that to Mr Browne. 203 The minutes of the Hayle directors meeting of 28 December 1995 (AB 3/1024-1026) record: - that sales in Australia have not been achieved in accordance with budget; - revenue slippage has occurred, likely to give rise to significant cash flow problems in January-July 1996; - "As a matter of urgency NB will produce a revised cash flow projection for the period through June 1997 and review with Bob Harbour in early January in order to ensure that the next ATG tranche is committed immediately in order to avoid the threat of insolvency." 204 On 29 December 1995 Dr Westlake forwarded a memorandum to Dr Harbour (AB 3/1019). He sent a copy of the first three pages of that memorandum, which were apparently self-contained, to Mr Browne. The fourth page (AB 3/1022) was not copied to Mr Browne. In the first section of the memorandum there was discussion of delays which had occurred and their causes, the net result of which is a projected cash shortfall in January, and another in June. The shortfall assumed that the "standby tranche" of $250,000 was used. Dr Westlake said that the "standby" tranche was tranche 3, which was only to be drawn down at the request of Hayle. However, the reference in this document cannot be to tranche 3, because the conditions precedent to the draw down of tranche 2 had not then been met. The reference must be to the emergency tranche. The total shortfall at the end of June was said to be about $250,000: "You will recall that the Investment Proposal indicated that there was a risk that there could be start-up delays and that we predicted that such delays could yield a cash deficiency of around this amount." Critical issues were then identified including: - under the current cash flow prognosis Hayle will be insolvent in January, unless ATG or Mr Browne is in a position to cover the cash shortfall; - the 3M pilot will only be for 500 people as a result of their major reorganisation. The conclusion included: - ATG have always recognised the high risk of delays to the start-up phase of the business; - significant delays have occurred through no fault of Hayle, nor of any technical or commercial difficulties with the product. These delays have also been completely outside the control of Hayle; - there is no doubt that Hayle is poised to perform in accordance with its Business Plan, but with approximately three months delay through circumstances outside the control of Hayle. There would be no value in closing the business at this critical stage as little has changed by way of any of the factors in the Investment Proposal. Dr Harbour (T 924) said that he did not agree with the first of the above propositions. He says that the 3M arrangement was presented to the ATG Board as virtually a done deal (T 923). 205 The fourth page of the memorandum was critical of Mr Browne and his performance. It suggested that Mr Browne needs the use of his own money to get through until the 1,000 person pilots are signed. An appropriate compromise might be for ATG and Mr Browne to make equal loans to get through January and permit the pilots to be signed up. However, "Neville is acting like he is penniless when it comes to additional funding". Dr Westlake suggests that Dr Harbour might be better placed to pursue the issue of funding with Mr Browne than Dr Westlake. 206 On 2 January 1996 Mr Browne forwarded a typed copy of Dr Westlake's handwritten minutes of the Hayle Board meeting held on 28 December 1995 to ATG (AB 3/1023). Those minutes referred to the various slippages which had occurred and to the need to produce a revised cash flow projection. Paragraph 9(d) of the typed minutes provided as follows: "(d) The expectation is that the cash should be able to be managed with the anticipated ATG tranches and with some possible short-term help from Panco. On behalf of Panco, NB stated that the most which Panco could take into consideration would be to delay the repayment of $146,000 bridging loan which is due for payment out of the second ATG tranche." The non-italicised portion was added to Dr Westlake's handwritten note by Mr Browne in order to make it plain that Panco had not agreed to provide additional new funds. The handwritten set of minutes had been sent by Dr Westlake to Dr Harbour on 29 December 1995 (AB 3/1019). Twenty-eighth representation: 3 January 1996, 2FASC par 88 207 On 3 January 1996 Mr Browne wrote to Dr Harbour in relation to a meeting scheduled to be held that afternoon (AB 3/1029). The letter gave Mr Browne's overview of the current position. The letter explained that the second tranche would need to be approved within a few days otherwise commitments already entered into would need to be cancelled. 208 That afternoon, a meeting took place between Mr Browne and Dr Harbour at the ATG conference room. Paragraph 88 of 2FASC alleges that at that meeting Dr Harbour represented to Hayle that: (a) there was no way ATG could release the second tranche payment until the second tranche milestone agreement recorded in the Share Sale Agreement was satisfied; (b) the only reason the ATG Board had approved the deal with the applicants was on the basis that the applicants would match any funds ATG had to invest out of a standby tranche up to $250,000; 209 Dr Harbour accepts that he told Mr Browne at this meeting that the second tranche would not be released until Hayle has a deal for a 1,000 person pilot (Affidavit 31/8/99 pars 3.4, 3.6). Hayle has to meet the milestones otherwise ATG is under no obligation to make the second tranche payment. 210 Mr Browne contends Dr Harbour said (Affidavit 29/5/99 par 146(m)): "But back in October, before we signed the deal, you agreed that you would match any funds ATG had to invest out of the 'standby tranche'. That was the only reason the Board finally agreed to the deal." In his affidavit (31/8/99 par 3.9), Dr Harbour denied the last sentence in par 146(m). By implication he accepts the first sentence. He says in his affidavit (par 3.2) that the following conversation took place: "Browne: 'I thought Barry was keeping you informed.' Harbour: 'The company has failed to meet its milestone. The financials of the company show the company is in a worse position than what we thought. Extra funds will need to be put into the company to hold the company over until a thousand people are on trial. We won't be putting in any extra money unless you are also putting in extra money. We need to work something out.'" Dr Harbour accepts that he indicated that $125,000 would be required from each of ATG and Mr Browne (par 3.8). Dr Harbour also accepts that when he suggested to Mr Browne that he should put more money in, Mr Browne appeared surprised (T 899) and there was a misunderstanding as to whether or not Mr Browne had a willingness to put more money into the company (T 899). Dr Harbour says that he then understood that Mr Browne was willing to consider putting more money into the company (T 900). 211 During the course of this conversation Mr Browne claims to have said to Dr Harbour (Affidavit 29/5/99, par 146(n)): "Barry came to me a few days before the deal closed and told me that the only way the Board would approve the deal was if I agreed to invest dollar-for-dollar with ATG in the event that the roll-out went slower than planned and additional funds were needed. I flatly refused and told him the deal was off. I'd had enough. I virtually threw him out of my office. He came back to me the very same day and told me that he had convinced the Board to go ahead with the deal despite my refusal to invest or promise to invest any more funds. Now you're telling me the opposite ..." In his affidavit, Dr Harbour originally denied "the last paragraph of 146(n)" (Affidavit 31/8/99 par 3.10). That did not make sense, as par (n) had only one paragraph. When sworn to give evidence, he changed "paragraph" to "sentence". By implication, he accepts the balance of par 146(n). But in cross-examination Dr Harbour disputed both the par (m) and (n) conversations. His ultimate position was that neither conversation occurred at the 3 January meeting, but a conversation to the effect of that set forth in par 146(n) occurred at a meeting at the Ritz Carlton Hotel on 19 January 1996 (T 898). 212 On 8 January 1996 a further meeting took place between Mr Browne and Dr Harbour. It is common ground that on this occasion Dr Harbour said that he had been in communication with Dr Westlake, and that it would seem there was some misunderstanding regarding the arrangement for Hayle to provide additional funding in the event that milestones were not met. Dr Harbour wanted to put that issue aside for the moment, and concentrate on what needed to be done in order to keep Hayle solvent. Either Hayle and ATG together inject more funds, or Mr Browne has to find a way to get 1,000 people into the pilot trial. Mr Browne responds that an agreement for a 1,000 person trial cannot be achieved within the 48 hours, which is the period within which Hayle will have to be shut down (Browne Affidavit 29/5/99 par 147; Harbour Affidavit 31/8/99 par 5). Twenty-ninth representation: 10 January 1996, 2FASC par 90 213 Paragraph 90 of 2FASC alleges that on or about 10 January 1996 ATG applied pressure or made threats to Hayle by stating that Hayle should co-operate with ATG by investing the applicants' funds alongside ATG's standby tranche in order to avoid ATG taking draconian measures to make things very uncomfortable for Mr Browne and the other applicants by firing Mr Browne from the management and removing him from the Board of Hayle and eventually watering down Panco's equity in Hayle Holdings so that Panco would lose the lot. 214 It is common ground that a meeting took place 10 January 1996 between Dr Harbour and Mr Browne at which Mr Brian Thomas, of Abbott Tout, was present (Browne Affidavit 29/5/99 par 152; Harbour Affidavit 31/8/99 par 8). The detail of the discussion is in dispute, but it is clear that it included a discussion of the Shareholders' Agreement, and of the consequences of Hayle missing the milestones, or becoming insolvent. 215 On 11 January 1996 Dr Harbour sent a memorandum to Dr Westlake. It stated: "The lawyers reality check on the S/H agreement Wednesday really shook Neville up. He thought he had many more 'degrees of freedom.'" (AB 3/1058) 216 On 14 January 1996 Mr Browne wrote to Dr Harbour (AB 3/1079). His message was that ATG needs to alter the milestone so that the second tranche can be confirmed immediately. Until the meeting with Abbott Tout, he said that he had every reason to believe that this was going to happen. Thirtieth representation: 17 January 1996, 2FASC par 91 217 Par 91 of 2FASC alleges that on 17 January 1996 Steve Robinson, in the presence of Dr Harbour, applied pressure on, or made threats to, the applicants by stating to the effect that ATG had a new plan which involved closing Hayle Holdings' Sydney office immediately, removing Mr Browne from the Board and management of Hayle Holdings, hiring someone else to start a US office of Hayle Holdings and run the pilot project, and altering the equity in Hayle Holdings to suit ATG. 218 This allegation is founded on the following statement by Mr Robinson: "We've developed a new plan. It involves closing Sydney immediately, removing you from the Board and the management, hiring Rob to start the US office and run the pilot and altering the equity appropriately." (Browne Affidavit 29/5/99 par 161) 219 On 17 January discussion occurred in relation to a revised funding proposal under which ATG would invest the balance of the $2 million in five more tranches taking its equity to 57.7 per cent. 220 On 18 January 1996 Dr Harbour forwarded notes of a discussion with Mr Browne and his accountant on 17 January 1996 (AB 1/1093). Notes relating to making available a further $1,700,000 in five tranches resulting in ATG having an equity interest of 57.7 per cent. 221 On 18 January 1996 Mr Browne wrote to ATG commenting on its plan to close down the Australian business, yet still launch in USA (AB 1/1098). The proposal was declined, and the reasons for declining given. 222 On Friday one9 January 1996 there was a meeting between Mr Browne and Dr Harbour at the Ritz Carlton Hotel. At that meeting Mr Browne attributes to Dr Harbour (Affidavit 29/5/99 par 166) the following statement: "Harbour: Between you and me I realise that all of this mess is ATG's fault. I should say Barry's fault. The problems we're having with Barry are not restricted to Hayle. He's leaving a mess everywhere he goes. He's way too individual and entrepreneurial for a quasi government operation like ATG. Too much of a cowboy ..." Dr Harbour denies making this statement (Harbour Affidavit 31/8/99 par 12.1). Whether he did or not is relevant only for such light as it throws upon the creditworthiness of these two witnesses. Dr Harbour accepts that at this meeting Mr Browne made statements that were strongly critical of Dr Westlake (T 933, 935). Mr Browne said that Dr Westlake had lied to both ATG and Hayle. 223 On 20 January 1996 a further letter was written by Mr Browne to ATG in relation to the possible development of a new Business Plan, and the possible alteration to the Shareholders' Agreement (AB 3/1112). The letter stated that Dr Westlake would need to resign as a Director of Hayle, and for Dr Jessup to assume that role. Hayle will not be asked to invest any more into the business. Thirty-first representation: 23 January 1996, 2FASC par 92 224 Paragraph 92 of 2FASC alleges as follows: "By letter dated 23 January 1996 addressed to Browne at Hayle Holdings, ATG applied pressure on or made threats to the applicants by stating to the effect that on 28 December 1995 Browne had presented a financial report to the Board which anticipated a negative cash flow from operations within the next three months which could not be met from Hayle Holdings' existing source of finance, that this was an Adverse Trading Event (within the meaning of the Shareholders' Sale Agreement) and that if the situation was not redressed by 27 January 1996 ATG intended to nominate and appoint so many additional directors as would give ATG control of the Board, and in the meantime restrictions were imposed on the scope of Browne's authority as Managing Director of Hayle Holdings." 225 A letter was written by Dr Harbour on 23 January 1996 to Hayle to the effect that as a result of the failure to agree a mutually acceptable strategy to fund the company's future operations, ATG had decided to cease to continue to fund the business operations under present conditions (AB 3/1139). The letter also made the statements alleged in par 92 of 2FASC. On 12 January 1996 ATG had agreed to fund the expenses of the company for a limited period. 226 On 24 January 1996 Mr Browne wrote to Dr Harbour (AB 3/1144). The letter stated: - Hayle was given an incorrect impression of ATG's milestone-attitude; - if Hayle had been told the truth in early December a different course would have been taken; - both Hayle and ATG had been misled by Dr Westlake. If the ATG Board had known the truth, namely that Hayle was not prepared to invest further funds, the deal would not have been done. If Hayle had known that the ATG Board approved the deal on the understanding that Hayle would bridge finance any shortfall caused by ramp up speed, Hayle would never have closed the deal; - owing to Dr Westlake's misrepresentation the deal was doomed from day one. There was no response to this letter by ATG. Dr Harbour (T 935) says that at this time, his focus was on trying to find some common ground. The letter struck him as a continuation of the negotiation back and forth with different stories from different sides (T 940). 227 On 24 January 1996 Dr Harbour sent a memorandum to the members of the Board of ATG detailing the various alternatives that had been explored with Mr Browne and which were unacceptable either to him or to ATG. Relevantly, the letter included the following: "Cash flow forecasts showed that Hayle needed an additional injection of funds to cover costs while another trial equivalent to the one at 3M was signed up. Neville Browne, 93% owner of Hayle, refused to put in the necessary funds, even though he had previously indicated to Barry Westlake his willingness to put $250K additional cash within the first 12 months, if required." In cross-examination (T 903) Dr Harbour said that it was not his perception in January or February 1996 that Mr Browne had previously given a commitment, contractual or otherwise, to put money into the project. He did not see any inconsistency between his memo to the Board, and his evidence in that respect. The inconsistency is plain. His evidence was that he was not seeking to convey by the memorandum that Mr Browne had gone back on his word (T 904). Clearly, he was, and, in his final submissions, counsel for the respondent did not contend otherwise. 228 On 29 January 1996 a Share Sale Agreement was entered into by which ATG agreed to sell its shares in Hayle to Mr Browne for the sum of $300,000 payable on 31 December 1998 (AB 3/1170). The Shareholders' Agreement entered into on 13 November 1995 was terminated. 229 Various public or confidential announcements were prepared in relation to the termination of the relationship. There is no need to detail the terms of those announcements as the circumstances in which they were prepared are such that they are not necessarily a reliable contemporaneous record of the events in question. They are the product of compromise. But a draft confidential announcement of 30 January 1996 (AB 3/1187) states that Panco (Hayle): "always made it clear that [it] was unable to fund anything beyond the money [it had] already invested". Dr Harbour reviewed and approved this draft. 230 The minutes of the meeting of ATG Directors of 12 February 1996 (AB 4/1208) refers to a "contingency plan" under which Mr Browne was to put up $250,000 additional capital into the business in the first twelve months to meet possible cash shortfalls. Dr Harbour (T 900) says that there was no contractual plan. There was an option that Mr Browne might put money in (T 900). 231 Another internal ATG document which Dr Harbour sent to the Board for the meeting of 12 February 1996 (AB 4/1209) records: "N Browne refused to fund the cash flow shortfall until the milestone could be met with another customer, although he had agreed to do so if a cash shortfall occurred in the first 12 months." At T 907 Dr Harbour accepted that this statement was inconsistent with his evidence, and he was unable to explain why he would tell the Board that Mr Browne had agreed to fund the cash shortfall, if that was not the case. 232 A report was made to the Minister on 12 February 1995 (AB 4/1255): "When Hayle badly missed their first milestone target and withdrew their previous commitment to put additional money into the project, ATG decided not to advance the second tranche investment." This report was signed by Mr Bourke, and the usual practice was for such reports to be prepared by Dr Harbour. Dr Harbour accepts (T 907) that it is inaccurate to say that Hayle withdrew their previous commitment to put additional money into the project. No satisfactory explanation for this was forthcoming. 233 On 14 February 1996 Mr Browne closed Hayle's offices. 234 Mr Browne says that in February 1996 he believed there were only two options available to him to resurrect the Hayle concept (Browne Affidavit 29/5/99 par 188). The first was to recommence the search for venture capital in the USA. The second was to find a major corporation which was prepared to licence the technology and commercially exploit it in return for a licence fee and/or royalty payments. Whilst the venture capital operation was much more attractive to Mr Browne, he believed that it would be impossible to attract venture capital to any business which had Hayle's experience with ATG in its recent past. The fact that Hayle had attracted an Australian venture capitalist, who had then, after a short period, abandoned the deal, would be impossible to explain away, even though the explanation might completely exonerate Hayle. 235 Thereafter Mr Browne attempted to secure a US licensee. Those efforts were unsuccessful. A report of 7 October 1997 from Mr Jacobs to Mr Browne (AB 4/1383) includes the following: "Of the hundreds of people we have spoken to over the last two years, only two remain potentially interested and neither of these are beating a path to our door. But never say die! We'll keep at it until we get there ... unless your enthusiasm or cash runs out first!" General 236 The conduct alleged to be misleading and deceptive consists, in the main, of statements made orally in the period March 1995 to January 1996. For much of this period, ie from March 1995 until November 1995, the parties were engaged in a negotiation, the object of which was to reach agreement as to the provision of venture capital by ATG to Hayle. There were a large number of communications during that time, and the proposal changed and evolved as the negotiation progressed, until agreement was reached on 13 November 1995. 