New South Wales Court of Appeal CITATION : LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 HEARING DATE(S) : 21 October 2002 JUDGMENT DATE : 10 April 2003 JUDGMENT OF : Meagher JA at 1; Hodgson JA at 2; Young CJ in Eq at 13 DECISION : Appeal dismissed with costs. Cross appeal as to costs dismissed. CATCHWORDS : Contracts- Meaning of "successful"- Conditions to a contract- Construction of commercial contracts- Rules of legal interpretation- When pre-contractual material is admissible to aid construction of a contract- When post-contractual material is admissible to aid construction of a contract- Significance of substitution of contracting parties- "Surrounding circumstance" evidence regarding contracts- Dictionary principle- Frustration of contract. Inducing breach of contract- Companies controlled by common directors- Whether in same position as conspiracy between company and its directors- Held analogy inappropriate- Mere failure by common directors to take steps which might prevent a breach of contract does not constitute inducing a breach. Damages- Gross uncertainty regarding damages due to the absence of evidence should be resolved adversely to the party who could and should have called that evidence- Calderbank letter- How far relevant when one party succeeds as to 80%- Indemnity costs- Cross claim for costs. (D) Aberdeen Asset Management Ltd v Challenger Wealthlink Management Ltd [2002] NSWCA 245 Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd (1999) 21 WAR 425 Administration of the Territory of Papua New Guinea v Daera Guba (1973) 130 CLR 353 Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251 Baulkham Hills Private Hospital v GR Securities Pty Ltd (1986) 41 NSWLR 622; on appeal (1986) 40 NSWLR 631 HL Bolton (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159 Bowes v Shand (1877) 2 App Cas 455 Brambles Holdings Ltd v Bathurst CC (2001) 53 NSWLR 153 British Motor Trade Association v Salvadori [1949] Ch 556 Brown v Dunsmuir [1994] 3 NZLR 485 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 Fotheringham v Fotheringham (No 2) (1999) 46 NSWLR 194 Hearst v WJ Lake & Co Inc 16 P (2d) 627, 629 (1932) Ho v Powell (2000) 51 NSWLR 572 Hofer v Howell (2001) 113 LGERA 391 Investors Compensation Scheme Ltd v West Bromidge Building Society [1998] 1 WLR 896 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 76 ALJR 246 CASES CITED : Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Insurance Cases 60-853 Masters v Cameron (1954) 91 CLR 353 McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 707 Mitchell v Henry (1880) 15 Ch D 181 Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 Naomi Marble & Granite Pty Ltd v FAI General Insurance Co Ltd (No 2) [1999] 1 Qd R 518 Nicoll v Pittsvein Coal Co 269 F 968, 971 (Circuit Court of Appeals, 2nd Circuit) (1920) Nobrega v Trustees of the Roman Catholic Church of the Archdiocese of Sydney (No 2) [1999] NSWCA 133 O'Brien v Dawson (1941) 41 SR (NSW) 295 (affirmed HCA (1942) 66 CLR 18) Oran Park Motor Sport Pty Ltd v Fleissig [2002] NSWCA 371 Pan Foods Company Importers & Distributors Pty Ltd v Australia & New Zealand Banking Group Ltd (2000) 74 ALJ 791 Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd (2002) 25 WAR 511 Re Rossfield Group Operations Pty Ltd (1980) 5 ACLR 237; [1981] Qd R 372 Re Sassoon [1933] 1 Ch 858 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436 Sasson v Fahevu [1999] NSWCA 400 B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147 Shore v Wilson (1842) 9 Cl & Fin 355; 8 ER 450 Skalkos v Assaf (No 2) [2002] NSWCA 236 Smith v Wilson (1832) 3 B & Ad 728; 110 ER 266 Sportsvision Australia Pty Ltd v Tallglen Pty Ltd (1998) 44 NSWLR 103 LMI Australasia Pty Limited (Appellant) PARTIES : Baulderstone Hornibrook Pty Limited (1st Respondent) Docklands Stadium Consortium Pty Limited (2nd Respondent) Baulderstone Hornibrook International Limited (3rd Respondent) FILE NUMBER(S) : CA 40197/02 COUNSEL : AJ Sullivan QC, RJ Weber SC and KM Richardson (Appellant) RBS Macfarlan QC and PD Santamaria (Respondent) SOLICITORS : Moray & Agnew (Appellant) Gadens (Respondent) LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT 50023/00 FILE NUMBER(S) : LOWER COURT Barrett J JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40197/02 MEAGHER JA HODGSON JA YOUNG CJ in EQ Thursday 10 April 2003 LMI AUSTRALASIA PTY LTD v BAULDERSTONE HORNIBROOK PTY LTD Judgment 1 MEAGHER JA: I agree with Hodgson JA. 2 HODGSON JA: I agree with the orders proposed by Young CJ in Eq and substantially with his reasons. 3 Under the relevant Heads of Agreement, the appellant (LMI) was entitled to be appointed manager of the Colonial Stadium if any of "the Bids" to be made to the Docklands Authority for the development of that Stadium by the second respondent (DSC), or by the first respondent (BH) or the second respondent (BH International) on behalf of BSC, were "successful". 4 DSC (a wholly owned subsidiary of BH International) submitted two bids on behalf of a consortium which included a company associated with LMI. The tender documents required the nomination of a manager for the Stadium, and both bids nominated LMI. There were then negotiations between the Authority and DSC, which led to an agreement dated 3 September 1997 for the development of the Stadium, to which Stadium Operations Limited (SOL), a wholly owned subsidiary of BH, was a party. 5 The negotiations and the agreement involved some changes from the bids as originally submitted: 1. The bids were $150 million short of underwriting requirements, and they required the Victorian government to provide that shortfall; and the Authority conveyed to DSC that it had reservations about the bids on that account. 2. New parties were introduced to the bidding process, committed to providing the finance that the original consortium members could or would not provide, including Seven Network Limited (Channel 7). 3. The Authority identified, as an unsatisfactory part of the bids, that LMI had no direct Australian management experience; and to satisfy that concern DSC notified the Authority that it would approach an organisation identified as "Spotless" to become involved in the management. 4. The agreement was made with a consortium omitting the company associated with LMI and including the new investors. 5. The agreement did not identify the manager to be appointed, but required the "developer" (being parties to the agreement including SOL, another company in the Balderstone group, and National Mutual Trustees as trustee of a unit trust representing other investors) to appoint the manager after consulting with the Authority as to the terms of the agreement. 6. On 10 August 1998, a wholly owned subsidiary of Spotless was appointed manager, and a wholly owned subsidiary of LMI was appointed a consultant to the manager. 6 No claim was made against DSC or associated companies that they had breached fiduciary duties as agents for members of the original consortium including the company associated with LMI. There was a claim made that DSC was obliged to act in good faith in performance of the Heads of Agreement; but no claim that, if it had done so, some different agreement would have been made that would have counted as one of the bids being successful. The claim made was that, in the events that happened, one of the bids was in fact successful. 7 Mr. Sullivan QC submitted that what was in contemplation by the Heads of Agreement was that there would be an evolving process of negotiation, potentially involving extensive revision and change including change concerning finance arrangements. It was also contemplated that if a bid as modified by such a process was accepted, that would count as one of the bids being successful. He submitted that the agreement as negotiated did not preclude the appointment of LMI as manager, and DSC's (and therefore SOL's) obligation was to ensure that that appointment was made. 8 In my opinion, plainly the substitution of SOL for DSC as a contracting party would not of itself mean that this was not a situation where the DSC bid had been successful, and the contrary was not contended. However, in my opinion the differences between the bids contemplated by the Heads of Agreement and the agreement of 3 September 1997 were such that the agreement could not count as one of the bids being successful. 9 Although the agreement did not in terms preclude the appointment of LMI, such appointment (rather than appointment of a Spotless/LMI combination) was opposed by the Authority, and the agreement was awarded to a consortium including Channel 7 and not including LMI or an associated company. In those circumstances, the appointment of LMI as manager could be seen as both undesirable and difficult to achieve, because of the Authority's opposition and because of the involvement of National Mutual Trustees on behalf of other investors, and also (having regard to the circumstances of entry into the agreement) at least potentially contrary to representations made during the negotiations. In my opinion, that fact, together with the substantial difference in the consortium made to overcome a shortfall of $150 million in underwriting finance, meant that the agreement was not fairly or reasonably characterised in terms of one of the bids referred to in the Heads of Agreement being successful. 10 In those circumstances, it is not necessary to consider questions of liability for inducing breach of contract or damages. However, I would comment shortly on these matters. 11 The mere circumstance that DSC was a wholly owned subsidiary of BH International with some common directors, and that SOL was a wholly owned subsidiary of BH also with some common directors, is insufficient without more to justify an inference that either BH International or BH, or both of them, induced a breach of contract. It could be inferred that BH International and BH, if they knew the facts, could given time have prevented DSC and SOL acting as they did, if only by calling meetings to dismiss directors or threatening to do. But the directors of DSC and SOL are not liable as such for inducing breach of contract (O'Brien v. Dawson (1942) 66 CLR 18), and in any event it is not shown that common directors knew the relevant facts. Furthermore, in my opinion the mere failure to take steps which might, given time, have been taken to prevent a breach of contract, is insufficient for the tort of inducement of breach of contract or interference with contractual relations. 12 On the question of damages, LMI led no evidence concerning the expenses and outgoings it would incur in earning the management fees, beyond a statement that one aspect of those expenses and outgoings would be "minimal". The primary judge correctly held that this did not mean that LMI had not proved any loss; but in my opinion, in determining that the expenses necessary to earn management fees of $500,000.00 per year would be $60,000.00 per year, the primary judge did not apply the principle that gross uncertainty due to the absence of evidence should in general terms be resolved adversely to the party who could and should have called that evidence: see Ho v. Powell (2000) 51 NSWLR 572, and Oran Park Motor Sport Pty. Limited v. Fleissig [2002] NSWCA 371 at [66] and cases there cited. In my opinion, a correct application of that principle would have resulted in a finding of damages certainly no more than about $100.000.00 per year. 13 YOUNG CJ in EQ: This is an appeal from a decision of Barrett J sitting in the Commercial List in the Equity Division. 14 The dispute before the Court concerns whether the respondents are liable to pay the appellant damages for a breach of clause 2.1 of Heads of Agreement made between them on 30 June 1997 with respect to what was then known as the Colonial Stadium at the edge of the Melbourne CBD. 15 Essentially, the appellant says that it was promised that if the respondents' bid to be the developer of the Colonial Stadium was successful, the appellant would be appointed manager of the stadium. It says that the bid was successful, but it was not appointed manager. The respondents say that, whilst they obtained the rights to develop the stadium, this was not because the bid in question was successful. Indeed, they say, that any bid guaranteeing the appointment of the appellant as manager would have failed. Barrett, J found that the condition that the bid be successful was not fulfilled. 16 His Honour found that the Heads of Agreement constituted a binding contract under either the first or fourth class of preliminary or provisional agreements referred to in Masters v Cameron (1954) 91 CLR 353 and Baulkham Hills Private Hospital v GR Securities Pty Ltd (1986) 41 NSWLR 622 (and on appeal (1986) 40 NSWLR 631). The respondents challenge this view in their notice of contention. 17 The Heads of Agreement contained recitals A to E as follows: A. The Developer is presently developing the Bids (in competition with two other consortia) for the Facility. B. The Bids are to be submitted to the Docklands Authority on or before 30 June 1997. C. The parties have agreed that, if any of the Bids are successful, LMI shall be appointed as Manager of the Facility. D. The parties wish to enter into this Heads of Agreement to record the terms upon which LMI shall be appointed as Manager of the Facility. E. If any of the Bids are successful the parties intend to enter into a formal Facility Management Agreement, but, in the meantime, intend this Heads of Agreement to be legally binding. 18 Clause 2.1 of the Heads of Agreement provided: "If any of the Bids are successful, the Developer agrees that it shall appoint LMI as Manager of the Facility." 19 The Heads of Agreement defines "Bids" as the bids to be made by the developer (the second respondent) or the first and third respondents on behalf of the second respondent. LMI (a subsidiary of Leisure Management International based in Texas, USA) is the appellant. The Facility is the Colonial Stadium. 