237 Almost without exception, there is no contemporaneous written note or record of the oral communication in question, although, in some cases, communications written at about the time may throw some light on the likelihood of a particular unrecorded communication having occurred. Some care is required in assessing written communications, particularly by Mr Browne, because sometimes they are expressed in terms which are an exaggeration of the factual position. For example, by letter dated 2 August 1995 Mr Browne told Timex that ATG "have decided to invest in Hayle". All that could be accurately said at that time, as Mr Browne accepted, was that Mr Browne thought ATG were very interested in the possibility of funding Hayle. I do not mean to convey that Mr Browne was intending to mislead Timex by this statement; rather his confidence and positive outlook in terms of outcomes sometimes results in an expectation confidently held being expressed in terms of achievement. 238 The evidence was given, in the first instance, by affidavit. In some cases resort to more than one of Mr Browne's affidavits is required in order to obtain a complete picture of Mr Browne's version of what was said or done on a particular occasion. By and large, he gives verbatim accounts of conversations which occurred on particular occasions. But this creates a spurious impression of accuracy, because he accepts (T 223-223) that a verbatim account of a particular conversation might in fact be a composite reconstruction of a number of conversations occurring at about that time. Further, Mr Browne's affidavits are replete with assertions as to his state of mind on particular occasions, but in cross-examination (T 376) he said that he found it difficult to remember his state of mind at the time. 239 The respondents' affidavits are no better than, and in some respects, are not as illuminating as those provided by the applicants. In large measure the deponents of the respondents' affidavits deny the whole or parts of conversations, without giving a coherent narration of what was said and done insofar as the deponent is able to recall it, or to state what his practice was on such occasions: cf R v Murphy [1985] 4 NSWLR 42, 63. A narrative account of what did happen, or what ordinarily happened, is usually more illuminating than a number of unconnected assertions as to what did not. 240 Given the nature of the evidence, and the representations alleged, the warning of McLelland J in Watson v Foxman (Supreme Court of NSW, 3 August 1995, unreported) should be heeded: "Where, in civil proceedings, a party alleges that the conduct of another was misleading or deceptive, or likely to mislead or deceive ... within the meaning of s 52 of the Trade Practices Act (or s 42 of the Fair Trading Act), it is ordinarily necessary for that party to prove to the reasonable satisfaction of the Court (1) what the alleged conduct was, and (2) circumstances which rendered the conduct misleading. Where the conduct is the speaking of words in the course of a conversation, it is necessary that the words spoken be proved with a degree of precision sufficient to enable the Court to be reasonably satisfied that they were in fact misleading in the proved circumstances. In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition. Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the degree of fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions of self-interest as well as conscious consideration of what should have been said or could have been said. All too often what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. All this is a matter of ordinary human experience. Each element of the cause of action must be proved to the reasonable satisfaction of the Court, which means that the Court 'must feel an actual persuasion of its occurrence or existence'. Such satisfaction is 'not ... attained or established independently of the nature and consequence of the fact or facts to be proved' including the 'seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding' (Helton v Allen 63 CLR 691 at 712). Considerations of the above kinds can post serious difficulties of proof for a party relying upon spoken words as the foundation of a cause of action based on s 52 of the Trade Practices Act (or s 42 of the Fair Trading Act), in the absence of some reliable contemporaneous record or other satisfactory corroboration." That approach was followed by Einfeld J in Christofidellis v Zdrilic [1999] FCA 39, and by me in Paramedical Services Pty Ltd v Ambulance Service of NSW [1999] FCA 548. Decision on representations The rubber stamp representations 241 On the applicants' case, a representation that the Board was simply a rubber stamp for the Management Committee, and that Board approval followed automatically from the approval of the Management Committee, was made on three occasions, viz: 2 March 1995 : Dr Jessup – representation 1 5 June 1995 : Dr Jessup – representation 7 25 July 1995 : Dr Westlake – representation 10 That stands in contrast to the 14th representation by Dr Westlake on 8 September 1995 that some times the Directors liked to justify their existence by "tweaking" the deal. 242 The evidence establishes that by mid 1995 the Board of ATG had not rejected any recommendation made to it by the Management Committee. An Investment Proposal would not be submitted to the Board unless it had the unanimous support of that Committee. Some times the Managing Director sounded out the Board's likely reaction before a proposal was submitted, so that potential difficulties could be anticipated and met. 243 Dr Jessup denies the making of the representations in question. Dr Jessup accepts that he may have said to Mr Browne that the Board had never rejected any deal that had been approved by the Committee, but says that he never indicated to Mr Browne that Board approval was a formality, or that the Board would not have any input into the deal (T 799). Of all the lay witnesses called by Hayle/ATG, my impression was that Dr Jessup was the most reliable, although I have reservations about his evidence in one respect, to which reference will be later made. 244 Dr Westlake's personal operating plan (AB 1/313) included a stipulation that he was to ensure that proposals taken to the Board by Dr Westlake and his colleagues are to be of such high quality in concept, structure and due diligence that they will not be rejected by the Board. One of the factors by reference to which the Managing Director's performance was assessed was the extent to which Investment Proposals were accepted by the Board without resubmission (AB 1/110). 245 Dr Westlake expected, up until the 6 October 1995 Board meeting that there would be no difficulty in securing Board approval to the Investment Proposal (T 584). His expectation, in September 1995, was that there was a high likelihood that the Board would approve the deal on 6 October 1995 (T 667). He would not have had any hesitation expressing that opinion to Mr Browne (T 667). His view was that "the amount of quality assurance done by the Management Committee would normally suffice the Board's requirements as far as doing a deal was concerned"(T 584). The Management Committee's aim was never to have a proposal rejected by the Board (T 666). Dr Westlake accepted that it was likely he told Mr Browne that "the practice of the Board had been to make minor changes around the edges" (T 663). Whilst, as will later appear, I have significant reservations about some aspects of the evidence of Dr Westlake, I accept what he has to say in this respect. 246 Dr Harbour rejected the suggestion that a proposal would not be put to the Board by the Management Committee unless it was practically certain that the Board would approve it (T 912). 247 In Mr Browne's letter of 20 October 1995, sent to 3M and copied to Dr Westlake, he said: "We were given to understand that if the due-diligence went smoothly, which it did, and if the ATG Investment Committee members unanimously recommended the deal, which they did, that Board approval would be virtually automatic." (emphasis added) That statement was not corrected by Dr Westlake. 248 The Expression of Interest letters of 28 April 1995 (AB 1/301) and 3 August 1995 (AB 1/385) each stipulate that ATG's investment is conditional upon Board approval. The timetables put forward by Mr Browne on 16 May 1995 (AB 1/311) and 1 June 1995 (AB 1/324) both contemplated that Board approval would be obtained on July 7 and the transaction completed shortly thereafter. The timetables did not allow any time for the deal to be changed as a result of the Board's consideration of it. 249 Representations 1, 7 and 10 are, in my view, an exaggeration of what Mr Browne was told on the matter of the role of the Board. More limited indications were given to him that it was not expected that securing Board approval would present a real problem, which he has, in his own mind, elevated to an assurance that Board approval would follow automatically from the recommendation of the Management Committee. 250 In my view, the primary significance of whether or not this group of representations was made is for such light as the resolution of that issue sheds upon the credibility or reliability of the contestants. Mr Browne accepted in cross-examination that he did not suffer any loss by these representations. The fact that Mr Browne asserts that Dr Jessup stated that the ATG Board was just a rubber stamp, and that he was impressed by that statement, indicates that some caution is required in the assessment of his evidence. Representations as to timing Representations 1 and 2 251 The first representation includes a representation that on 2 March 1995 Dr Jessup represented that ATG would definitely be able to fund by 30 June 1995 subject to three provisos. The second representation is that on 24 March 1995 Dr Jessup represented that ATG saw no problem with funding by the end of June 1995. I have already outlined the competing versions of Mr Browne and Dr Jessup on these issues in pars [19-21] and [32-34] above. 252 Dr Jessup accepts that at the first meeting, timing may have been discussed in a general sense, but he denies that any specific date or commitment was discussed (T 798-799). His response to a suggestion that he made the second representation was: "That's totally incorrect" (T 802). It was not until the meeting of 31 March 1995 at the Hayle office that Dr Jessup started getting the detail of what Mr Browne wanted (T 802). 253 By 12 May 1995 Mr Browne knew that funding by 30 June 1995 was not going to occur (see par [56]–[58] above). In none of the letters prior to that date is there any reference to funding being completed by 30 June 1995. If there was an arrangement to that effect there would have been no need for Mr Browne to "estimate a likely closing date" as referred to in his letter of 4 April 1995 (AB 1/298). 254 A reason for agreeing to a "drop-dead" closing date of 1 July 1995 would have been the first and second representations, if they were made, and the fact that Mr Browne stopped the pursuit of venture capital in the USA market on the faith of those representations, if that were the case. Yet Hayle's letter of 5 May 1995 (AB 1/306) advances reasons why 1 July 1995 should be an agreed "drop-dead" closing date, but neither the first nor the second representations is included among those reasons. 255 ATG's letter of 12 May 1995 (AB 1/308) proposed a commitment in mid July and funding 2-4 weeks thereafter (AB 1/308). Hayle's response of 16 May 1995 (AB 1/309) does not refer to the first and second representations. Mr Browne simply enquires whether a "workable timetable" could conclude with funding the first tranche by 31 July 1995. 256 Mr Browne professes that it was of critical importance to him that the funding be completed by 30 June 1995, and but for Dr Jessup's assurances in that regard he would have closed down the Australian operation, and gone to the USA in search of venture capital. The correspondence to which I have referred does not support that claim. Nor does the failure to act in that way once it became apparent in mid May that funding by 30 June 1995 would not occur. 257 I have already indicated my view that Dr Jessup was the most reliable of the Hayle/ATG witnesses. My preference for his evidence over that of Mr Browne where the two are in conflict is reinforced by the matters referred to above. 258 Hayle contends that the fact that Mr Browne gave up following the leads he had in the USA following the 24 March 1995 conversation is an event of major significance, consistent with something sufficiently concrete having been said to Mr Browne by Dr Jessup which caused him to change tack. I do not agree. Hayle's letter to Mr Dalfen of 20 March 1995 (AB 1/283) indicated that Mr Browne was going to let the dust settle in the USA for a couple of weeks before suggesting the next move. At that time Mr Browne did not have any negotiations for venture capital going on. All he had from the USA was "a couple of expressions of sort of very tentative prima facie interest" (T 218), and, as a matter of preference, he wanted to stay in Australia (T 219). He "wasn't asking anyone [in the USA] for money" at that stage (T 198). In my view, it is the preference to stay in Australia, coupled with Mr Browne's confidence in himself and his product, rather than assurances by Dr Jessup, which explains the direction which he took. 259 Even if the first and second representations had been made, Hayle has not established that it suffered loss by the making of them. By 12 May 1995 Hayle knew that the matters allegedly represented were not going to occur, yet it did not discontinue its negotiations with ATG or go to the USA in search of venture capital. That was because Mr Browne had confidence in his ability to conclude a deal with ATG, and for both business and personal reasons his preference was to conclude an arrangement with ATG if he could, rather than chance his arm on the USA venture capital market. Representations 6 and 7 260 The sixth representation is that soon after 16 May 1995 Dr Jessup represented that it was certain that ATG's agreement with the applicants would be concluded by 31 July 1995. The seventh representation is that on 5 June 1995 Dr Jessup represented that the deal would be concluded and funded by 31 July 1995. Dr Jessup denies the making of these representations. 261 As noted in par 69 above, it was Mr Browne's evidence that if he had known on 1 June 1995 that ATG could not be sure of completing on 31 July 1995 he would have gone to the USA. I do not accept his evidence in this respect. It is against the probabilities and not consistent with his actual behaviour on occasions when he learnt that alleged deadlines would not be met. By mid June 1995 Mr Browne knew that funding was not likely to occur by 31 July 1995, yet he did not go to the USA, but continued to negotiate with ATG. 262 It is inherently unlikely that Dr Jessup would make so extravagant a representation that it was certain that ATG's agreement with the applicants would be concluded by 31 July 1995, or that anything which he said upon that topic would be taken by Mr Browne as conveying either that this was certain, or that Dr Jessup was certain of it. Further, it is inherently unlikely that Mr Browne would rely upon so extravagant an assertion, assuming it were made. As a businessman he was accustomed to making allowance for slippage in timetables (T 210). The risk of an uncertain outcome and an uncertain time was one which Mr Browne accepted from the beginning of April (T 300). Mr Browne states in par 65 of his affidavit of 29/5/99 that he accepted Dr Westlake's assurance that he was certain of funding by July 31 1995. If this is intended to convey that Mr Browne changed his position on the faith of a statement by Dr Jessup that he was certain that funding would be completed by 31 July 1995, then I would not accept this to be so. 263 Hayle's letter of 1 June 1995 (AB 1/323) contains a section on "timing". In that letter, Mr Browne said that he was worried about timing, but there is no reference to the assurances allegedly given by Dr Jessup on that topic. The letter proposed a timetable commencing with agreeing all points of the Letter of Intent by 6 June 1995, and concluding with funding the first tranche by July 31. Intermediate steps included the conduct of due diligence and the completion of a revised Business Plan. The letter enquires whether that timetable is acceptable to ATG. It does not assert that Dr Jessup has already expressed his certainty that the deal would be completed by 31 July 1995. Achievement of the intermediate steps was uncertain, and they could not be secured without co-operative action on the part of Hayle and ATG. 264 I am not satisfied that either of these representations is made out. Representation 9 265 The ninth representation is that on 21 June 1995 Dr Westlake represented to Hayle that ATG would be able to do the funding by the end of August 1995. I have outlined the respective positions of the parties in relation to this representation in pars 74 and 79 above. 266 When Dr Westlake took over the file, he understood that Mr Browne was anxious to have completion as soon as possible (T 569). He took a different view of the Business Plan and the project fundamentals from that taken by Dr Jessup. As a consequence the Business Plan had to be completely rewritten, and it would have been obvious to all involved that there was likely to be some delay. 267 In Dr Westlake's affidavit, he does not deny that on this occasion Mr Browne asked: "How do you see the timing now?" In the circumstances it is inherently likely that Mr Browne would make some such enquiry. The response which he gives in his affidavit is set out in par 79 above. Dr Westlake claims that he did not say to Mr Browne: "We'll be able to get this funded by the end of August" (Westlake Affidavit 13/8/99 par 17). However, in cross-examination (T 591) the following emerged: "And you also told him that you'd be able to get it funded by the end of August didn't you? --- There was an expectation that he would be able to put together a Business Plan that we could work on and if that was the case that that could be achieved. Yes, and that's what you told him? --- That's right." 268 In my view, in this passage Dr Westlake effectively recanted his denial that he said "We'll be able to get this funded by the end of August", contained in his affidavit. On a number of occasions, there are discrepancies or inconsistencies between the affidavit and oral evidence of Dr Westlake, and this is one of many. I accept that a conversation occurred between Mr Browne and Dr Westlake on this occasion substantially to the effect of that set forth in Mr Browne's affidavit. 269 The conversation which I have accepted does not sustain a representation that ATG "would be able to do the funding by the end of August 1995". The context makes it plain that Dr Westlake was not giving unqualified assurance to that effect. Rather he referred to matters which needed to be dealt with before funding could occur, and expressed the opinion that funding could nonetheless be achieved by the end of August. 270 That was an opinion which Mr Browne shared. He said in par 75 of his affidavit that he believed the Business Plan could be reworked within a month to meet Dr Westlake's requirements. "It therefore seemed to me that Westlake's assessment that the funding would be available a month later, at the end of August, was probably right." 271 2FASC par 29 alleges that the pleaded representation was false, misleading and deceptive in that: (a) ATG would not be able to do the funding, or there was a risk that it would not be able to do the funding, by the end of August 1995, and it did not commence funding until after 13 November 1995 or thereabouts; (b) insofar as it related to a future matter, there were no reasonable grounds for making it. 272 It is not established, as a matter of fact, that as at 21 June 1995 ATG would not be able to do the funding by the end of August 1995. Whether it would be able to do so or not depended upon a range of matters which lay in the future, some of which were under the control of Mr Browne. The fact that there was a risk that ATG might not be able to do the funding by the end of August 1995 was obvious from the context, because the opinion that funding could be achieved by the end of August was expressed in the context of hurdles which needed to be overcome if that end was to be achieved. Mr Browne's view that Dr Westlake's assessment was "probably right" impliedly incorporates an appreciation of a risk that it might be wrong. In any event, Mr Browne's evidence establishes an appreciation on his part at the time of a risk that there would be slippages in relation to projected time frames. 273 Mr Browne's concurrence in Dr Westlake's assessment would probably be sufficient to establish that there were reasonable grounds for making it, if that issue arose. 274 The representation as pleaded is in unqualified terms, and is a representation with respect to a future matter. Such a representation is taken to be misleading if the representator does not have reasonable grounds for making the representation. Unless the representator adduces evidence to the contrary, it is deemed not to have reasonable grounds for making the representation: Trade Practices Act 1974 (Cth) s 51A ("the Act"). 275 I gave directions prior to the commencement of the hearing that the respondent should give particulars of any representations which it contended were made on reasonable grounds, identifying what those grounds were. No such particulars were given in relation to any of the oral representations pleaded. In the respondents' submission it would be impossible sensibly to formulate such grounds in relation to the representation as pleaded, because of the unqualified nature of the representation in question. The respondent could not have had reasonable grounds for making a representation in the terms pleaded given the matters then known by both parties to be outstanding, not all of which were within ATG's control. I think that there is force in this submission, and it would not be right for me to reformulate the pleaded representation into the more qualified form established by the evidence, whilst holding the respondent to its failure to rely on the existence of reasonable grounds as exculpating the respondent from what would otherwise be the operation of s 51A(2). The case was not fought on that basis, and on more than one occasion, counsel confirmed that the case was being fought on the pleadings. 276 Paragraph 75 of Mr Browne's affidavit states, in part: "I certainly accepted that it [ie Dr Westlake's assessment] was correct and based on that belief, and relying on what he said, I channelled all of my energy into meeting his requirements, and of course I continued to fund the Sydney operation in the expectation that I would only need to do so until the end of August 1995." As indicated earlier, Mr Browne's evidence was that he did not rely on the end of August estimate to deter him from seeking venture capital in USA (T 270). The letter of 26 June 1995 which Mr Browne wrote to Mr Dalfen (AB 1/327) does not support a conclusion that Mr Browne was then relying upon any assurance of end of August funding. In view of the conclusion which I have reached, it is not necessary to express a view on reliance in relation to this representation. In any event, as Heerey J held in Jaldiver Pty Ltd v Nelumbo Pty Ltd (1993) ATPR (Digest) 46-097 where more than one representation is relied upon as inducing particular action or inaction it may be that it is their collective effect which has to be considered. Representations 10 and 13 277 The tenth representation, insofar as it concerns timing, is a representation made by Dr Westlake on 25 July 1995 that ATG would close and fund the deal by the end of September 1995 at the latest. The thirteenth representation is a representation made by Dr Westlake on 24 August 1995, in his conversation with Mr Thompson of 3M that the deal should be closed and funded by the end of September, such that a meeting could be held with 3M in October. 278 I have outlined the respective positions of the parties in relation to the tenth representation at par 86-87 above. A comparison of the affidavits reveals a consensus that the discussion at the 25 July 1995 meeting had as its object the formulation of a realistic timetable which would hopefully lead to the completion of the deal. 279 In par 81(d) of his affidavit Mr Browne recounts the conversation which he says occurred in relation to the outstanding matters culminating in the statement by Dr Westlake: "so we will be able to close and fund the deal by the end of September at the latest". In his affidavit (par 23) Dr Westlake simply denies par 81(d). But in par 21 Dr Westlake asserts that he said: "We need to have realistic timing goals. Lets aim for the end of September". 280 Mr Browne's letter of 26 July 1995 (AB 1/374) lists the outstanding matters, provides a timetable for their achievement, and concludes with the statement "This means the deal can be closed by end September". 281 The outstanding matters were such that it would have been obvious to both parties that it was not certain that they would be achieved, or achieved to ATG's satisfaction. The Business Plan was not complete, and a four week due diligence remained to be undertaken. In the context, Dr Westlake was not, by his statements as to end September completion, making an unconditional commitment that ATG would close and fund the deal by end September at the latest. Rather he was expressing an opinion that the outstanding matters were such that subject to their being completed to ATG's satisfaction, the deal could be closed by end September. 282 I am satisfied that on 25 July 1995 there was a discussion between Mr Browne and Dr Westlake about the formulation of a realistic timetable which would hopefully lead to the completion of the proposed funding arrangements, and that Dr Westlake expressed the view, with which Mr Browne concurred, that on the assumption that outstanding matters were completed to ATG's satisfaction, the deal could be closed and funded by the end of September. There was a mutual expectation that the outstanding matters would be completed to ATG's satisfaction. 283 A conversation to that effect does not sustain the representation as pleaded, which is in unqualified terms. That this is, and was intended to be so, is made clear by 2FASC par 32(b) which asserts that the representation pleaded is misleading because (inter alia) there was a risk that ATG would not close and fund the deal by end September 1995. The context and content of the conversation are such that it was self-evident there was a risk that funding would not occur by the end of September. 284 The comments which I made with respect to the ninth representation, in relation to reasonable grounds and s 51A, are equally applicable to the tenth representation. 285 I have outlined the position of the parties in relation to the thirteenth representation in pars 100-102 above. It seems to me that the thirteenth representation does not rise above the tenth. The expectation of the parties that the deal could be closed and funded by end September was simply relayed to Mr Thompson of 3M. If that occurred then an October meeting with 3M was eminently achievable. Conclusion on timing representations 286 For the reasons given, none of the pleaded representations as to timing are made out. In coming to that conclusion, I have borne in mind that in the draft Investment Proposal, prepared by Dr Westlake on 14 September 1995 (see par 113 above), he stated that Hayle had led ATG to believe that an investment could be made much earlier than is now perceived. That is consistent with my conclusion in relation to representation nine, and there is no doubt that Dr Westlake's assumption of responsibility for the proposal led to delays which would not have been expected by Dr Jessup. But I do not think that Dr Westlake's observation in this respect indicates or requires any different conclusion in relation to the timing representations allegedly made by Dr Jessup. The balance of representation 1 287 On 2 March 1995 it is also claimed that Dr Jessup represented that: - ATG would not look to the applicants to provide any more funding; - if ATG decided to go ahead, it would make a clear and definite equity funding commitment on day one. 288 I have summarised the respective positions of the parties in relation to these representations in pars 20-22 above. I have already indicated my general preference for the evidence of Dr Jessup over that of Mr Browne. The preliminary nature of this meeting, and the fact that it was not until the meeting of 31 March 1995 that the parties began to look at the proposal in any detail, reinforces my lack of satisfaction that the pleaded representations were made on this occasion. Third representation 289 The third representation is a representation made by Dr Jessup on 31 March 1995 that ATG would go ahead on the basis of providing equity funding commitment of $2 million on day one. 290 I have summarised the competing contentions of the parties in paras 35-36 above. Even if Mr Browne's version of the conversation were accepted, the words he attributes to Dr Jessup: ("I can't see any great problem committing the full amount up front") fall short of a statement that ATG would go ahead on the basis of providing equity funding commitment of $2 million on day one. 291 Dr Jessup's position as at 31 March 1995 was that if Mr Browne had asked for an up front commitment of the full amount of $2 million he would have totally rejected it. Mr Browne's position was that had Dr Jessup failed to give that commitment, but suggested that the matter needed to be considered and negotiated, he would have walked away from ATG [see pars 36 and 37 above]. 292 Reference to what happened thereafter suggests that each of these positions is too extreme, and I am not satisfied that either accords with the fact. Dr Jessup's letter of 28 April 1995 (AB 1/301) refers to ATG's normal practice of tranching a $2 million investment, with tranches being committed as milestones are achieved. But no specific tranches are proposed in that letter. In Mr Browne's response of 5 May 1995 (AB 1/305) he expresses the hope that ATG did not mean that it intended to tranche the first $2 million and gives reasons why tranching is not required. Those reasons did not contain any reference to the alleged representation. Soon after the letter of 5 May 1995, Dr Jessup suggests that the parties should look at two $1 million tranches and Dr Jessup's letter of 12 May contains a proposal to that effect (AB 1/307). The negotiation then moved on to other matters. 293 I referred earlier to a reservation which I have in relation to the reliability of Dr Jessup's evidence. It is a reservation as to the reliability of his recollection, and not as to his honesty. Dr Jessup's evidence that he would have totally rejected a request for a commitment of $2 million up front, is not consistent with what in fact occurred. It is more likely that Mr Browne told Dr Jessup of his preference that there should be a commitment of the $2 million up front, and Dr Jessup responded with a statement as to ATG's usual policy as to tranching. Dr Jessup may well have indicated a preparedness to take up the question of tranching with the Management Committee, and soon after 5 May 1995, tranching is proposed. 294 For those reasons, I do not accept that Dr Jessup represented that ATG would go ahead on the basis of providing equity funding commitment of $2 million on day one. In any event, it seems to me that even accepting Mr Browne's version of the conversation, Dr Jessup was not making a statement or prediction as to what ATG would do in the future. He was simply stating a view which he then held in relation to a matter which was a step in the negotiating process. Fourth, Fifth, Sixth and Seventh representations 295 I have already dealt with these representations insofar as some of them concern timing and Board approval. There remains representations said to have been made on 5, 12 and 16 May, and on 5 June 1995 in relation to milestones. The representations are expressed in different terms, but the essence of all of them is that the only milestones which will be set by ATG are those which Hayle will certainly achieve, because milestones are not meant to be a genuine trigger for funding, but are only necessary to satisfy ATG's internal processes. 296 The terms of the conversation of 5 May 1995 are the subject of dispute and the respective contentions of the parties are as outlined in paras 48-49 above. The conversation of 5 May 1995 concluded with Mr Browne requesting Dr Jessup to put something in writing. The letter of 12 May 1995 from ATG (AB 1/307) is that writing. The letter refers to a discussion about milestones, but that milestones should be set so that they are readily achievable. There is nothing in the letter which supports a consensus that the milestones should be illusory, or for the sake of form only. The suggested milestone: "Sign US distributor with orders for 5,000 units" could not be described in that way. Hayle's letter of 16 May 1995 (AB 1/309) indicates that Mr Browne did not see it in that way. 297 The letter of 16 May 1995 does not refer to the representations relied upon, and the terms of the letter are not consistent with the representations having been made. In particular the statements: "I am worried that you not only see the tranching as an ongoing due-diligence but also as an opportunity to re-assess risk and I'm not sure that is appropriate." and "In summary, I can live with a few 'milestones' needing to be met between the first and second tranches but I prefer the concept to be that you are using the two tranches for additional comfort regarding our representations and warranties so that the deal can be expedited." are more consistent with Mr Browne negotiating towards a position, than with his having already achieved that position. In any event, the position referred to in the letter falls short of the position as represented. 298 Hayle's letter of 1 June 1995 (AB 1/323)contains an assertion that Mr Browne believes that Dr Jessup agrees that the tranching is only being used as a quasi-extension of the due diligence and not as a means of reassessing risk. The asserted belief was presumably based on the conversation deposed to by Mr Browne in par 64 of his 25 May 1995 affidavit which is said to have occurred shortly after 16 May 1995. In that conversation he attributes the following to Dr Jessup: "You're going to have to trust me on this tranche issue. I will not set milestones unless I am certain you'll meet them but I need the milestones concept to get the Management Committee to approve the deal." Dr Jessup accepts that he would have said to Mr Browne that he needed the milestone concept to be included in the proposal to obtain Management Committee approval, but otherwise denies the conversation alleged (Jessup Affidavit 26/7/99 par 17). I prefer the evidence of Dr Jessup to that of Mr Browne in that respect. Milestones are a means by which ATG can check whether projections of a Business Plan are being achieved before committing further funds. They were required before the Management Committee would approve the proposed investment. It does not make commercial sense to assert simultaneously that milestones are required to secure Management Committee approval to the deal, but they will not be set unless Dr Jessup was certain Hayle could meet them. Dr Jessup had proposed a milestone of "sign US distributor with orders for 5,000 units" with which Mr Browne was not happy. But Mr Browne does not suggest that there was any specific discussion of this milestone or that Dr Jessup agreed to withdraw that suggestion. It seems odd that this should be so, and the conversation should be conducted at the level of generalities. 299 Dr Jessup said, in relation to Hayle's letter of 1 June 1995: "I believed he was trying to negotiate to the milestones where they are effectively meaningless and that was not acceptable to us, but I regarded that as a negotiation." (T 814) I accept that evidence. If a conversation had occurred between Mr Browne and Dr Jessup shortly after 16 May 1995 to the effect of par 64 of Mr Browne's affidavit, he would not have commenced his letter of 1 June 1995 with the somewhat tentative observation "I believe you agree ...". Some reinforcement for this view can be derived from later correspondence. Hayle's letters of 25 September 1995 (AB 2/456) and 23 October 1995 (AB 2/778) contain sections on tranching. Those sections suggest that this was an issue on which Hayle and ATG had different positions. Those sections do not support the alleged representations. 300 Accordingly, I am not satisfied that the fourth, sixth or seventh representations in relation to milestones has been made out. 301 Dr Jessup and Mr Browne were engaged in a negotiation in which a number of matters needed to be agreed upon including tranching, in terms of the amount, timing and conditions on which tranches would be payable. Mr Browne accepted (T 388-389) that these matters were the subject of ATG's continuing risk assessment, and there was a risk that the same mind or different minds might have second or third thoughts on such matters as the negotiation proceeded. After all that is inherent in the negotiating process. 302 The letter of 12 May 1995 should be seen as part of that negotiation. In context, it is simply a statement by Dr Jessup of a suggested basis for the parties to treat, on one of the many elements of a proposed deal which had to be agreed upon. Until agreement is reached, either party is free to depart from intermediate positions. I agree with the submission of the respondents' counsel that one would not ordinarily regard consensus on particular matters reached in a negotiating process on the way to an ultimate agreement as operating like a ratchet, from which neither party is free to withdraw. In my view, to regard the letter of 12 May 1995 as a statement with respect to a future matter, namely that tranche conditions would be set by ATG which are readily achievable, or that the first tranche will be for $1 million payable on a particular event, is to exaggerate its significance and effect. It is simply a proposal which has no independent operation unless and until it is incorporated in an agreement. It is not a representation as to how ATG will act in the future. 303 I do not mean to convey that s 52 of the Act can have no operation in relation to a negotiation. Clearly it can. However, the fact that a statement is made as part of a negotiating process may be relevant in determining what the statement conveys in its context. It is not suggested, nor could it be established on the evidence, that there was any element of insincerity in the statements which Dr Jessup made, in the letter of 12 May 1995. A case was not sought to be made upon the basis that the letter in some way falsely represented Dr Jessup's (or ATG's) position at the time. 304 Accordingly, the fifth representation is not made out. Eighth representation 305 I have summarised the respective positions of the parties on the alleged representation by Dr Jessup on 16 June 1995, that the Management Committee had approved the deal, in pars 71-73 above. In par 70 of his affidavit of 29/5/99 Mr Browne contends for a conversation with Dr Jessup which includes the following: "Dr Jessup: '... The good news is that the Committee has approved the deal ...' Mr Browne: 'Well seeing that the Board is only a rubber stamp I guess we've got a deal and its time to celebrate ...'" In par 74 of his affidavit Mr Browne claims that on 21 June 1995, in a conversation with Dr Westlake, he asserted that Dr Jessup told him the deal had been approved by the Management Committee. 306 I prefer the evidence of Dr Jessup and Dr Westlake on this issue to that of Mr Browne. My assessment is that Mr Browne is exaggerating what he was told in this respect. It is inherently improbable that Dr Jessup would have told Mr Browne the Management Committee had approved the deal, when no deal had been structured at that stage. I do not accept that Mr Browne was told any more than that the Management Committee was agreeable to the proposal moving to the stage of due diligence. The conversation extracted above, with its convenient reference to the position of the Board as a rubber stamp is as self-serving as it is unconvincing. 307 Mr Browne asserted (T 187-189) that the letter from 3M of 10 January 1996 (AB 3/1124) evidenced a deal, even though the letter clearly specified additional points which needed to be finalised. In my view, Mr Browne is prepared to claim the existence of a deal, when all that can be said is that there is a good prospect that one may later eventuate. 308 Nor do I accept Mr Browne's assertion that on 16 June 1995 he had a genuine belief that the deal would definitely happen because the Board was only a rubber stamp. That assertion is inconsistent with the tone and content of the letter which Mr Browne wrote to Mr Dalfen on 26 June 1995 [AB 1/327]. It is theoretically possible that his belief in this regard could have been shattered in the period between 16 June and 26 June. But his affidavit does not assert this to be so, and his evidence was that on 26 June 1995 he had a deal with ATG (T 274-275). The letter to Mr Dalfen suggests that he did not. 309 I am not satisfied that the first element (a) of this representation has been made out. So far as the second element (b) is concerned there is no substantial dispute on the evidence, but Hayle's submissions do not indicate how this materially advances its case. Eleventh representation 310 These representations are grounded in the "Expression of Interest" letter of 3 August 1995 at AB 1/385. The representations pleaded in par 34 of 2FASC are probably conveyed by that letter (see pars 89-93 above), although 34(a) is more accurately stated as: "ATG was interested in entering into detailed due diligence with the purpose of deciding whether to (invest)" $2 million dollars in Hayle. 