20 Barrett J found that although the respondents were the people who were awarded the Facility or as the appellant would have it, "won the job", yet it could not be said that the bids are successful. He thus found for the respondents on the part of the case which is the subject of this appeal. However his Honour said that should he be wrong he would and did give an indication as to how damages should be assessed. It would seem that the computation of damages assessed according to his Honour's guidelines would have been in the vicinity of $4,500,000.00. 21 It is virtually conceded that if the appellant fails in its submission that in fact the bid was successful then it would fail altogether. It is thus expedient to consider this point first. However, before I do so, I should note that in contract the appellant can only succeed against the second respondent which we are told is a $2 company. In order to succeed against the first or third respondents, the appellant must also succeed in showing that they or either of them induced a breach of contract. Barrett J held that this question did not arise but that if it did, then on analogy with the principles discussed by Jordan CJ in O'Brien v Dawson (1941) 41 SR (NSW) 295, 308-9, affirmed by the High Court of Australia (1942) 66 CLR 18, it was not actionable. I will discuss this in due course. 22 I should briefly sketch the history of the project after the entering into of the Heads of Agreement. The second respondent submitted two bids, a conforming bid and a non-conforming bid. The tender documents required nomination of a manager and the bids named the appellant as manager. 23 Barrett J said in [6] to [16] of his judgment, so far as is currently relevant, that: "DSC (the second respondent Docklands Stadium Consortium Pty Limited) submitted the bids on behalf of a consortium consisting of itself, KPMG Corporate Finance (Vic) Pty Ltd, ISFM (Mr Watson's company and a 50% shareholder in LMIA (the plaintiff)) and Clifton Project Management & Associates Pty Limited. In each bid (that is, the conforming bid and the preferred bid), DSC included a section headed 'Consortium Structure'. This outlined in brief terms the contractual arrangements in place among the named consortium members. It contained the following paragraph: 'In addition, the bid company has entered into a Heads of Agreement with (the appellant) regarding its role as operator of the stadium. This agreement and a draft of the Facility Management Agreement for the stadium are contained in Part E of the bid document.' "On 8 July 1997, DSC made a presentation to the Authority. Mr Simmons of LMI came from the United States for this (LMI is the American corporation LMI/HHI Limited). Over the following two weeks or so, dialogue continued between the Authority and DSC which, for the purpose, was represented mainly by Baulderstone personnel – principally Mr Steven Wise. … "On 27 July 1997, DSC lodged with the Authority a bid addendum for both its conforming and preferred bids, together with a covering letter which read in part as follows: 'At our presentation in early July you challenged our Consortium to remove the risk to the government. We have risen to that challenge. We have delivered a bid that is significant enhanced which now offers a premium to secure the project.' "By letter dated 4 August 1997, the Authority informed DSC that the DSC consortium was one of two short listed bidders, the other being the Melbourne Sports Stadium Consortium led by Transfield and Grocon. Also dated 4 August 1997 was a document from the Authority headed 'Unsatisfactory Parts of Your Bid as at 4 August 1997'. One of the items in that document was the following: 'Your management team of LMI/ISFM has no direct Australian Stadium management experience.' "On or about 5 August 1997, representatives of DSC informed the plaintiffs through Mr Watson, of the concern raised by the Authority as to the lack of direct Australian stadium management experience. The following day, 6 August 1997, Mr Watson faxed to Mr wise of Baulderstone a letter which read in part as follows: 'In order to satisfy the Dockland Authority's concern regarding the operations of LMI/ISFM (no present operation within Australia) we will enter into discussions with Spotless immediately to consider their potential amalgamation in the overall operation of the facility.' "Spotless … was and is an established company the activities of which include the provision of catering and related facilities at various locations, including sporting and entertainment venues. … "On or soon after 22 August 1997, DSC received from the Authority, in preparation for a meeting scheduled for 25 August 1997, a document headed 'Outstanding Key Stadium Issues as at 22 August 1997'. One item on the list was 'superior management proposal' against which, in an 'Action' column, appeared 'DSC'. "On 1 September 1997, the Authority announced that DSC was the successful bidder. Four days previously, on 28 August 1997, Stadium Operations Limited (SOL) a wholly owned subsidiary of Baulderstone was formed. On 3 September 1997, an agreement entitled Stadium Development Agreement was executed, the parties to it being the Authority, a company in the AW Baulderstone Group called Stadium Management Limited, National Mutual Trustees Limited and SOL. … The agreement included clause 15.6: "The Developer must execute a Stadium Management Agreement with the appointed Stadium Manager by no later than 30 days before the date for Practical Completion and must perform and observe all obligations imposed upon it by the Stadium Management Agreement. "Before appointing a Stadium Manager and executing a Stadium Management Agreement, the Developer will consult in good faith with the Authority and, so far as the Authority reasonably requires, the AFL, with a view to ensuring that the management arrangements to be contained in the Stadium Management Agreement reflect commercial arm's length arrangements equivalent to the arrangements that it would be reasonable to expect the Developer could have negotiated were the appointment of the Stadium Manager to have been conducted by way of a competitive tender open to Australian and international operators and managers of stadia equivalent to the Stadium." "'AFL' is a reference to the Australian Football League. "On 10 August 1998, the agreement contemplated by clause 15.6 of the Stadium Development Agreement was made. But the appointed manager was not (the appellant). It was Nationwide Venue Management Pty Limited, a wholly owned subsidiary of Spotless. LMI Melbourne Pty Limited (a wholly owned subsidiary of the appellant) was appointed a consultant to Nationwide Venue Management and agreed to provide defined services in support of that company's activities as manager of the stadium. When LMI Melbourne accepted this appointment, the appellant expressly reserved its rights under the heads of agreement. The appointment was, in June 2000, terminated in accordance with the agreement when Nationwide Venue Management ceased to be the manager of the stadium." 