311 There is no evidence that ATG was not then interested in investing $2 million in Hayle whether in two tranches of $1 million or at all. That was never put to Dr Westlake. It is patent on the face of the document that there was a risk that the contemplated investment would not occur as par 10 "'busted deal' expenses" and par 12 "commitment" specifically adverted to that possibility. In any event, Mr Browne always knew and appreciated that there was a risk that ATG could decide not to go ahead with the deal at all, or to do so only on terms different from those which Mr Browne wanted (T 391-392). 312 No submissions were put in support of the contention that the representations contained in the letter of 3 August are false, misleading and deceptive in that Hayle Holdings reasonable operating expenses of not more than $80,000 per month up to $160,000 would not be reimbursed out of the first tranche. The letter of 3 August proposed that they should be paid out of the first tranche, and it was not put to Dr Westlake that ATG then had some different but uncommunicated intention. The fact that in the offers of 19 and 27 October a deal was proposed on the basis that these expenses should be paid out of the second tranche (a proposition then accepted by Mr Browne) does not mean that the statement in the letter of 3 August was false, misleading or deceptive. Again, it is self-evident that there was a risk that the expenses would not be reimbursed out of the first tranche because all that existed at that stage was a proposal which might come to nothing, or the terms of which might change. Mr Browne knew and accepted that this was so (see eg T 322-323). 313 Although 2FASC par 40 alleges that insofar as the letter dated 3 August 1995 related to future matters, there were no reasonable grounds for making them, no submissions were put in elaboration of that contention. In my view, this contention has not been made out. The letter ought not to be treated as rising above what it says, namely that ATG was interested in entering into detailed due diligence in relation to the business of Hayle with a view to a possible investment on the terms proposed. There is no basis for a conclusion that ATG's intentions were otherwise than as stated. There was no cross-examination of Dr Westlake to that effect. Twelfth representation 314 This is an oral representation on 3 August 1995 by Dr Westlake that the letter of 3 August 1995 meant that Hayle's reasonable operating expenses up to $160,000 would be reimbursed out of the first tranche. Clearly the letter does mean that and, as indicated at pars 95 and 96 above Dr Westlake accepts that he said something to that effect. 315 However, a case that this representation was false and misleading or deceptive fails for the same reasons as the like case in relation to the representation contained in the letter of 3 August fails. Fourteenth representation 316 This representation, said to have been made on 8 September 1995, contains three elements, namely: - normally ATG waited for the Board to sign off on a deal in case they made any last minute changes; - sometimes the Directors liked to justify their existence by tweaking the deal; - the applicants need not worry and that Dr Westlake had it under control. 317 As to the first of those matters, an assertion to that effect is contained in par 92(a) of Mr Browne's affidavit of 25 May 1995, which is not denied by Dr Westlake. As to the second of those matters, an assertion to that effect is contained in par 92(c) of Mr Browne's affidavit which Dr Westlake denies. Nonetheless he accepts (T 663) that it is likely he told Mr Browne that the Board's practice was to make changes around the edges. In substance that is the same thing. As to the third of those matters, an assertion to that effect is contained in par 92(c) of Mr Browne's affidavit which, as I have indicated, is denied by Dr Westlake. However, Dr Westlake accepts (Affidavit par 28) that he may have said: "It's all proceeding OK." "It's going where we want it to go." 318 In my view, the substance of the fourteenth representation is made out, but having regard to my finding on the "rubber stamp" issue, I do not think that this finding advances the applicants' case very far, if at all. So far as Dr Westlake having the matter under control is concerned, whatever may have been said on 8 September 1995, by 13 September 1995 Mr Browne knew that there was some opposition to the proposal at Board level. Fifteenth representation 319 The initial draft of the Investment Proposal was completed by Dr Westlake on 13 September 1995 (AB 2/433). Generally it was consistent with the Terms Sheet, with the investment proposed to be in two tranches of $1 million each. The first milestone is the successful conclusion of a trial site in a large US corporation – probably 3M. The first draft of the Shareholders' Agreement was received by Mr Browne between 13 and 25 September 1995 whilst Dr Westlake was in Europe. The draft generally followed the Terms Sheet of 3 August 1995. 320 The matters referred to in par 112 above indicate that the first limb of this representation is made out. So far as the second limb is concerned, "Dr Westlake had everything under control" (the Browne version) and "Everything should be OK. We're doing everything we can to get the deal approved as soon as possible" (the Westlake version), in the context of a communication that there are negative votes on the Board, are simply different ways of expressing the same notion, rather than expressions of different notions. The message is that a problem has emerged which Dr Westlake is confident that he will be able to solve. I am not satisfied that what Dr Westlake said on this occasion rose above that message, or was taken as going beyond it. 321 Although I accept that a statement was made by Dr Westlake as referred to above, that finding does not materially advance the applicants' case. No submissions were put by the applicants' counsel as to whether or how the conclusion which I have reached in relation to this representation would materially advance the applicants' case. Sixteenth representation 322 The facts in relation to this representation are set forth in paras 114-117 above. This representation was not the subject of specific submission by Hayle's counsel. I do not see how the submission of a first draft of an agreement containing provision for two $1 million tranches, with a pencilled note that it might be a good idea to split the first tranche into smaller tranches in order to make the deal more attractive to ATG's Board, can convey a representation that ATG will provide funding of $2 million in two $1 million tranches (as alleged in par 52(a) of 2FASC) when the accompanying pencil notation indicates that ATG may not provide funding in that way. 323 This representation is not established. Seventeenth representation 324 Between 25 September and 6 October 1995 the Investment Proposal to which ATG was giving consideration internally underwent significant changes from that proposed in the 3 August 1995 term sheet. Investment Proposals were prepared by Dr Westlake on 25 September 1995 (AB 2/463), 29 September 1995 (AB 2/500) and 3 October 1995 (AB 2/686). The evolution of these proposals is discussed in pars 118-126 above. 325 For present purposes it is probably sufficient to say that by 3 October 1995, the Investment Proposal the subject of consideration within ATG had evolved from a proposal that there be two $1 million tranches with the second at the end of twelve months and after achievement of appropriate milestones, into a proposal that the first tranche be $500,000 payable on documentation, the second tranche be $500,000 payable on agreement to proceed with the 3M trial, and the third tranche of $1 million payable on successful completion of the trial, commitment to the HayleSystem from at least four Fortune 500 companies, and management accounts showing a negative variance in EBITD and cash flow of no more than 10 per cent from the Business Plan. As from 29 September 1995 the Investment Proposal contained the "run out of cash" requirement. 326 As to the splitting of the first tranche, Mr Browne's letter to Dr Westlake of 25 September 1995 (AB 2/456) contained a statement that he hoped the original plan of two $1 million tranches could be adhered to. There was no reply to that letter. Apart from the pencil notation on the draft Shareholders' Agreement, Dr Westlake did not tell Mr Browne prior to the Board meeting of 6 October about the splitting of the first tranche, or the second and third tranche conditions (T 722-723). Nor was he told that the Investment Proposal presented to the Board was based on more conservative projections than those contained in the Business Plan (T 723). Nor was he told of the "run out of cash" requirement (T 723). 327 Mere non-disclosure of the matters to which I have referred, in a context where the message being conveyed to Mr Browne was that the Board had not reached a decision on the matter of investment of venture capital, would not amount to misleading and deceptive conduct: Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458, 475. 328 There is some difference in the accounts of Mr Browne and Mr Bourke of the conversation on which the pleaded representation is based, but the difference between the two versions is largely a matter of emphasis or degree. The essential thrust is the same, namely that the Board has not made a decision on the proposal and unspecified matters need to be attended to before a decision will be made, coupled with some words of encouragement. Given the general tendency on the part of Mr Browne to take an exaggerated or optimistic view of the state of negotiations in which he is involved, in my assessment the more guarded version of the conversation given by Mr Bourke is more likely to accord with the facts. 329 I come to that conclusion notwithstanding the terms of the faxes sent by Mr Browne to the USA on 20 October 1995 (AB 2/771-773) which are expressed in terms designed to convey that all that was outstanding on 6 October 1995 was "formal approval" of the ATG Board. The terms of those letters should be contrasted with Mr Browne's evidence that at the time he wrote them he was "devastated and bitterly disappointed" by the changes which ATG had then proposed by its offer of 19 October 1995 (Affidavit 29/5/99 par 105), which Mr Browne rejected on 20 October 1995. There is nothing wrong in Mr Browne concealing from his US suppliers the devastation and bitter disappointment which he claims to have then felt, but to say: "Discussions, however, are still under-way. ATG remain very positive but they have suggested some changes to the structure of our relationship which we need time to consider" does indicate that contemporaneous correspondence on the part of Mr Browne is not always a reliable indicator of the state of negotiation in which he is engaged at the time. 330 There was no cross-examination of Mr Bourke to suggest the views which he expressed were not a fair reflection of the position of the majority of the Board. The statements which Mr Bourke made were essentially non-committal in character, and in my view they were not misleading or deceptive in terms of what they conveyed. 331 Nor do I accept that Mr Browne would have been influenced in his conduct by Mr Bourke's statement, except that it is likely that the statement would have induced a belief on the part of Mr Browne that a decision would be made by the Board shortly. That conclusion is reinforced by the fact that on 9 October 1995, Mr Browne was given more information than he had been given on 13 September 1995 about the split on the Board, but that did not deflect him from his path of continued negotiation with ATG. Eighteenth representation 332 I accept that on 9 October 1995 Dr Westlake said that he was confident that he would get Board approval, hence the planned trip to 3M scheduled to commence on 20 October 1995 should not be cancelled. The manner in which Dr Westlake's affidavit has been constructed is such as to obscure the fact that there is consensus on this point. 333 Again, Dr Westlake was not cross-examined to suggest that this was not his view, and the context in which the view was expressed is such that it is self-evident that a risk existed that his confidence might be misplaced. 334 The applicants' submissions do not indicate how or in what way a favourable finding on this representation materially advances Hayle's case. 335 In par 103 of his affidavit of 29/5/99, Mr Browne says that on 9 October he realised for the first time that assurances given by Dr Westlake that Board approval would not be a problem were mere puffery. However, his earlier evidence was that on 13 September 1995 he understood, apparently also for the first time, that Board approval was not in the nature of a formality, and on 6 October 1995 Dr Westlake's confident expectation that Board approval would be given at the meeting scheduled to be held on that day did not come to pass. This is another illustration of Mr Browne's preparedness to make exaggerated statements as to the factual position. Twentieth representation 336 I have no doubt that Dr Westlake gave Mr Browne some comfort or reassurance in relation to ATG's approach to milestones at the meeting on 20 October 1995. The difficulty lies in trying to work out of the level of comfort or reassurance that was given. This involves making a choice between the evidence of two witnesses whose evidence on this and other topics was sometimes unsatisfactory, and not such as to instil confidence in its reliability. It is not appropriate for me simply to "prefer" the evidence of one in preference to that of the other, if only because the truth may lie somewhere between, and neither can necessarily be accepted as reliable. 337 For the reasons which follow, I do not accept that Dr Westlake told Mr Browne that the applicants had no need to worry about tranches. The pleaded representation conveys in par (a) that it did not matter whether a tranche condition was complied with or not; pars (b) and (c) are consequential. 338 On the day prior to this conversation, Mr Browne said that he knew the meeting with 3M was critically important from ATG's viewpoint because the 3M trial was now a tranche milestone (Affidavit 29/5/99 par 106). At T 422 Mr Browne said: "... Barry [Westlake] told me that they wouldn't be silly, that they would look at the situation and of course if circumstance dictated they wouldn't enforce the milestones strictly, they would handle it sensibly." 339 Mr Browne accepted at T 186 that he did not believe the 3M milestone was meaningless, or that he could obtain the second tranche as a matter of right without complying with the 3M milestone. He was, however, confident as a result of what he was told, that he and ATG would talk to each other in good faith if the 3M milestone could not be achieved. 340 This description of what Mr Browne was told with respect to ATG's attitude to the enforcement of milestones falls far short of the pleaded representations. When asked why he did not record the pleaded representations in writing, Mr Browne accepted that if he had done so, it would "scare ATG off" (T 422). Notwithstanding his later denial (T 422-423), I am satisfied that Mr Browne appreciated that the Board of ATG had not agreed, and would not agree, to ATG's relationship with Hayle being conducted on the basis of the twentieth representation. 341 Mr Browne's letter to Dr Westlake of 23 October 1995 (AB 2/778) has a section devoted to tranching changes. The letter conveys that Mr Browne accepted the tranching because of his confidence in Hayle's ability to meet the tranching conditions, rather than because of any representation that he had no need to worry about the milestones because they would not be enforced. 342 I accept that Dr Westlake told Mr Browne that ATG would not adopt a technical approach to the achievement of milestones, but would look at the situation and act sensibly and commercially, and would negotiate in good faith if a milestone was not achieved, rather than simply cancelling further funding. Mr Browne accepted in cross-examination, in the passages referred to above, that this is the substance of what he was told. I am not satisfied that what Dr Westlake said on 20 October went beyond this. However, this finding does not sustain the making of a representation in the terms pleaded. Twenty-First representation 343 This representation arises out of the "run out of cash" requirement which the Management Committee required to be inserted into the Investment Proposal. The Investment Proposal dated 3 October 1995 (AB 2/686), put to the Board of ATG on 6 October 1995, under the heading Key Risk Factors included the following: Risk Description Action Run Out of Cash The cash budget is very tight, especially in the first 12 months. A key focus for this business needs to be the control of cash flow. Consequently, it has not been considered prudent for ATG to establish tranches and milestones which give the company too much free cash. This cash tightness will be managed by requiring Neville Browne to provide a temporary facility of $250,000 to handle any short-term cash deficiencies caused by milestone delays. It will also be agreed with the principals that should the company have a cash deficiency after ATG's $2,000,000, then further equity raising will be permitted. 344 A further Investment Proposal was prepared on 27 October 1995 (AB 2/785). It was in the nature of an addendum to the proposal dated 3 October 1995, as it substituted new pages for the first two pages of the original proposal. On 2 November 1995 (AB 2/802) the Board confirmed the approval of the proposal dated 3 October 1995 as amended by an addendum dated 27 October 1995. 345 The prima facie position is that ATG's Board approved the Investment Proposal on the basis that cash tightness would be managed by requiring Neville Browne to provide a temporary facility of $250,000 to handle any short-term deficiencies caused by milestone delays. Dr Harbour accepted (T 921) that this "requirement" probably formed part of the Investment Proposal approved on 27 October 1995. It will be recalled that the "run out of cash" requirement had been incorporated into the Investment Proposal by direction of the Management Committee; it was not a requirement which Dr Westlake sought to impose upon Hayle. There is no evidence that the matter of further equity raising in the event that the company had a cash deficiency after ATG's $2 million, was ever raised with Mr Browne. 346 One then needs to try and understand what is meant by the "run out of cash" requirement. Both Dr Westlake (T 681) and Dr Harbour (T 915) gave evidence of an expectation that Hayle would enter into a contractual commitment, probably in the Shareholders' Agreement, that Hayle would provide the temporary facility should the need arise. On the other hand, Dr Westlake said at T 689, 758, 759 and 761 that the "requirement" was simply a risk management process which, at least ultimately, did not require advance contractual commitment on the part of Mr Browne. 347 The "run out of cash" requirement is not referred to in the offer documents of 19 October or 27 October 1995, nor in the Shareholders' Agreement, nor in any draft of it which is in evidence. Dr Harbour says that if this was a live requirement it would have been referred to in the letter of offer (T 918). In the context, I think that Dr Harbour was assenting to the proposition that if the requirement was a contractual commitment upon which ATG was then insisting, it would have been referred to in the letter of offer. 348 Mr Walker SC, counsel for ATG, described what happened between 6 and 27 October 1995 in relation to the "run out of cash" requirement as "a mystery", although his submissions accepted that the ATG Board approved the Investment Proposal on the basis of the "run out of cash" requirement (T 1206). 349 There is a stark contrast between the evidence of Mr Browne and Dr Westlake in relation to their communications on the topic of the "run out of cash" requirement. The evidence is summarised in pars 152-170 above. Paragraphs 210-212, 226-227 and 230-232, although dealing with later events, may be of some relevance insofar as they shed light upon the present topic. 