24 I should note that ISFM is a company controlled by one Graeme Watson who is also a director of the appellant. The appellant is a company which is jointly owned by ISFM and Leisure Management International. 25 Returning to the construction of the Heads of Agreement, Barrett J said at [40]: "The meaning to be attributed to 'If any of the Bids are successful' must be gathered from the circumstances which existed when the heads of agreement were concluded. The question whether the condition was satisfied requires examination of the facts concerning the bidding process and its outcome". 26 The appellant does not cavil with this. However, his Honour continued at [67] to [71]: "I return now to the central question whether, in the events which happened, it can properly be said that either of the bids submitted by DSC 'was successful'. I have concluded that neither such bid was successful. This is so because of two important departures which caused the arrangements eventually reflected in the Stadium Development Agreement to differ in a material way from the arrangements proposed in the bids. "The first such departure is in relation to funding and financial structure. It is summed up in the following statement of Mr Wise in cross-examination: 'But the heads of agreement was for a bid placed on 27 or 30 June, which was $150 million short of underwriting and required the Victorian Government to provide that. The bid on 1 September was fully and absolutely underwritten by private equity. The bid had changed.' "The change involved the introduction of new parties committed to providing the finance that original consortium members would not or could not provide. The balance of influence within the bidding group shifted to the equity providers. "The second departure – of more immediate relevance, in the present context – was in relation to management of the stadium. The bids of June proposed LMIA as manager. The arrangements embodied in the Stadium Development Agreement did not adopt that proposal and left the choice of manager for future decision. The feature of the bids involving appointment of LMIA as manager thus did not find a place in the concluded agreement arising from those bids. "Related companies of DSC were 'successful' in becoming two of the three companies which together became 'the Developer' under the Stadium Management Agreement. That 'successful' outcome would not have been achieved but for DSC's having submitted its two bids to the Authority. But neither of those bids was 'successful' because neither was in substance translated from proposal to contract. Intervening events and negotiations brought about substantial differences and departures in relation to parties, in relation to funding and financing and in relation to management and identity of the manager. "It follows from this that the condition to be satisfied before DSC was obliged by the heads of agreement to bring about the appointment of LMIA as manager of the stadium on the basis stated in the heads of agreement was never satisfied. It also follows that, according to the correct construction of the heads of agreement, no breach of its express terms occurred through non-appointment of LMIA as such manager. In saying this, I do not resort to any strict or literal approach at the expense of an approach consonant with business reality." 27 His Honour then referred to the submission of counsel for the LMI Group relying on Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 74 ALJ 791 and McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, citing what Kirby J had said in the former case at 794: "Commercial documents … should be construed practically, so as to give effect to their presumed commercial purposes and so as not to defeat the achievement of such purposes by an excessively narrow and artificially restricted construction." 28 Barrett J then went on to say at [72]: "I do not consider that the approach I have taken to the pre-condition 'If any of the Bids are successful' runs counter to this. On the contrary, once it is recognised that the contractual promise to appoint LMIA was given and, more importantly, received in circumstances where the process about to be embarked upon was a process of negotiation which might see DSC obliged, in its own interests, to depart significantly from its own original desires in order to obtain the ultimate benefit for itself … the practical business construction becomes one which must accommodate the possibility that an element of the proposal unacceptable to the Authority will be jettisoned in the course of that negotiation. The negotiation process was one in which it was clear from the outset that the Authority placed great weight on the qualities of the proposed manager and would play an active role in accepting or rejecting the party put forward as intended manager by a bidder. The Authority simply did not accept LMIA." 29 His Honour then at [73] to [77] of his judgment dealt with the case put by the appellant that there were two relevant implied terms in the Heads of Agreement, first a term that the parties would act in good faith in the performance of their contractual rights and obligations, and secondly, a term that each party would do all things necessary on its part to enable the other party to have the benefit of its contractual rights. His Honour noted that implied terms of this nature were incapable of rising above express terms. He said that any implied term did not require DSC to risk its own interests "once it encountered substantial resistance from the Authority, DSC was free to modify its proposal to overcome the problem." His Honour considered that was reinforced by clause 15 of the Heads of Agreement which provided that: "Neither party shall have any claim against the other if a Bid is not lodged or if none of the Bids lodged is successful or if one of the Bids lodged rather than any other is selected." 30 His Honour said at [77]: "If, as this provision shows, DSC was free to change its mind about lodging a bid at all, it could scarcely be contended that, having lodged its bids, it was compelled to pursue them in unamended form, however hopeless the prospects of achieving a positive outcome in that form might be." 31 On the appeal, Mr Sullivan QC appeared for the appellant with Mr Weber SC and Miss K M Richardson. They took us through the principles of legal interpretation and the whole of the matters which they considered was the background material which his Honour should have considered when construing the contract. 32 Mr Sullivan started with citing the speech of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromidge Building Society [1998] 1 WLR 896, 912-3 where his Lordship said that "Almost all the old intellectual baggage of 'legal' interpretation has been discarded" and re-summarised what he considered to be the principles in five propositions. Mr Sullivan then took us to Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, both to the leading judgment given by Lord Bingham and also to para 39 of the speech of Lord Hoffmann at 269 where he "clarified" some of what he had said in the Investors Compensation Scheme case. We then, of course, went to Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, 347-352 and the cases there cited, Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 76 ALJR 246, 248 [11] and Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 76 ALJR 436, 444-5. 33 Mr Sullivan concedes that his Honour applied the right test but said, "What his Honour did wrong in applying the right test, in a nutshell was this. His Honour says quite rightly that what is shown here, when one looks at all the big documents and the like, that this was an evolving process, that the mere bid itself wasn't going to be on a take it or leave it basis but rather the parties had in mind that there would be negotiations and discussions down the track before the ultimate winner was announced. His Honour seems to use that as justification for saying that therefore because those negotiations in fact produced the anticipated result, namely substantial changes, that the bid wasn't successful. We say the correct approach is the absolute reverse of that, or the obverse of it. That because the parties had in mind that there was virtually no possibility of the bid being accepted unadorned, unaltered or unenhanced, that in fact when they used the words "Bid was successful" they meant it in a more generic sense that if ultimately the developer was successful in winning the job. So that we actually say one needs to look at those background circumstances, that his Honour, although looking at the background circumstances, derived the wrong conclusion from them." 34 It is probably necessary at this stage to embark upon a substantial digression. Mr Sullivan QC asked us to enter into a full consideration of the surrounding circumstances. These surrounding circumstances that we were asked to look at included three periods: (a) before the bids were submitted; (b) the negotiation between the parties at about the time the bids were submitted; and (c) negotiations between the parties after the bids were submitted. 35 Barrett J was invited to do the same exercise. This meant that there were seven days of oral evidence before his Honour, most witnesses being in the box for the whole day and one unfortunate for two days. In addition, there were 2,524 pieces of paper placed before his Honour, not only including the substantial agreements and various drafts of them, but almost every piece of paper that passed between the parties. All this to work out the meaning of the word "successful". 36 Under what Lord Hoffmann would doubtless call the "old rules of legal interpretation", almost none of this material would have been tendered and the case would doubtless be over in half a day. That is because 50 years ago courts paid great respect to the rule that if parties had put down their contract in a written document, one construed their writing and the parol evidence rule was applied to exclude extraneous material. That may have been too draconian an approach. However, the reverse approach which permits every piece of paper to be put before the court is causing tremendous expense in commercial litigation. That expense might be justified in a case such as the present where something like $4.5 million might be at stake. However, it is not at all uncommon for the same approach to be used in small commercial disputes involving amounts not greater than the District Court ceiling. 37 However, it is difficult for a trial judge to exclude this material because of the very wide statements that are being made by the High Court and the House of Lords about what must be considered. 38 It is probably appropriate to note briefly what the current state of the law is in this respect. In the Investment Compensation Scheme case, Lord Hoffmann's first three rules at 912-13 were: "(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. (2) The background was famously referred to by Lord Wilberforce as the "matrix of fact" but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man. (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear." 39 In the BCCI case at [39] p 269 his Lordship said: "The background is however very important. I should in passing say that when in Investors Compensation Scheme … I said that the admissible background included 'absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man', I did not think it necessary to emphasise that I meant anything which a reasonable man would have regarded as relevant . I was merely saying that there is no conceptual limit to what can be regarded as background. … I was certainly not encouraging a trawl through 'background' which could not have made a reasonable person think that the parties must have departed from conventional usage." 40 In Australia, Mason J, as his Honour then was, in Codelfa pointed out at 347 that in past times when the theory was that words of a contract are ordinarily to be given their plain and ordinary meaning recourse to extrinsic evidence was superfluous. However, always underlying this was the exception that evidence of surrounding circumstances was admissible in aid of the construction of a contract. His Honour then went on to say at 352: "The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although as we have seen, if the facts are notorious knowledge of them will be presumed. "It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. The extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification." 41 However, in Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Insurance Cases 60-853 at 75,343, McHugh JA, when a member of this Court, said: "However few, if any, English words are unambiguous or not susceptible of more than one meaning or have a plain meaning. Until a word, phrase or sentence is understood in the light of the surrounding circumstances, it is rarely possible to know what it means. In my view evidence of surrounding circumstances would generally be admissible if it is known to both parties or sufficiently notorious to be presumed to be within their knowledge." 42 In the Royal Botanic Gardens case, Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ said at 445 that it was unnecessary to determine whether the House of Lords in Investors Compensation Scheme and BCCI "took a broader view of the admissible 'background' than was taken in Codelfa, or if so, whether those views should be preferred to those of this court. Until that determination is made by this court, other Australian courts, if they discern any inconsistency with Codelfa should continue to follow Codelfa." [39]. Kirby J at [104] said that, "Accepting that the law on the availability of contextual materials and extrinsic evidence has advanced somewhat in Australia as elsewhere, the position remains, in my view, that stated by Mason J in Codelfa … . In this I agree with the joint reasons at [39]." 