350 Dr Westlake's position (see eg T 685-686) is that between 6 and 27 October 1995 he discussed the "run out of cash" requirement with Mr Browne, whose response was that he would not be contractually obliged to put any further money in, but, if there were problems he would not be silly about it. Mr Browne's position is that the issue was not raised with him during that period, but only on 27 October 1995. On that occasion, far from agreeing that he would not be silly about putting further money in if there were problems, he flatly rejected Dr Westlake's request that he should provide 50 per cent of any bridging funds which might be needed between tranches, and threatened to call the deal off if ATG persisted in that requirement. Dr Westlake's response is the foundation for representation twenty-one, namely: "We'll never ask you for any more money, don't worry about it, I've got it fixed" (T 440). 351 Mr Browne seeks to gain some support for his version of the facts from his declared position as to his "line in the sand". He describes that line as an "absolute commitment" not to put any more money into Hayle's operations (see eg T 330). In my view, this is an exaggeration of the "line in the sand". Mr Browne accepted in cross-examination (see par 159 above) that the "line in the sand" was no more than a very strong preference that his financial risk be capped at what he had already invested in the Hayle business, but it depended on circumstances whether that preference would drive his decisions, or whether he would allow some compromise away from it. At T 238 Mr Browne accepted that his "line in the sand" had shifted in 1995, and it might be sensible to shift it again. 352 But I do accept that Mr Browne would not be willing to compromise his "line in the sand" philosophy, if at all, unless and until he felt that there was no other choice realistically available to him, and that it was in his overall commercial interests to retreat from that position. 353 I have no confidence in Dr Westlake's account of his communications with Mr Browne upon this topic. His evidence is non-specific as to when and in what circumstances the communication with Mr Browne is said to have occurred. Dr Westlake claims (T 685-686) that he discussed with Mr Browne that if the company did run out of cash, an available option before resorting to the adverse trading condition was the injection of further funds by Mr Browne. That discussion is said to have taken place between 6 and 27 October, with Mr Browne's response being that he would not be contractually obliged to put any further money in, but if there were problems, he would not be silly about it. Dr Westlake's affidavit does not record any such conversation. The conversation deposed to in par 40 of Dr Westlake's affidavit does not follow the lines put forward by Dr Westlake at T 685-686. Further, the conversation to which Dr Westlake deposes at T 685-686 is not consistent with his evidence (T 691-692) that: "it was a very non-specific situation. I certainly didn't wish to be specific ..." Nor is it consistent with his evidence (T 699-700) that when he raised the matter of the temporary facility with Mr Browne: "I certainly recall proposing something like that to him and I certainly was told in no uncertain terms what his opinion would be." Dr Westlake's evidence as to the terms of the communication at T 685-686 is inconsistent with his unexplained failure to join issue in his affidavit with par 114(a) of Mr Browne's first affidavit. He did not advance oversight or mistake by way of explanation. In addition, whilst in his affidavit he did deny the balance of par 114, and par 115, Dr Westlake did not give his own account of what was said in response to par 114(a). His evidence in cross-examination was unsatisfactory. His response to questions on critical elements of conversation were sometimes expressed in terms of: "I don't deny or confirm" (eg T 757). 354 Dr Westlake's conduct in December 1995 is not consistent with Mr Browne having given him comfort that if cash flow problems arose, Mr Browne would not be silly. Had Dr Westlake been given an assurance to that effect, the probabilities are that he would have raised the matter with Mr Browne at the end of December 1995, and referred to it at least in the uncommunicated fourth page of the memorandum of 29 December 1995. The fact that Dr Westlake left it to Dr Harbour to raise the subject of money with Mr Browne does not sit comfortably with Dr Westlake's evidence that Mr Browne had assured him that if cash flow problems due to delay in meeting tranching conditions arose he would not be silly about it. Further, Dr Westlake's trip report of 6 December 1995 (AB 3/979) was expressed in terms that were highly optimistic, and had a level of exaggeration which would have been unnecessary if Dr Westlake was the recipient of an assurance from Mr Browne that he would not be silly if cash flow problems arose as a result of a failure to meet tranching conditions. The two sections of Dr Westlake's memorandum of 29 December 1995 (AB 3/1019-1022) provides an example of duplicitous behaviour on his part; so too does the contrast between the trip report, and the private monthly report (at AB 3/1202) in relation to the success of the USA trip, and the outcomes of it. 355 I do not think that Mr Browne would have so lightly and so easily departed from his "line in the sand" position as Dr Westlake's evidence would have me accept, even though the departure was not expressed in terms of contractual commitment. Further, Dr Westlake's account is inconsistent with his acceptance of the proposition (T 693) that Mr Browne would have been horrified by the "run out of cash" provision, nor is it consistent with his evidence (T 757) that it was the directors of ATG who "saw the light", rather than Mr Browne. Nor does Dr Westlake's account sit comfortably with his evidence (T 691) that Mr Browne was already upset by the tranching changes, and Dr Westlake did not wish to upset him further by telling him he might have to put in more money (T 691). 356 As earlier indicated, (par 163 above) the evidence is not clear as to whether the conversation described in par 40 of Dr Westlake's affidavit is the occasion on which he claims to have discussed the "run out of cash" requirement. I have some difficulty in appreciating why a conversation along those lines would occur. At the time neither Dr Westlake nor Mr Browne regarded the conclusion of the 3M agreement as a problem (T 706, 707, 712). Be that as it may, a conversation in these terms is certainly "non specific" and Dr Westlake says that "it was a very non specific situation". 357 At least in general terms, Mr Browne's version of events gains some support from Dr Westlake's initial non-denial of par 114(a) of Mr Browne's first affidavit. Further, the letter of offer of 19 October 1995 from ATG was sent by fax to Hayle. The letter of offer of 27 October 1995 was hand delivered by Dr Westlake to Mr Browne. Mr Browne did not immediately accept the offer contained in the letter (T 758). That suggests the existence of some impediment which lay in the path of immediate acceptance. The conversation referred to in par 114(a) of Mr Browne's first affidavit would be such an impediment. That may lend some support to Mr Browne's view that the matter was only raised with him on 27 October 1995, but it is odd that a similar discussion did not take place in relation to the offer of 19 October 1995. At T 700 Dr Westlake was unsure whether the matter was raised with Mr Browne between 6 and 27 October, or on 27 October itself. 358 Paragraph 115 of Mr Browne's first affidavit goes beyond a withdrawal of the request that Mr Browne should agree that if the roll out of the HayleSystem is slower than expected, and bridging funds are needed between tranches, then they should be provided equally between ATG and Hayle. In Mr Browne's contention, Dr Westlake told him that ATG would never ask him for any more money except possibly that at some point in the future "ATG might for very positive and good reasons suggest to me it would be a good idea to invest" (T 440). 359 I do not accept Mr Browne's evidence that he was told by Dr Westlake that in no circumstances would ATG ask him to contribute further funds. My general assessment of Mr Browne as a witness was that he both advocated and, at times, exaggerated his own case, and I think that his evidence in this respect is an example of that tendency. At this time, Mr Browne knew and well understood that Hayle's trading performance after completion of the deal with ATG might fall short of the Business Plan projections, with the possible consequence of his loss of management control. He understood that the circumstances might be such that ATG could, with propriety, decide not to invest a further tranche (T 237). He knew that the future was uncertain as to trading, and that if he decided not to put in any more money when he was the only realistic source of funds, the business might come to a halt. That was a risk which he accepted (T 333). He knew there was a risk that ATG might not come up with the second or later tranches if Hayle did not meet a milestone (T 421). Mr Browne's appreciation of these risks is not consistent with Dr Westlake assuring him that under no circumstances would ATG ever ask him to invest further funds in the future. It is inherently unlikely that Dr Westlake would have given Mr Browne an assurance in the terms for which Mr Browne contends. Accordingly, I am not satisfied that the twenty-first representation is made out. 360 I am satisfied that at some stage between 6 and 27 October Dr Westlake communicated to Dr Harbour his view that Mr Browne would not enter into a contractual commitment in terms of the "run out of cash" requirement, and it was Dr Westlake's belief that, faced with an adverse trading situation, Mr Browne would not be stupid about it. 361 I accept that on 27 October 1995 there was a conversation between Mr Browne and Dr Westlake along the lines of the conversation referred to in par 114(a), and that Mr Browne refused to agree to Dr Westlake's request. I also accept that Mr Browne told Dr Westlake that if the Board did not approve the deal in terms of the letter of 27 October, with no strings attached, then the deal was off. I also accept that later that day Dr Westlake told Mr Browne that he had convinced the Board to go ahead with the deal despite Mr Browne's refusal to promise to invest any more funds. In other words, I accept the version of the conversation given in par 146(n) of Mr Browne's first affidavit, but without the embellishment introduced in par 115 and T 440 that he was told by Dr Westlake that he would never have to put in any more money. However, my conclusion that Mr Browne was told that the par 114(a) requirement had been withdrawn, and the deal approved in terms of the letter of 27 October 1995, is relevant to a consideration of whether the twenty-second representation has been made out. Twenty-second representation 2FASC par 69 362 It is as well to recall the case which Hayle seeks to make in this respect, as during the course of Hayle's submission, matters were relied upon which are remote from the case as pleaded. Paragraph 69 of 2FASC alleges that ATG engaged in misleading and deceptive conduct in that ATG concealed from, or failed to disclose to, the applicants that ATG was prepared to enter, and had only entered into the Shareholders' Agreement of 13 November 1995, on the basis that any tightness in the cash budget would be managed by requiring Mr Browne to provide a temporary facility of $250,000 to handle any short-term cash deficiencies caused by milestone delays. 363 It is not necessary that the applicants make out a representation in order to establish misleading or deceptive conduct. The question is whether in the light of all relevant circumstances constituted by acts, omissions, statements or silence, there has been conduct which is or is likely to be misleading or deceptive: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 40-41 per Gummow J. 364 In Ramensky at p 32 Black CJ observed that 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. The context here includes: - ATG knew of Mr Browne's stated position that he did not want to put any more money into Hayle because of his "line in the sand"; - on 20 October 1995 Dr Westlake told Mr Browne that ATG would not adopt a technical approach to the achievement of milestones, but would look at the situation and act sensibly and commercially, and would negotiate in good faith if a milestone was not achieved, rather than simply cancelling the funding; - on 27 October 1995 Mr Browne refused to proceed with the deal if it was a requirement that he contribute 50 per cent of bridging funds if those funds were required between tranches; - on 27 October 1995 Dr Westlake told Mr Browne that the Board had withdrawn its requirement to that effect. 365 There is one thing which is common ground between Dr Westlake and Mr Browne, and that is either between 6 and 27 October 1995, or on 27 October 1995, Dr Westlake asked Mr Browne to commit to investing further funds into Hayle in the event that there was a cash shortfall, and Mr Browne declined to give that commitment. 366 Mr Browne's refusal to commit to investing further funds in Hayle in the event that a cash shortfall emerged, does not necessarily mean that the "run out of cash" requirement was in some way spent, or written out of the Investment Proposal. Mr Browne was, or was perceived by Dr Westlake and Dr Harbour to be, a person of some substance. Dr Westlake was of the view that if tightness in the cash position emerged, ATG could remind Mr Browne of the adverse trading event provisions, and faced with that "reminder" (threat) he would agree to contribute further funds (T 687, 688). At some stage, Dr Westlake told Dr Harbour that whilst Mr Browne would not contractually commit to putting in the extra $250,000, it was his belief that if faced with an adverse trading event, Mr Browne would not be stupid about the situation (T 721). Dr Westlake had always taken the view that notwithstanding Mr Browne's declared "line in the sand", if faced with an adverse trading event, Mr Browne would be prepared to negotiate (T 759). Dr Harbour was of the like view (T 889). It was only from a contractual point of view that the "run out of cash" requirement was effectively abandoned by ATG (T 760). 367 In my view, faced with either an expectation that Mr Browne would not agree to contribute further funds in the event of cash shortfall, or a refusal to agree to do so, Dr Westlake and Dr Harbour concluded that the "run out of cash" requirement could be accomplished indirectly. That is, if a cash shortfall emerged, Mr Browne could be confronted with the adverse trading event condition, and given Mr Browne's confidence in and commitment to the HayleSystem, contribution by Hayle of further funds to tide the company over a liquidity problem would be seen as an economic imperative: see [165] above. At T 688 the following appears: "MR CAMPBELL: .... Do you accept that the intention that you had and as you understood it the other members of the Management Committee had in this run-out-of-cash scenario was that the [sic] Mr Browne would be for all practical purposes required to put money in because he would be confronted with a choice which you knew he wouldn't take? --- Yes, I think that's a fair statement." 368 Whether and to what extent Dr Harbour and Dr Westlake were acting on a frolic of their own, without the agreement of the ATG Board, is a matter which is difficult to assess, particularly as neither counsel asked Mr Bourke any questions on this topic. The difficulty is exacerbated by the fact that the proposal which was put to Mr Browne on 27 October 1995 (Dr Westlake) AND ON 3 January 1996 (Dr Harbour) was that Hayle should contribute 50 per cent of the cash shortfall. That reflects ATG management's idea that an "emergency tranche" would be available for use by ATG. Whether and to what extent the Board had approved this is not clear. However, a consideration of the memorandum which Dr Harbour sent to the Board on 24 January 1996, and the document which he sent to the Board for the meeting on 12 February 1996 and the letter to the Minister prepared by Dr Harbour and signed by Mr Bourke throw light upon this question. In those communications, Dr Harbour was at pains to suggest (falsely) that Mr Browne had gone back on his word in relation to the injection of further funds. These communications between Dr Harbour and his Board are not sensible, if it be assumed that the Board understood in October and November 1995 that the "run out of cash" requirement had been removed from the Investment Proposal as a result of Mr Browne refusing to agree to provide further funds in the event that there was a cash shortfall. I do not accept Dr Harbour's evidence (T 893) that he or Dr Westlake told the Board that Dr Westlake could not persuade Mr Browne to put up a temporary facility of $250,000. Dr Harbour was unable to give any details of when or how this information was given to the Board, there were no Board meetings held between 6 and 27 October, and the communications to which I have referred are inconsistent with the Board having been given this information. ATG elected not to adduce evidence from Mr Bourke on this issue, a matter which is of particular importance given that Mr Bourke signed the letter to the Minister (AB 4/1255) which referred to Hayle as having withdrawn its "previous commitment" to put additional money into the project. 369 I conclude: - ATG Board approved the investment in Hayle on the basis that a short-term cash deficiency caused by milestone delays would be handled by requiring Mr Browne to provide a temporary facility of $250,000; - it was left to Dr Harbour and Dr Westlake to implement the Board's decision in that respect; - it became apparent to Dr Harbour and Dr Westlake that Mr Browne would not give a commitment to the effect of that required by the Board; - Dr Harbour and Dr Westlake considered that the practical result which the Board wished to achieve, could be achieved by reminding Mr Browne, if the need arose in the future, of the adverse trading event condition, in which event the probabilities were that he would agree to the provision of further funds; - Dr Westlake misled Mr Browne into believing that the Board's requirement had been withdrawn, when it had not. Rather, Dr Harbour and Dr Westlake had simply formed the view that the requirement could be achieved by indirect means, a view which they did not disclose to Mr Browne. 370 In Lam v Ausintel Investments Australia Pty Limited (1989) 97 FLR 458, at 475, Gleeson CJ said: "Where parties are dealing at arms' length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause the other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice." And in Poseidon Limited v Adelaide Petroleum NL (1991) 105 ALR 25 at 26 Burchett J said: "I do not think it has ever been suggested that s 52 strikes at the traditional secretiveness and obliquity of the bargaining process. Traditional bargaining may be hard, without being in the statutory sense misleading or deceptive. No one expects all the cards to be on the table. But the bargaining process is not therefore to be seen as a license to deceive." 371 In the ordinary case, it would be quite unobjectionable for ATG to make its own internal assessment as to what it might do in the future should particular events happen without communicating those plans to Mr Browne. Similarly, it would have been open to Dr Westlake to seek a commitment from Mr Browne as to the provision of further funds and, when he refused to give it, to back off, and to let the future look after itself. However, Dr Westlake went beyond that. He told Mr Browne that a Board requirement. to which Mr Browne said that he would not agree, had been withdrawn when in fact it had not. As indicated above, all that had happened was that Dr Harbour and Dr Westlake had formed the view that the result which the Board desired to achieve could be secured by putting pressure onto Mr Browne in the future if and when the need arose. In my view, Dr Westlake engaged in misleading and deceptive conduct in that respect. This conclusion is reinforced by my earlier finding (at par 342 above) that Dr Westlake had told Mr Browne that ATG would not adopt a technical approach to the achievement of milestones, but would look at the situation and act sensibly and commercially, and would negotiate in good faith if a milestone was not achieved, rather than simply cancelling further funding. The "run out of cash" requirement is an uncommunicated qualification upon that position. 372 Conduct is not misleading and deceptive if it amounts to no more than a failure to tell a person something which the person already knows. Such a failure is not likely to lead a person into error. Mr Browne had known of the adverse trading event condition since it was first introduced as part of the proposed deal on 28 April 1995. Thereafter it was accepted by him without comment. As indicated in [359] above, Mr Browne accepted the risk that if he decided not to put in any more money when he was the only source of funds, the business might come to a halt. 373 It is too simplistic, however, to describe Dr Westlake's conduct as a mere failure to tell Mr Browne what Mr Browne already knew. Dr Westlake led Mr Browne to believe that an obstacle to the conclusion of a deal on mutually satisfactory terms had been removed, whereas in truth it had not. The conversation deposed to by Dr Westlake in par 40 of his affidavit does not indicate or require any different conclusion. 