43 In their article "Interpretation, Good Faith and the True Meaning of Contracts: The Royal Botanic decision", J W Carter and Andrew Stewart say in (2002) 18 Journal of Contract Law 182, 186: "The High Court's decision in Royal Botanic does little to settle the controversy – indeed it may have just the opposite result – which surrounds the reception of evidence of surrounding circumstances as an aid to interpretation. Yet it seems almost bizarre that at the beginning of the 21st century there should still be uncertainty as to such a basic issue of contract law. … "With respect to Mason J in Codelfa , his approach to context was a little old-fashioned at the time it was given, and with the passage of time now has the appearance of formalism." 44 The learned authors point out that although Australia has kept, and England discarded, the concept that ambiguity is necessary to be shown before one looks at the surrounding circumstances, the exposition of ambiguity has tended to show that this merely means that the parties have different submissions as to what the contract means. Furthermore, the approach in the Royal Botanic Gardens case itself shows that there is, in fact, a tendency to glean much more from negotiations as surrounding circumstances in Australia than would be permitted in England. 45 The Codelfa doctrine appears to be not only that a court uses the surrounding circumstances to aid its interpretation and to put itself in the armchair of the parties and to look to see what each knew when it was making the contract, but also that inferences can be drawn from the surrounding circumstances virtually to add terms; see Codelfa at 353. However, there is a limit to this so that "evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from the surrounding circumstances" (Codelfa 353; Aberdeen Asset Management Ltd v Challenger Wealthlink Management Ltd [2002] NSWCA 245). 46 The present problem comes close to the problem that exists where there is some trade usage where both the contracting parties are in a particular trade and should know of the usage. Thus counsel cited to us the well-known case of Shore v Wilson (1842) 9 Cl & Fin 355, 555; 8 ER 450, 529, where Baron Parke said that it was competent for the court to receive evidence as to the proper meaning of that language or technical terms: "where technical words or peculiar terms, or indeed any expressions are used, which at the time the instrument was written had acquired an appropriate meaning, either generally or by local usage, or amongst particular classes" 47 The usual illustration is Smith v Wilson (1832) 3 B & Ad 728; 110 ER 266, where there was a lease of a rabbit warren with a covenant that the lessee would leave 10,000 rabbits in the warren with the lessor paying £60 per thousand and parol evidence was admissible to show that by the custom of the country where the lease was made the word thousand as applied to rabbits denoted 1200. 48 A less known illustration is Mitchell v Henry (1880) 15 Ch D 181, a trademark case, as to what was white selvage. Jessel MR said at 187 that black selvage is not white selvage. However, he was reversed in the Court of Appeal as James LJ said at 190, the question was "not whether the selvage is white, but whether it is what the trade know as a white selvage." 49 Perhaps the most comprehensive statement in this part of the law was made by Rossman J, giving the majority decision of the Supreme Court of Oregon in Hearst v W J Lake & Co Inc 16 P (2d) 627, 629 (1932) where he gives a series of examples where common words have a different meaning according to particular science and trades. After giving these examples his Honour said: "It is said that a court in construing the language of the parties must put itself into the shoes of the parties. That alone would not suffice; it must also adopt their vernacular." 50 And so with this state of the law many days and thousands of pages of documents at a cost to the parties of $2 per page per copy was spent in trying to convince the learned Judge that the term "bid is successful" meant something other than its ordinary English meaning. 51 Of course the word "successful" is one which has inherent ambiguity. Many a barrister has been in a case in which he or she has been the losing party in the sense that a verdict was suffered and an order for costs was made against the client, but the client has been particularly happy, as for instance, when I was at the bar a verdict for a small amount of damages in a personal injury action which was far less than a redemption of the workers' compensation. 52 I will delve more deeply into this matter shortly. However, because of the inherent ambiguity in the word there was probably no alternative but for the learned judge to receive evidence of surrounding circumstances. 53 In view of what the High Court said and did in the Royal Botanic Gardens case, trial judges are virtually precluded from excluding this evidence. However, it may well be that after the case is over, special orders should be made as to costs where a party has unduly extended the time of hearing by long cross examination as to surrounding circumstances or by tendering a bulk of papers which are either of no actual assistance in the long run, or alternatively, stray too much into the field of negotiations as to the parties proposing and amending drafts as opposed to negotiations which show the underlying concept of the contract and the background to it. In the state of the law it is probably only by making such orders for costs as will dissuade people from unduly extending the length of cases that will bring this sort of commercial litigation back into some realistic scope. 54 The other matter that needs to be considered is the question of even if most of the material before the learned Judge was properly before him, what use could be made of conversations and negotiations between the parties after the Heads of Agreement were signed. Before dealing with this I should interpolate that the material appears to have been tendered before his Honour without objections, but if it was material which was, strictly speaking, inadmissible, then his Honour and we ourselves should give it virtually no weight. Accordingly the question is still a live one. 55 Mr Sullivan QC conceded that generally speaking, this material could not be relied upon in construction of the agreement: Administration of the Territory of Papua New Guinea v Daera Guba (1973) 130 CLR 353; Sportsvision Australia Pty Ltd v Tallglen Pty Ltd (1998) 44 NSWLR 103, 116. 56 However, he relied on two sets of submissions as to why, in this particular case, it was admissible. First, he relied on a series of cases including B Seppelt & Sons Ltd v Commissioner for Main Roads (1975) 1 BPR 9147; Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 and Sportsvision Australia Pty Ltd v Tallglen Pty Ltd (1998) 44 NSWLR 103, to show that to a limited extent, subsequent conduct can be used in the construction of contracts. 57 In Brambles Holdings Ltd v Bathurst CC (2001) 53 NSWLR 153, 163-4, Heydon JA said that there were three relevant principles of law in this area: "The first relevant principle of law is that pre-contractual conduct is only admissible on questions of construction if the contract is ambiguous and if the pre-contractual conduct casts light on the genesis of the contract, its objective aim, or the meaning of any descriptive term … . The second relevant principle is that post-contractual conduct is admissible on the question of whether a contract was formed … . The third relevant principle is that post-contractual conduct is not admissible on the question of what a contract means as distinct from the question of whether it was formed." 58 The second line of attack by Mr Sullivan was less attractive. He relied on what was said by Beazley JA, with whom Sheller and Fitzgerald JJA agreed, in Sasson v Fahevu [1999] NSWCA 400 at [31]. That is, that what happens after a contract is formed whilst not, strictly speaking, admissible on the question of construction, may be admissible "as an admission or acknowledgement of the state of the parties' rights." Various citations are given in support of that proposition which appear to derive from Bryson J's judgment in the Sportsvision case at 119-120, but none of these examples deal with the situation where subsequent conduct or utterances are being used to construe a contract. One can have an admission as to what the contractual rights of the parties are if it is a clear admission by an appropriate person, but one cannot use the post-contractual toing and froing of the parties to work out what the contract means. As Bryson J said in Sportsvision at 120, this is a separate area of the law from the admissibility of evidence in aid of construction of a document. 59 I now return, at long last, to the actual construction of the words "if the bid is successful". 60 As I said earlier, the word "successful" is itself ambiguous because one has to work out what is the aim for which success might be claimed. There is very little in the legal dictionaries throwing up cases where the word has been judicially construed. One of the few useful notes is by Devlin J in Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873, 874, where his Lordship remarked that a person who recovers nominal damages is not ordinarily a "successful" plaintiff, though he may be if the object of the exercise was to establish a legal right. See also Brown v Dunsmuir [1994] 3 NZLR 485, 488. 61 However the problem in the instant case is not quite caused by the word "successful". What the appellant says is that the whole phrase should be construed as meaning if the Baulderstone Group win the right to the Stadium. 62 When asked for examples of what "surrounding circumstance" evidence might lead the trial judge to a different view, but to which he allegedly had no regard or insufficient regard, counsel for the appellant put forward 30 points. I will take a selection of these, choosing those which are more likely to support the appellant's position. 63 At Blue Book 41X, there is evidence of a telephone conversation on 18 March 1997 between Messrs Watson, Wise and McGee in which Wise said to McGee, "We are putting our costs on the line and agreeing to wear them. But we do that on the basis that if we win the job, then we are all going to do well out of it. Later in the conversation Mr McGee said, "I just want to be sure that LMI will be reimbursed its costs if the bid is successful" to which Mr Wise replied, "Yes if the bid is successful all of us will get our costs back, you included …". Mr McGee then finished the conversation by saying, "It doesn't seem like we're getting anywhere on this. Why don't I put something to you in writing and we'll go from there." 64 The aim of this material was to show that in conversation before the contract was made the words "If the bid is successful" were equated with "If we win the job". However, the whole tenor of the conversation is that the parties are discussing concepts which they intend in due course to be put in more formal language in the document, and of itself, these conversations cannot amount to very much. 65 Secondly, there is a letter from Mr Wise to Mr Watson of 7 April 1997 (Blue Book 594), which, so far as relevant, reads: "The following in principle elements were discussed and should form the basis of ongoing negotiation with LMI. … 4/ If our consortium is successful in securing the rights to build, own and operate the stadium then LMI will secure the rights to operate the stadium based on an agreed contract." 66 Mr Sullivan says, "This casts considerable light on what the parties had in mind by using the expression 'If the bid is successful', namely, put colloquially, if Baulderstone wins the job." 67 This seems to be as far as the evidence other than that already considered by Barrett J went in endeavouring to show that the surrounding circumstances or the terms that the parties mutually understood equated the two expressions "If our bid is successful" and "If we win the contract". 68 There are then a series of matters referred to where after the bid was put in, the Baulderstone interests kept referring to a revised bid. The appellant says that the constant use of the words "revised bid" showed that the bid that was accepted by the Authority was the same bid as was referred to in the Heads of Agreement. 69 Again, this is pretty weak evidence but it is post-contractual, and it does not come within the exceptions which I referred to earlier. 70 I have listened attentively to what Mr Sullivan said and his team's written submissions in the Orange Appeal Book. If the parties had really intended the criterion to be the consortium being the successful tenderer from any proposal which it offered, they could easily have said so, especially as the conversation of March which I have outlined showed that the point was already in their minds. 71 However, Mr Sullivan puts that the background facts show clearly that all of the parties to this litigation were aware: (1) That after the bids were lodged on 30 June 1997 there would be negotiation with the Authority and that the bids were not open to acceptance as such but would form the basis of selection and negotiation. (2) It was contemplated that there may well be major changes made after the bids were submitted. (3) The parties often, in correspondence between them before the Heads of Agreement (and so far as is relevant, afterwards) describes success in terms of the respondents winning the job. (4) There was a draft agreement of 1 August 1997 between the respondents and the appellant which recited "The developer's bid has been successful". (5) Although there were major changes after the initial bids, the essential character of what was subsequently accepted by the relevant Authority was the same. 72 Accordingly, the learned Judge should have held that the condition had been fulfilled. 