374 Counsel for Hayle submitted that Dr Westlake was motivated by self-interest to misrepresent the position to Mr Browne having regard to the terms of his bonus entitlement, and the terms of his personal operating plan. I do not accept that submission. Dr Westlake liked Mr Browne personally and he liked the HeartWatch proposal. It was his view that the Investment Proposal of 3 October 1995 should have been approved by the Board. He was surprised by the opposition which he encountered at Board level, and was disappointed by the last minute changes which the Board required to be made. I accept that he was genuinely of the view that it was in Mr Browne's interests to do the best deal with ATG that he could, and I do not accept that his conduct was motivated by considerations of self-interest. Rather he thought that the immediate problem was securing Board approval to the Investment Proposal, and matters such as "run out of cash" requirements were problems which might have to be managed should they arise in the future. Twenty-second representation 2FASC par 69A 375 The misleading and deceptive conduct consists of a number of elements set out in par 69A, which is reproduced at par 180 above. The allegation is that ATG embarked upon a scheme, calculated to put pressure on Mr Browne to inject further funds into Hayle, or to bring about the renegotiation of the Shareholders' Agreement whilst Mr Browne was under pressure, on terms more favourable to ATG. 376 The proposition seems to be that ATG knew, but Mr Browne did not, that the working out of the arrangements in the 27 October 1995 letter would inevitably enure to the detriment of Mr Browne and to the benefit of ATG. An element of the scheme is that ATG knew from the inception that the applicants' business would fail by 31 December 1995. The plan is a Machiavellian one, of which presumably Dr Westlake is said to be the author, or if someone else is the author, presumably Dr Westlake is said to be privy to the scheme. 377 Neither the plan nor its elements was directly put to Dr Westlake as a scheme on which he consciously embarked, hence the existence of the plan or scheme is to be inferred, if at all, from the circumstances. In my view, the alleged scheme is without factual foundation, and is based upon an exaggeration or distortion of the facts. 378 Both Mr Browne and Dr Westlake were confident that the deal with 3M would be concluded so as to enable the second tranche payment to be made (T 167, 706, 707, 712). The inability of 3M to do a deal of the kind called for by the second tranche milestone was a completely unexpected and utterly new element in the joint business plans of Mr Browne and ATG. Dr Harbour said it was an "absolute shocker" that the 3M deal did not come through (T 924). Mr Browne must have known that the second tranche condition was a matter of importance to ATG because the offer of 27 October 1995 contained the notification: "ATG does not wish to have an exposure of more than $300,000 before it is known that 3M (or equivalent) is prepared to trial the HayleSystem." 379 The parties did not embark upon a venture which ATG knew and intended would fall over at the first hurdle. Rather the events of 29 November 1995 were entirely unexpected, and disappointed the mutual expectations of the parties. 380 This ground is not made out. Reliance 381 It is reasonable to conclude that Mr Browne believed what he was told by Dr Westlake on 20 October 1995 about ATG's attitude to the achievement of milestones. It is also reasonable to conclude that he believed what Dr Westlake told him on 27 October 1995 about the Board having withdrawn its requirement that Mr Browne should contribute 50 per cent of bridging funds, if those funds were required between tranches. I would also conclude that the statements by Dr Westlake on these topics were a factor which induced Mr Browne to enter into the Shareholders' Agreement on 13 November 1995. 382 A party that is misled suffers no prejudice or disadvantage unless it is shown that the party could and would have acted in some other way which would have been of greater benefit or less detriment to it than the course in fact adopted: Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494, 511, 514. Thus the question is whether had Mr Browne been told: - that ATG accepted that he would not give a commitment to invest further funds; - but nonetheless intended to confront him with a choice between investing further funds, or suffering the operation of the adverse trading event condition, in the event of a cash shortfall arising as a result of the delay in achievement of milestones; he would not have concluded the deal with ATG, but would have sought venture capital in USA. That question needs to be determined on the balance of probabilities because it is an issue of causation, rather than quantification of loss. 383 Mr Browne says (Affidavit 29/5/99 par 116; Affidavit 13 April 2000 par 5) that his understanding was that the ATG Board accepted that under no circumstances would he invest more money in the deal. Had he appreciated that this understanding was false, he says he would not have proceeded with the ATG deal. 384 At T 433-434 Mr Browne gave the following evidence in relation to a hypothetical request by Dr Westlake: "If he'd said to you, don't be silly, none of us can predict what the position will be six, twelve months down the track, we particularly can't predict whether or not for want of a relatively small sum of money a great opportunity will be lost; why don't we just wait until something happens, both of us thinking it won't happen anyhow, don't get your knickers in a knot, the deal is not worth breaking for that. What if he'd said something like that, would you still have walked away? --- Absolutely, if he was - - - What would you then have done? --- I beg your pardon? What would you then have done? You've described yourself to his Honour several times as a man with no choices then, trapped. What would you then have done? --- I'd have closed up shop. I'd have done exactly what I did in February with the exception that I would have moved the equipment to America and sought out venture capital. I'd have had no choice, that would have been my only option." 385 Some support for Hayle's position in this respect is to be found in its letter to ATG of 24 January 1996 (AB 3/1145) which contains the following: "... if (Hayle) had known that the ATG Board had given their approval on the understanding that (Hayle) would bridge-finance any shortfall caused by ramp-up speed, (Hayle) would never have closed the deal." 386 Evidence of Mr Browne as to what he would, or would not, have done in a hypothetical situation needs to be approached with some care, because of his evident self-interest, and because in not unimportant respects, I have not accepted Mr Browne's evidence on other issues. That does not mean that I should not accept his evidence on this issue, if having regard to all the circumstances, I am persuaded by it. 387 I accept Mr Browne's evidence that whilst there were obstacles in the way of his relocating to the USA, he would have relocated to the USA if he had to. That was ATG's assessment at the time, and it accords with the probabilities. The Investment Proposal of 3 October 1995 (AB 2/698) records that Mr Browne, his wife and children are all prepared to relocate to USA if required. The document at AB 2/739 contains a statement by ATG to similar effect. For a variety of reasons Mr Browne preferred to deal with ATG, if a deal could be struck on acceptable terms. If it could not, then I consider it more probable that Mr Browne would have sought venture capital in USA, rather than simply giving up. 388 The more difficult question is whether Mr Browne would have broken off the negotiations with ATG if told that the "run out of cash" requirement had not been withdrawn by the ATG Board, but that Dr Harbour's and Dr Westlake's intention was as set forth in par 367 above. 389 Mr Browne described other elements of the deal as being of "critical" importance (completion of funding by 30 June 1995) or of "vital" importance (commitment of $2 million on day one) but he continued to negotiate with ATG even though these requirements were eroded as the negotiation took its course. By 12 May he knew that funding would not occur by 30 June, but he continued to negotiate with ATG (see par 256 above). I have not accepted Mr Browne's evidence that if he had known on 1 June 1995 that ATG could not be sure of completing by 31 July 1995 he would have gone to the USA (see par 261 above). Nor did he go to the USA on 26 June 1995 when it became clear that Dr Westlake had a different and less favourable view of the proposal than Mr Browne (see pars 76-77 above). Mr Browne says that if he had been told at the outset that a commitment for $2 million on day one was not assured, but was a matter for negotiation, he would have walked away from ATG. Yet he did not do so when two tranches were proposed soon after 5 May 1995, or on 25 September 1995 when he suspected that ATG was considering splitting the first tranche (see 117 above), or on 19 October 1995 when four tranches were proposed. On each occasion he continued to negotiate. 390 The fact that Mr Browne was prepared to suffer timing delays in the expectation of concluding a satisfactory deal does not throw much light on the question of whether communication of the non-withdrawal by the Board of the "run out of cash" requirement would have been like the straw which broke the camels back. The fact that he was prepared to suffer alterations in the tranching arrangements does suggest that he was confident of Hayle's ability to meet the tranching conditions, albeit in the belief that they would be sensibly administered: cf Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 at 36 per Burchett J. 391 Mr Browne had invested time, money and emotional effort with a view to concluding a deal with ATG. The concept of "shutting up shop and going to America" (T 403) was not something which "really entered" Mr Browne's mind at about this time, because he was confident that the negotiations with ATG would have a successful outcome. He would not have terminated those negotiations unless he thought there was no other practical alternative. It would cost money to seek venture capital in the USA, with a consequent erosion of the "line in the sand". 392 There is at least the theoretical possibility that had Mr Browne been informed of the terms on which the Board had approved the deal that further negotiations would have occurred which would have allowed the deal to proceed but, in the events which happened, would have still caused ATG to decline to advance the second tranche when the 3M proposal failed to come to pass. However, no evidence was adduced by ATG which would enable a conclusion to be reached that this was probable. 393 Another possibility is that Mr Browne would have nonetheless proceeded with the ATG proposal and relied upon what was described in submissions as his "chemistry" with Dr Westlake to sort out any problems that might arise in the future. But, on my findings, that is not the attitude which Mr Browne adopted on 27 October 1995: he threatened to call the deal off. 394 In the end I have come to the conclusion that I should accept Mr Browne's evidence in this respect, notwithstanding my lack of satisfaction with other aspects of his evidence, principally for the following reasons: - acceptance of the "run out of cash" requirement would have involved a fundamental change in the basis on which ATG and Hayle had dealt with each other up to that point in time. Dr Westlake accepts that it went against the whole spirit of the dealings he had with Mr Browne. Although not inflexible, Mr Browne's "line in the sand" was nevertheless real, and important to him. - The "run out of cash" requirement was, or was potentially, a qualification to Dr Westlake's assurance that the tranching conditions would be sensibly administered, an assurance which was important to Mr Browne. - The introduction of four tranches, each tranche being subject to its own conditions, exacerbated the likelihood of a cash deficiency between tranches arising. Dr Westlake's view was that first $1 million should be applied by two tranches of $500,000, rather than the three, and subsequently four tranches proposed. - Whilst Mr Browne was confident that the 3M proposal would proceed, the cash flow projections indicated that the second tranche would be required in about December. Due to the delays in completing the proposal, the timing was becoming tight. - Dr Westlake's assessment of the position was that: · Mr Browne would have been horrified by the "run out of cash" condition (T 693); · disclosure of the "run out of cash" requirement would create a difficulty in going forward. There was no point in creating "a major relationship problem" with a man who did not believe that the adverse trading event condition would ever be able to be invoked (T 689-690). · Mr Browne was already upset by the tranching changes, and Dr Westlake did not wish to upset him any further by telling him he might have to put in more money (T 691). Dr Westlake was the person with whom Mr Browne was directly engaged in day to day negotiation. Even though he says (T 702) that it was not his belief that Mr Browne would cease dealing with ATG if apprised of the "run out of cash" requirement, the three matters to which I have referred, coupled with the making of a misleading statement as to the factual position, suggest the contrary. - In Dr Westlake's October 1995 report [AB 2/796] he expressed the view that unless the ATG Board agreed to Mr Browne's request for a "salary": "... I believe that Neville will pursue a 'slow-down' approach to the business and carry the expenses until he can introduce a US-based venture capital company into the deal". - I have accepted Mr Browne's evidence that when told of the requirement that he should agree to provide further funds, he refused to do so, and indicated that unless the deal was approved in terms of the letter of 27 October, with no strings attached, then the deal was off. Twenty-third representation 395 The competing versions of what is alleged to have been said are set forth in pars 184-186 above. At this time Dr Westlake represented both Hayle and ATG. He needed to negotiate with the Management Committee, the Managing Director, and ultimately the Board of ATG in relation to the missed milestone (T 768). I do not accept that he told Mr Browne on this occasion that: "ATG will want to renegotiate". His evidence on this topic in cross-examination at T 765 was: "... It is incorrect to say that you said to Mr Browne after the news of the St Paul going ahead was known that ATG will want to renegotiate? --- I couldn't confirm or deny words to that specific intent. I would have expected to use some comfort situations, but I certainly believed that there would be some form of renegotiation associated with that missed milestone. But you can't swear that you said ATG will want to renegotiate, can you? --- Not to that level of definitiveness." The trip report (AB 3/979) does not refer to any renegotiation. There is in fact no evidence of any negotiations occurring prior to January 1996, until after Dr Westlake went on holidays. In my view, in December 1995, Dr Westlake was concurrently seeking to reassure Mr Browne of ATG's support, whilst at the same time putting "an appropriately positive spin" (T 767) on the results of the trip in order to persuade ATG to provide that support. Whilst Dr Westlake is likely to have expressed himself in comforting and confident terms, I am not satisfied that he made any commitment on behalf of ATG in relation to the waiver of the second tranche condition. 396 Obviously enough, the conversation on this occasion could not induce the agreement made on 13 November 1995, and Hayle's submissions do not indicate how or in what way a favourable finding on this issue would materially advance its case. (The fact that Dr Westlake accepted during this conversation that ATG had been guilty of some delay leads nowhere.) Whilst in par 124 of his affidavit Mr Browne ascribes to Dr Westlake an assurance that the second tranche would be funded even though the literal requirement of the milestone had not been met, I am not satisfied that what Dr Westlake said on this occasion rose to that level. Mr Jacobs' affidavit (26/5/99 par 5) does not support Mr Browne in that respect. Nor am I satisfied that Mr Browne would have acted in a manner different from the way in which he in fact acted had Dr Westlake told him that the failure to meet the milestone was a problem which would have to be confronted, and dealt with. Twenty-fourth representation 397 The competing contentions of the parties are set forth at pars 187-192 above. In my view it does not matter which version of the conversation is accepted. On either version, Mr Browne knew that the approval of the ATG Board was needed to secure the second tranche payment having regard to the lack of closing of the 3M deal. I accept that Dr Westlake would have expressed confidence and given comfort about the prospects of securing that approval, but the fact remains that Mr Browne knew that it was necessary and that Hayle at that point, did not have a commitment in relation to the provision of the second tranche. So much is clear from Mr Browne's report to the Board of 28 December 1995 at AB 3/997 where he referred to the need to obtain the commitment from ATG to get the second tranche approved despite the lack of closing the 3M deal. 398 Accordingly, in my view, this representation leads nowhere. Twenty-fifth representation 399 The competing contentions of the parties are summarised at pars 193-195 above. 400 Again, I do not think it matters which version of the conversation is accepted. It is likely that Dr Westlake said something to the effect that he had the matter under control, but as indicated in the previous section, Mr Browne knew that the approval of the ATG Board to the second tranche needed to be obtained because of failure to comply with the tranche condition, and he knew, at that point, that he did not have a commitment from ATG to make that payment. Twenty-sixth representation 401 The competing contentions of the parties are dealt with at pars 196-197 above. 402 Again, it seems to me that this representation leads nowhere. Again, I accept that Dr Westlake made supportive and comforting statements and generally expressed the view that the payment of the second tranche was likely to be approved. But the fact remains that Mr Browne knew that he needed a commitment from ATG to the making of that payment which he did not then have. Twenty-seventh representation 403 The competing contentions of the parties are dealt with at pars 198-206 above. The representations are set forth in par 199. Representations (a), (c) and (d) are alleged to be false, misleading and deceptive. 404 As to (a), the production of a cash flow projection showing the second tranche payment, in the context of the meeting, could not conceivably give rise to an implied representation that the second tranche payment would be made notwithstanding failure of the second tranche milestone because, as Mr Browne's report to the Board accepted, everybody knew that a commitment from ATG to making the second tranche payment was something which needed to be secured thereafter, rather than something which had impliedly been given already. 405 As to (c) it is common ground that at this meeting Dr Westlake told Mr Browne that ATG had mentally set aside an extra $250,000 above the $1 million in the event that there are cash flow difficulties. However, Hayle's submissions do not explain how this advances the case sought to be made. 406 As to (d), again I accept that Dr Westlake is likely to have expressed his confidence in securing a satisfactory outcome in relation to the second tranche payment, but whether he had done so or not, I do not think that Mr Browne's conduct would have been any different from what it was in fact. Accordingly, a claim based on this representation fails. 407 During this meeting, Dr Westlake claims that the following conversation occurred (Affidavit par 53): "Panco may have to put some extra money in. At the meeting both Belinda Green and Neville Browne said words to the following effect: 'I don't want to'. However, I read out to both of them what I had written which was 'the expectation is that the cash should be able to be managed with the anticipated ATG tranches with some possible help from Panco'. Neville Browne then said: 'Can you change what you have written to say short term help'. I said 'Yes'. My comment did not relate to the monies which were due to Panco by way of loan reimbursement but, in fact, related to monies which Panco would be required to make available to Hayle if the company was to continue." It seems odd that Dr Westlake did not remind Mr Browne of his statement that he would not be silly about putting in more money if bridging funds were required between tranches, if in fact a statement to that effect had been made. Thereafter Dr Westlake refers to the alteration which Mr Browne made to the minutes of that meeting in a manner which suggests that there was something underhand about that alteration. Clearly, there was not, as the handwritten notes had already been sent to ATG by Dr Westlake. 408 This evidence of Dr Westlake amounts to an assertion that prior to his going on holidays, he raised with Mr Browne the likelihood that Hayle would need to put some extra money in as part of the negotiations surrounding the failure to meet the second tranche condition. 409 This needs to be contrasted with his evidence in cross-examination at T 772-773, where he accepted that prior to writing his letter of 29 December 1995 to Dr Harbour, he had not mentioned to Mr Browne the prospect that he might have to pay in some of his own money in any way, other than delaying receipt of the $146,000. Dr Westlake's then intention was that ATG should negotiate with Mr Browne on a basis which required him to put some money into the company, but he had not told Mr Browne about it. 410 In cross-examination, Dr Westlake has completely contradicted the assertions which he made in his affidavit in this respect. Whilst this is not of any particular relevance to the representation under consideration, it is a factor which reinforces my view that Dr Westlake is not a reliable witness. Twenty-eighth representation 411 The competing contentions of the parties are set out at pars 207-212 above. 2FASC asserts that the twenty-eighth representation was partly true (par 89), but no consequences are pleaded as flowing from the twenty-eighth representation. That being so, the only relevance of the meeting which took place between Mr Browne and Dr Harbour on 3 January 1996 is for the light which it throws on the events of October 1995. 412 It is common ground that at this meeting Dr Harbour suggested that the solution to the cash flow problem was the injection of further $125,000 from each of ATG and Hayle (Browne Affidavit 29/5/99 par 146; Harbour Affidavit 31/8/99 par 3.8). Dr Harbour accepts that Mr Browne appeared surprised that Dr Harbour would make a suggestion to that effect, and that there appeared to be some misunderstanding involving Dr Westlake as to Hayle's willingness to put in further funds (T 885). 413 In cross-examination, Dr Harbour asserted that it was always his understanding that Mr Browne had refused to agree, in October 1995, to invest further funds, but it was Dr Westlake's belief that he might do so in certain circumstances. At T 888-889 the following appears: "What Dr Westlake repeatedly told me was that he believed that Mr Browne might invest funds under the appropriate circumstances if the needs were there and the business was successful and the conditions were right but Mr Browne never, to my knowledge, from talking with Barry said that he would, it was a negotiating, Barry believed it was negotiating. That he was negotiating this point and although Mr Browne said that he wouldn't, that Barry still believed for whatever reason that he might." Whilst this passage is a little unclear, when taken in context, Dr Harbour was seeking to convey that it was his understanding that Dr Westlake could not persuade Mr Browne to put up a temporary facility to cover cash flow shortages, but that it was Dr Westlake's belief that in appropriate circumstances, Mr Browne might be persuaded to do so. 414 If one accepts Mr Browne's evidence, at the meeting on 3 January 1996 he recounted to Dr Harbour his version of the events of 27 October 1995, including his refusal to commit to the provision of further funds, and his then being told by Dr Westlake that he had convinced the Board to go ahead with the deal despite Mr Browne's refusal to invest or promise to invest any more funds. If one accepts Dr Harbour's version of events that is something which he was not told on 3 January 1996, but at the Ritz Carlton meeting on 19 January 1996 (T 890, 898-899). For present purposes it does not matter which version is accepted. Mr Browne's letter of 24 January 1996 makes clear his contention that both Hayle and ATG had been misled by Dr Westlake (AB 3/1145). 415 What is important is that when Dr Harbour writes to the Board on 24 January 1996 (AB 3/1148) he makes no reference to this supposed misunderstanding, but asserts that Mr Browne had previously indicated to Dr Westlake his willingness to put in $250,000 additional cash within the first twelve months if required. The document AB 4/1208 refers to a contingency plan for Mr Browne to put up $250,000 additional capital in the first twelve months to meet possible cash shortfalls. The document AB 4/1255 refers to a previous commitment to put additional money into the project. 416 These written communications are quite inconsistent with Dr Harbour's oral evidence that it was his understanding that Mr Browne had refused to agree to invest further funds. The mere expression of a belief by Dr Westlake that in certain circumstances Mr Browne might be persuaded to adopt a different course could not possibly sustain the communications to the Board and to the Minister to which I have referred. 417 Dr Harbour could not explain the inconsistency between the terms of his oral evidence and his written communications. In par 227 above I referred to the fact that Dr Harbour claimed not to see any inconsistency between the terms of his memorandum of 24 January and his evidence on cross-examination, when the inconsistency is plain. I also referred to the fact that it was his evidence that he was not seeking to convey by this memorandum that Mr Browne had gone back on his word, when clearly, he was. 418 At T 887, in relation to the 3 January meeting, Dr Harbour said: "... it became obvious that we were operating off a different set of assumptions". That tends to suggest that Dr Harbour was then of the view that Mr Browne had already agreed, or was likely to agree, to contribute further funds to cover the cash deficiency. It is difficult to know what to make of the fact that Dr Harbour's affidavit (which does not join issue with the first sentence of par 114(m) of Mr Browne's affidavit) proceeds upon the basis that on 3 January 1996 it was Dr Harbour's belief that Mr Browne had agreed in October 1995 to advance further funds to cover a cash deficiency, whereas his oral evidence denies that this was his belief, yet his correspondence with the Board asserts the existence of an agreement made in October 1995 on the part of Mr Browne to put up further funds. 419 Hayle's submissions invite me to find that Dr Harbour was told, believed or assumed in October 1995 that at least a verbal commitment had been obtained from Mr Browne consistent with the "run out of cash" requirement. When Dr Harbour found out on 3 January 1996 that it was Mr Browne's contention that he had given no such commitment, Dr Harbour realised that the situation would impact very seriously on management. He then decided that ATG should extricate itself from its involvement in Hayle. His letters to the Board were designed to convince the Board to agree to an exit from the Hayle investment (T 905), and to cover up management's failure to implement the Board's decision. 420 The difference between Dr Harbour's oral evidence, his contemporaneous communications to the Board, and his professed inability (in one case) to recognise or (in all cases) to explain the discrepancy between his evidence and those communications, makes it difficult to have any confidence in his evidence. As already indicated, his communications with the Board support the inference which I would otherwise draw that the Board approved this investment upon the basis that the "run out of cash" requirement formed part of the Investment Proposal which the Board was authorising. The communications are also inconsistent with any disclosure to the Board in October/November 1995 of a refusal on the part of Mr Browne to contribute further funds to meet a cash shortfall, because the tenor of the communications is that Mr Browne had gone back on his word in relation to contribution of funds. 421 It is possible to conclude that in October/November 1995, Dr Harbour was deceived into believing, or deluded himself into believing, that Mr Browne had agreed to the "run out of cash" requirement; but if that were so, then his oral evidence is false. It is also possible that in October 1995 Dr Harbour's knowledge was consistent with his oral evidence, and his communications to the Board falsely presented the situation. If that were so, it would reflect adversely on Dr Harbour's credit. There may be other possibilities but none were identified in the course of submissions. 422 Whilst recognising the possibility that Hayle's submission might accord with the fact, I do not feel an actual persuasion that this is so. The probabilities are that both Dr Harbour and Dr Westlake had formed the view that the Board's objective embodied in the "run out of cash" requirement could be achieved by the indirect means to which I earlier referred. The 1996 communications with the Board were intended to throw the responsibility for what might be seen to be a failed investment on Mr Browne, and were expressed in terms calculated to induce the Board to agree to exit from the proposal. Twenty-ninth representation Thirtieth representation Thirty-first representation 423 Each of these representations is pleaded as the application of pressure or the making of threats to Hayle in various respects. No submissions were put by counsel for Hayle in support of any of them. Whilst they were not formally abandoned, I do not think that it is necessary for me to prolong an already overlong judgment to deal with them. Damages – loss of expected benefits 424 Par 122 of 2FASC particularises the damages claim. I have rejected the first way in which Hayle seeks to put its case, namely that were it not for ATG's misleading and deceptive conduct, Hayle's Sydney operation would have been closed down on 30 June 1995, and venture capital sought and obtained in the USA. It is not necessary for me to deal with the damages claimed on that basis. 425 The alternative way in which the case is put, is that were it not for the misleading and deceptive conduct on the part of ATG (which I have found), Hayle would not have entered into the agreement of 13 November 1995 with ATG, the Sydney operation would have been closed down on about 15 November 1995, and venture capital sought in the USA. Hayle contends that venture capital would have been obtained in the USA in about March 1996 in return for a 25 per cent equity in a business ("Hayle-USA") which would have been established, and successfully operated, in conformity with that part of the Hayle/ATG Business Plan for October 1995 which relates to the USA. 426 The case is that the results which would have been achieved by Hayle-USA from the commencement of its operation to 30 June 2000 would have been those predicted in that part of the Business Plan which relates to the USA (subject to minor adjustments), and that the forecast results for the financial year 2000 are a reasonable prediction in real terms of the results likely to be achieved thereafter. 427 On that basis, Hayle's expert accountant, Mr Vella, has calculated that: - Hayle's share of the pre-tax profits which would have been hypothetically derived by Hayle-USA from the commencement of its operations until 30 June 2000 is $9.4 million. - The hypothetical value of Hayle's 75 per cent interest in Hayle-USA at 30 June 2000 would be $33.25 million. That value is in addition to the accrued profit entitlement, and is based upon multiplying the forecast earnings in the year 2000 by price earnings multiple of 9. (Fourth report of Vella, par 3) 428 Hayle claims $42.65 million, or alternatively, damages for loss of chance to make profits, and to have a valuable business. In addition, various items of expenditure are claimed upon the basis that as a result of ATG's misleading and deceptive conduct, the expenditure on those items was wasted. 429 Mr Vella did not undertake any assessment as to the reasonableness of the projections contained in the Business Plan, or as to whether his calculations were a reflection of the loss which Hayle suffered in consequence of the misleading and deceptive conduct of which it complains. On the basis of the assumptions he was required to make, he concluded that a multiple of 9 was appropriate to a business which is assumed to have traded up to the financial year 2000 with the results as shown in the projections. ATG adopted a multiple of 10 in its internal consideration of the project (AB 2/494). Ms Exner, an accountant called by ATG, thought that a multiple of 3 was appropriate, because although instructed to assume that Hayle-USA performed in accordance with the Business Plan until financial year 2000, in her opinion, the risk associated with Hayle was significantly higher than that of an established company, and a multiple of 3 is more appropriate to a business of that character (see Joint Report of Vella and Exner, dated 6/6/00 par 13-16). 430 As indicated in par 234 above, Mr Browne's evidence was that he formed the view in February 1996, that it would be impossible to attract venture capital to any business which had Hayle's experience with ATG in the recent past. In Mr Browne's view, the fact that Hayle had attracted a venture capitalist who had then, after a short period, abandoned the deal would be impossible to explain away, even though the explanation might completely exonerate Hayle and the HayleSystem. 431 Between 8 April 1996 and 16 July 1999, Hayle made seven trips to the USA, (and at least once to Europe), in attempts to secure a licensing agreement for the HayleSystem. Hayle retained three advisers to assist in those attempts. The following trips were made: 1. 8 April 1996-20 May 1996; 2. 15 October 1996-15 November 1996; 3. 17 May 1997-30 May 1997; 4. 20 June 1997-1 August 1997; 5. 28 February 1998-19 April 1998; 6. 28 January 1999-6 March 1999; 7. 7 June 1999-16 July 1999. Hayle incurred costs of $132,649.31 by way of trip expenses (AB 4/1636) and $61,922.62 in consultants' fees (AB 4/1473), a total of $194,571.93, in its unsuccessful attempts to secure a licensing arrangement. 432 On 22 May 1996, after the first trip, Hayle wrote to 3M (AB 4/1256). The letter stated that Mr Browne had been "meeting with potential investors/licensees with the view to launching the HayleSystem" in the USA. The first trip report (AB 4/1257) refers to a meeting with a very wealthy potential investor, who was impressed with the presentation, and would be an investor if Hayle decided to go that way. There is also a reference to a lady from Hankin Investment Banking, discussing a possible appointment as a non-exclusive finder of "potential investor/licensee" (AB 4/1259). My attention was not drawn to any other entries in the trip report which unambiguously referred to meetings with potential investors. Nor was my attention directed to any entry in the trip report to the effect that ATG's withdrawal had any adverse effect upon potential investees or licensees. There was no cross-examination on the trip reports. 433 No cross-examination was directed to Mr Browne to the effect that his evidence that the stigma of the failed ATG deal would make a venture capital deal impossible, was an opinion which he did not genuinely hold. 434 Two United States experts were called in the field of venture capital. Hayle called Mr Rider, who had a background of 30 years experience in venture capital investing. ATG called Mr Feigen, whose background in venture capital was as a regulator, as a consultant, and as a teacher but who had some involvement in the provision of venture capital himself. 435 In Mr Rider's first report the following question was posed: "3. What was the likelihood that Browne could have secured venture capital funding for Hayle USA after January 1996 in light of the history of the association between ATG and Hayle in Australia in 1995 and early 1996, and in particular in light of ATG's withdrawal from the deal on 29th January 1996?" Mr Rider's answer to that question was: "Highly unlikely". The reason which he gave for that answer is that US venture capitalists would be likely to follow the lead of the Australian firm and to assume that ATG must have discovered some serious problem with the deal, and used the 3M problem as an excuse to exit. Further, deals in the venture capital market are either dead or alive. "By early 1996 the Hayle deal was dead". 436 Mr Feigen was of the view (First Report of Feigen, dated 10/2/00 par 10) that Mr Browne would have substantially the same likelihood of obtaining venture capital funding for the investment after January 1996 as he would have had during the second half of 1995: "If a US venture fund received negative 'vibes' during the due diligence process because another fund turned a deal down or backed out of the deal, it might raise serious questions, but would not automatically kill the deal as long as the US market clearly demonstrates a distinct opportunity to grow exponentially, the product is proven unique, and the plan and the entrepreneurs make sense. If there are insurmountable reasons why the deal may no longer be attractive or the risk becomes too great then it would be difficult to raise interest. However, it is not unusual in the US for six venture firms to turn a deal down while six months to a year later six other venture firms actually do the same deal with some modifications." 437 The disagreement between the experts upon this issue was not removed by their joint report. As I understand that report: - Mr Rider answered question 3 "Highly unlikely" because of his view as to the negative impact upon US venture capitalists of ATG's refusal to proceed with its proposed investment. - Mr Feigen answered that question "Unlikely", because it was his view that Hayle-USA would not have been funded in 1995, and Hayle would have had substantially the same likelihood of obtaining funding for the investment after January 1996 as it would have had in 1995. 438 In Mr Rider's third report he was asked this question: "3. Would potential investors have viewed Browne's withdrawal from ATG negotiations in October 1995 negatively?" His answer to that question was: "No." The question is put in the context of an assumption that Mr Browne withdrew from negotiations with ATG in consequence of its requirement made on 27 October 1995 that if for some reason the roll-out was slower than expected, and bridging funds became necessary between tranches, Mr Browne would provide half of those funds and ATG would provide the other half. 439 Mr Feigen's response to the same question was: "Unlikely." because prospective investors and entrepreneurs often go their separate ways during the negotiations process (Second Report of Feigen 24/5/00). 440 As I understand the expert evidence, it is to the effect that Hayle's prospects of obtaining venture capital in the USA would not have been materially lessened on the hypothesis that Hayle called off the proposed deal with ATG because ATG imposed a requirement that Hayle should contribute to bridging finance, a requirement to which Hayle would not agree. 441 The experts could not agree on whether or not Hayle would have been able to secure funding if it sought it in November 1995. The following question was put to the experts: "Whether Browne, in early 1996, in your opinion, would have secured $US1.15 million in venture capital funding in the USA to finance the commercial exploitation of the HayleSystem in the United States based on a Business Plan ... which would have actually been the same as the October 1995 Hayle/ATG Business Plan ... except that the Australian operations, having been closed down in November 1995, would not be a part of the new Hayle USA Business Plan and the focus would have been exclusively on the United States." Mr Rider's answer to that question was: "Yes" and Mr Feigen's answer was: "Unlikely." Their respective answers to a similar question as at mid-1995 was, in the case of Mr Rider, "Yes", and in the case of Mr Feigen, "No". Thus their views were less polarised in relation to the position at the end of 1995 than they were in relation to the position as at mid-1995 because in the second half of 1995 the venture capital market in the United States was stronger than it had been at mid-year. 442 One of the factors which Mr Feigen took into account in expressing his view is that Mr Browne's visits to the United States at the end of 1994 and in early 1995 had not exposed any serious interest by a potential venture capitalist in investing in the project. Hayle submits that this assumption does not accord with Mr Browne's evidence that his trips to the United States prior to April 1995 were merely to investigate opportunities, rather than to ask venture capitalists for money and follow through such requests to finality. 443 One of the reasons that Mr Browne went to the United States in March 1995 was to pursue sources of finance, and to determine what the level of interest was in the provision of finance (T 198). Mr Feigen had some difficulty in coming to grips with an assumption that serious interest was expressed on these trips which Mr Browne simply elected not to follow through because "anytime anybody expresses interest you want to follow up on it" (T 849). Nonetheless he accepted that if it were the fact that in the early part of 1995 American venture capitalists had expressed serious interest in investing in Hayle, then he could not give a negative answer to the question which was put to him (T 850-851). 444 I was invited to prefer the evidence of Mr Rider over that of Mr Feigen because of their differing backgrounds and because of Mr Feigen's erroneous assumption in relation to the pre-April 1995 expressions of interest by venture capitalists investing in the HayleSystem. 445 On the evidence, I do not think that Mr Feigen made an erroneous assumption as to the level of interest on the part of US venture capitalists prior to April 1995. One of the reasons for the March visits was to ascertain the level of interest in the provision of venture capital, which resulted in Mr Browne having "a couple of expressions of sort of very tentative prima facie interest" (T 218). Nor do I think that their different backgrounds provides a sufficient, or indeed any reason for preferring the evidence of one over that of the other. It is simply a case in which two experts have a different opinion on a matter where legitimate differences of opinion might well be expected. 446 Mr Rider's evidence is given in the most general of terms. He does not say that he would have been prepared to invest money in the project, nor does he identify any particular venture capitalist who, in his opinion, would have been prepared to do so. Nor does he describe any market practice which would enable a conclusion to be drawn that the Hayle proposal fell within some accepted parameters which guided the provision of venture capital. His assessment is an intuitive one, that Mr Browne and the HayleSystem were likely to be attractive to venture capitalists. Given the heterogeneous nature of the market, that must mean attractive to some venture capitalists. 447 Mr Rider's third report is based upon the assumption that by December 1995 Hayle had secured the verbal commitment of the 3M company to fund and conduct a twelve month trial of the HayleSystem involving between 200 and 500 employees at the 3M plant in Austin, Texas, as soon as the HayleSystem infrastructure was in place (Assumption 8). His report does not refer to the significance of this assumption (as distinct from the corresponding assumption made in the first report), or to the likelihood of venture capital being provided in tranches. 448 Of course if Hayle were seeking venture capital in the USA in and after November 1996, it would be doing so in a context where the 1,000 person trial with 3M in St Paul would not be achieved. The October 1995 Business Plan was based on the successful completion of this trial, inasmuch as at least initially Hayle intended to rely on the domino effect of the success at 3M to increase the level of corporate sponsorship. The number of corporate sponsors was estimated to be 10 in the first year, 20 in the second, 40 in the third, 75 in the fourth and 100 in the fifth (AB 2/586). Apart from the Business Plan itself, there is no material which indicates the likelihood of that level of sponsorship being achieved. 449 Whether Hayle suffered any loss or damage in consequence of the misleading and deceptive conduct which I have found involves a comparison between what actually happened, and what would have been the case if the misleading and deceptive conduct had not occurred. What actually happened is that Hayle entered into the agreement with ATG on 13 November 1995 and received $300,000 pursuant to that agreement. The agreement was terminated on 29 January 1996, and Hayle agreed to pay $300,000 to ATG. What would have been the case if the misleading and deceptive conduct had not occurred is that Hayle would not have entered into the agreement with ATG, but would have sought venture capital in the USA from about November 1995. 450 There is an issue between the parties as to whether Hayle needs to prove on the balance of probabilities that it would have succeeded in obtaining venture capital from an alternative source, or whether the Court is required to estimate the chance of that occurring, and to reflect the chance in the amount of any damages it awards. 451 Hayle's objective was to establish and successfully conduct the business of Hayle-USA in accordance with the Business Plan, so as to derive the benefits in terms of income and capital value reflected in Mr Vella's calculations. The damages claim is constructed on the basis that but for the misleading and deceptive conduct in question Hayle could and would have achieved that objective. 452 A number of contingencies lay in the path of that objective; venture capital had to be found, Hayle-USA needed to be established, the corporate sponsorships projected in the Business Plan needed to be obtained, and the other assumptions on which the Business Plan was based needed to be made good. So many contingencies lay in the path of that objective, that whether or not it would be achieved is a matter of pure speculation. 453 Alternatively, Hayle puts its case on the basis of a loss of a valuable opportunity. In order to succeed on that alternative case, Hayle would need to prove both that there was a valuable opportunity, and that in consequence of the misleading and deceptive conduct which I have found, that opportunity was lost to it. 454 Hayle's ability to exploit commercially the HayleSystem in a manner not involving ATG was restored to it when the Shareholders' Agreement was terminated on 29 January 1996. At least in theory, Hayle could then have entered into arrangements with a venture capitalist and proceeded to implement the Business Plan. That Hayle believed it had not lost the opportunity to exploit the HayleSystem commercially is illustrated by the fact that it attempted to so, albeit unsuccessfully, in the seven trips which Mr Browne made to the USA thereafter. 455 If, Hayle could and would have entered into a contract with a venture capitalist in the USA, instead of doing so with ATG, then, depending on the terms of that contract and any tranching conditions, Hayle would have had a prospect of acquiring the financial benefits it sought to achieve. The value of that opportunity could be ascertained by reference to the degree of probabilities or possibilities: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355. That returns of the level shown by the Business Plan are expected by a venturer providing $2 million capital, demonstrates the magnitude of the risks which lie in the way of the achievement of those returns. 456 Causation and the existence of a loss needs to be established on the balance of probabilities, although that standard is inappropriate to the assessment of the amount of a loss where the assessment depends upon an evaluation of future possibilities: Sellars at 355 and 367. The finding that a loss has been suffered is to be made on the balance of probabilities whether or not the finding depends upon historical facts or evidence giving rise to competing hypotheses: Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 423 per Gaudron J. See also Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 511 where McHugh, Hayne and Callinan JJ referred to the plaintiff having to prove that he "could and would" have entered into an alternative contract but for his reliance on the misleading and deceptive conduct of the defendant. 457 Thus, in order to prove loss and causation Hayle needs to establish on the balance of probabilities that: - but for the misleading and deceptive conduct which I have found, it would not have entered into the contract with ATG; - it could and would have obtained venture capital to establish and operate Hayle-USA from an alternative source; - it lost the opportunity of deriving profits from Hayle USA by reason of the misleading and deceptive conduct which I have found. 458 In Sellars the prejudice or disadvantage which the respondents suffered in consequence of the misleading and deceptive conduct was the loss of the opportunity or chance of securing commercial benefits, which entry into and completion of the Pagini agreement would have brought. Both the majority (p 356) and Brennan J (p 368) regarded it as significant that but for the misleading and deceptive conduct, the Pagini contract would have been entered into. Although, on the probabilities it would not have been completed because conditions precedent to the performance would not have been satisfied, there was a significant chance (40 per cent) that it would have been. 459 I am not satisfied on the balance of probabilities either that Hayle would have obtained venture capital in the USA had it broken off negotiations with ATG at the end of October 1995, nor am I satisfied to the requisite standard that whatever chance of obtaining venture capital which Hayle then had, was destroyed by the circumstances surrounding ATG's withdrawal from the project. 460 As to the first of those matters, one of the reasons for the March 1995 visit to the USA was to ascertain the level of interest in providing venture capital to the project. Thereafter Hayle chose to proceed with its negotiations with ATG rather than pursuing whatever venture capital opportunities were available in America. No venture capitalist who was contacted on that visit gave evidence that it had any interest in providing venture capital to the project. No venture capitalist was called to say that it would have been prepared to provide venture capital, and if so, on what terms. No practice was established such as would enable one to conclude that the present case was one in which venture capital would ordinarily be provided on acceptable terms. Venture capitalists are a heterogeneous group of people and the evidence from each expert was little more than an educated speculation as to what others might or might not have done, falling short of proof on the balance of probabilities. 461 As to the second, again there is a disagreement between the experts. Both Mr Feigen and Mr Rider were witnesses who were honestly expressing different views, but I was more persuaded by the following evidence given by Mr Feigen in cross-examination: "You do agree that the pull out of ATG within ten weeks of funding the matter the first time is a serious question which would need to be fully explained before a venture capitalist would invest? --- Yes, I think that's a significant question. You agree that the fact that one venture capitalist had pulled out of a deal that it had agreed to fund is something that other venture capitalists would take seriously? --- They would ask questions. They wouldn't kill the deal. Well, when you say it wouldn't kill the deal it would depend on just whether the venture capitalist was able to satisfy itself that there was no smell remaining about the deal, that's right, isn't it? --- What the issues are, yes, whether there is a smell or something else. And unless the smell could be dispelled the venture capitalist wouldn't touch it, that's right, isn't it? --- It might express an interest but certainly when they due diligence they wouldn't do the deal until that was explained." (T 858) than by the reasons given by Mr Rider in support of his "highly unlikely" answer to question 3 posed in the first report. Whilst I generally accept Mr Browne's evidence that in 1996, his concentration was upon securing licensees, rather than venture capital, it is clear from the trip reports that there were at least some venture capitalists who were spoken to, but there is no evidentiary foundation for a conclusion that any of them were deterred from investing by reason of the ATG experience. 462 It follows that Hayle has not made out its case to recover the pre-tax profits and the hypothetical value of its profit entitlement. Even if Hayle had established on the balance of probabilities that venture capital would have been raised by it, I would not have been satisfied on the balance of probabilities that the results projected in the Business Plan would have been achieved, or that the lesser ATG figures would have been achieved. 463 Either there would have to be an assessment of the chance of achieving those results, or the projections would need to be substantially discounted to allow for contingencies. Hayle was willing to part with a 30 per cent interest in the venture for a contribution of $2 million by way of venture capital and ATG was willing to pay $2 million in order to obtain a 30 per cent interest in the chance of obtaining the revenue stream predicted by the projections of the Business Plan. Its risks were hedged by the tranches and the tranching conditions, but on a very broad view, that suggests that, if venture capital is obtained, the value of a 70 per cent interest in the chance of obtaining the revenue stream predicted by those projections is of the order of $4.66 million. Whilst no evidence was called that this was an appropriate method of calculating damages, it approximates a market assessment of the value of the opportunity and in my view it more closely reflects reality than the artificial calculations undertaken by Mr Vella and Ms Exner. 464 Given my conclusion on the expert evidence, it is hard to make an assessment of the chances of Hayle obtaining venture capital in the USA before and after the ATG transaction. Nor, in view of my conclusion, is it necessary for me to do so. If I had to make a percentage estimate I would estimate the prospects of obtaining venture capital in the USA before the ATG transaction as being of the order of 30 per cent, and after the ATG transaction as being of the order of 10 per cent. But I would find it difficult to martial reasoned arguments in support of the particular percentages I have chosen rather than some other percentage which was less than 50 per cent, such as, eg, 40 per cent. 465 If I were wrong in my conclusion that Hayle needs to establish on the balance of probabilities that it would have been successful in raising venture capital in the USA, and it was sufficient to establish that it had, eg, a 30 per cent chance of doing so which was lost, then in the absence of any other evidence as to the value of the chance, I would have estimated the value of the lost chance of obtaining venture capital and achieving the projections of the Business Plan at 30 per cent of $4.6 million, ie $1.38 million. Damages – outgoings $300,000 liability under Share Sale Agreement. 466 Hayle contends that if it had not entered into the agreement with ATG then the Share Sale Agreement and the Guarantee and Indemnity, both dated 29 January 1996, would not have been executed. It follows that none of the applicants would have incurred the $300,000 liability created by the latter two documents. But neither would Hayle Holdings Pty Ltd have received the first tranche capital subscription of $300,000. 467 Thus, at least in the case of Hayle Holdings Pty Ltd, the liability which it assumed on 29 January 1996 was matched by an equivalent benefit it would not have otherwise received in November 1995. 468 Hayle's submissions do not distinguish between the position of individual applicants. ATG's submissions did not condescend to dealing with the damages claim at this level at all. It may be that applicants other than Hayle Holdings Ltd may have some claim, for example under s 87 of the Act in this respect. As counsel were responsibly endeavouring to fashion their submissions to accommodate reasonable time expectations, I do not propose, at this stage, to make any order in relation to this aspect of the claim, but will simply reserve liberty to the applicants to argue on the basis of the existing evidence whether any, and if so what, order is appropriate in this respect. $488,270 trading losses incurred as a direct result of postponing the closedown of Hayle Sydney from 15 November 1995 to 14 February 1996. 469 Mr Browne's evidence was that if he had known what I have found to be the true position, he would have closed down the Sydney operation, and sought venture capital in the USA. On my findings, he should have been told the true position at least by 27 October 1995. ATG did not put any submissions to the effect that the closure of the Sydney office could not have been effected within the time frame contemplated by Mr Vince's report. 470 In Mr Vince's second report he was asked this question, to which he gave the following answer: "QUESTION FOR OPINION: What trading losses were incurred by the Hayle Group of companies as a direct result of postponing the close-down of the Sydney operation from 15th November, 1995 until 14th February, 1996? OPINION: Based on the information provided and the assumptions made, the answer to the above question is: $488,270 Australian Dollars." 471 Mr Vince was not cross-examined. No submissions were put by counsel for ATG as to why, if I came to this point, I should not simply adopt Mr Vince's conclusion. In those circumstances, I do not think that I should comb through Mr Vince's report for myself with a view to finding whether there are deficiencies in it which have not been identified, let alone argued, by counsel for ATG. 472 One of the purposes of the "line in the sand" was to prevent erosion of Mr Browne's capital by trading losses which were being incurred in the hope that something might turn up. I accept Mr Browne's evidence that he would have closed the Sydney operation if he called off the negotiations with ATG. In the circumstances to which I have referred, the applicants are entitled to judgment in the sum of $488,270. $194,571.93 expenses incurred in attempting to secure a licensing arrangement with Hayle Technology from 14 February 1996 to date. 473 I accept that these expenses were incurred for the purpose indicated. No argument was put by counsel for ATG to the contrary. The argument for payment of this sum really proceeds on the basis that had the proposed deal with ATG been called off in November 1995 venture capital would have been obtained, hence there would have been no need to pursue licensing arrangements. 474 Whilst I am satisfied that Hayle would have pursued the raising of venture capital, I am not satisfied that it would have been successful in that respect. No doubt some expenses would have been incurred in the unsuccessful pursuit of venture capital, but I do not know what they are likely to have been. 475 Nor do I know whether, if the pursuit of venture capital had been unsuccessful, as I have found, Hayle would nonetheless have pursued a licensing arrangement. 476 In those circumstances, Hayle has not discharged its onus of showing that this expenditure would not have been incurred if ATG had not engaged in the misleading and deceptive conduct which I have found. $A81,679 expended in developing the 3M relationship which was lost. 477 This expenditure was incurred in the period between November 1994 and March 1995 when Mr Browne travelled to the USA in order, amongst other things, to develop a relationship with 3M. This expenditure was wasted because of the unexpected problems which arose at 3M on 29 November 1995, rather than by reason of the misleading and deceptive conduct on the part of ATG which I have found. Conclusion 1. There should be judgment for the applicants in the sum of $488,270. 2. I reserve for further consideration the question of whether any relief should be granted to parties other than Hayle Holdings Pty Ltd in relation to the incurring of a liability to ATG in the sum of $300,000 pursuant to the agreements of 29 January 1996. 3. I will hear argument on the question of costs. I certify that the preceding four hundred and seventy-seven (477) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely. Associate: Dated: 5 September 2000 Counsel for the Applicant: Mr J Campbell QC, Mr R Weber, Mr M Henry Solicitor for the Applicant: Aitken McLachlan & Thorpe Counsel for the Respondent: Mr B Walker SC, Mr P O'Loughlin Solicitor for the Respondent: Gordon & Johnstone Date of Hearing: 26-30 June, 3-7 July, 10-11 July, 13-14 July, 17 July 2000 Date of Judgment: 5 September 2000