73 I must confess that this way of putting it is really not a reliance on the Codelfa principle, but rather seeks to look at the subjective intention of the parties. It must be remembered as Owen J said in Acorn Consolidated Pty Ltd v Hawkslade Investments Pty Ltd (1999) 21 WAR 425, 436: "One thing is clear: Save for the one exception mentioned by Mason J in Codelfa (at 352) … evidence of subjective intention is not admissible. If extrinsic evidence of the surrounding circumstances is admitted, it can be used only for an objective assessment of what a reasonable person, armed with the knowledge that the parties actually had, would have understood the words to mean." 74 A more charitable way of looking at these submissions is that the parties had supplied their own dictionary. However, the cases on the dictionary principle usually emphasise that one has to find the dictionary in the document itself; see eg Re Sassoon [1933] 1 Ch 858, 890-891 per M L Romer LJ. 75 Of course there are a series of cases of which Smith v Wilson already referred to is one, where people in a particular trade use expressions used in that trade as was said in Nicoll v Pittsvein Coal Co 269 F 968, 971 (Circuit Court of Appeals, 2nd Circuit) (1920) per Hough J, giving the judgment of himself , Rogers and Manton: "Indeed, when tradesmen say or write anything, they are perhaps without present thought on the subject, writing on top of a mass of habits or usages which they take as a matter of course." However, the present case is not one where a trade usage is suggested. 76 I do not know of any case where it has been successfully alleged that outside the trade usage situation and outside the terms of the document itself, surrounding circumstances can provide a dictionary to show that a meaning of a word in a document is to have some special definition. 77 One could think of examples where this might be so. So for instance, in a case of the sale of pornographic magazines the parties may very well use the word "comics" to deceive outsiders, both knowing what the word meant. 78 However, it seems to me that where such a case is to be made out, fairly strong evidence should be presented to show that the parties both adopted the same dictionary meaning. This view is supported by what Lord Hatherley said in Bowes v Shand (1877) 2 App Cas 455, 473: "If the contract bears a plain natural sense and meaning, nothing should make us deviate from that plain natural sense and meaning, but the strongest evidence, not of the opinion of this or that witness, but of a custom of the trade or business which forms the subject-matter of the contract, which has given an unusual, and … 'a non-natural' meaning to the contract." 79 Although those words were spoken in the context of a trade meaning, it seems to me that they are equally apposite to the present case. See also the reasons of Parker J in the Supreme Court of Western Australia in Re Michael; Ex parte Epic Energy (WA) Nominees Pty Ltd (2002) 25 WAR 511, 542, a judgment with which Malcolm CJ and Anderson J agreed. That was a statutory construction case, but Parker J discussed generally the principles involved in dictionary cases. 80 In my view, the evidence in the present case falls much short of the standard noted above. The highlights, which I have already set out, merely indicate that in some negotiations a couple of months before the Heads of Agreement were signed there was a conversation and a letter in which it might be inferred that the parties or some of them were meaning the two expressions to be synonymous. However, they were not laying down some definite dictionary: they were merely feeling their way towards making the agreement. 81 I have set out Barrett J's judgment on the matter. It is one with which I completely agree. I do not consider that we should assume that Barrett J ignored any of the matters which are put by Mr Sullivan in his particulars document to which I have referred. However, even if he had ignored these matters, it would not seem to me that their weight is such as would have made any difference. 82 Indeed, even if the Court were to accept Mr Sullivan's approach, it is highly likely that the result would not be any different. 83 As I have said, Mr Sullivan would have us read "If the bids are successful" as "If we win the job" or "If our consortium is successful in securing the rights to build own and operate the stadium." As I have set out earlier, the DSC consortium was Baulderstone, KPMG, ISFM and Clifton. The appellant was never a member of the consortium. There was a change at the last minute when SOL, a subsidiary of the first respondent, was substituted as the person making the bid for DSC, a subsidiary of the third respondent. It was conceded at the trial and before us, that practically speaking, this made no difference. However, the question must be asked, who is the "we" or "our consortium" if the substitution urged on us by Mr Sullivan QC is successful? Legally it is a group including ISFM, but excluding the appellant. But is it so commercially, that is, would reasonable commercial people have so understood it? I consider that the probabilities are that this question would be answered in the negative and this is reinforced when one looks at the text of the letters such as that to which I have already referred of 7 April 1997 set out Blue Book 594. 84 Accordingly, in my view, the principal submission of the appellant fails and the appeal should be dismissed, principally for the reasons given by Barrett J. 85 However, there are two "loose ends" which must be considered. 86 The first is that a notice of contention was filed raising the point that if the appellant otherwise succeeded, the contract was brought to an end by frustration. The answer to this point was that if there was frustration it was self induced frustration so of no moment. In all the circumstances there is no need to do anything more than mention this point as it is of purely academic interest. 87 The other matter is also of academic interest, but raises serious questions of law which must be dealt with. 88 As I said earlier, in order to be commercially successful in this litigation, the appellant not only has to show a case in contract against the second respondent, but also has to show that the first and third respondents, the bodies which appear to have funds, induced that breach of contract. 89 Barrett J was able to dismiss this point very quickly. His Honour said that the claim must fail on a twofold basis. He said [79]: "First, directors of a company do not commit the tort of inducing breach of contract when, acting as directors, they cause their company to commit a breach. … Secondly, a director installed as such on the board of another company by his or her employer is in general presumed not to be subject to the employer's direction when performing functions as a director, so that no vicarious liability attaches to the employer for the employee's conduct in that capacity. …". 90 After discussing the authorities his Honour said at [96] and [97]: "There is a distinct air of unreality about the proposition that one wholly-owned subsidiary within and subject to the framework of authority acts intentionally to cause another wholly-owned subsidiary within and subject to the same framework of authority to behave in a certain way when both are actuated by and subject to the common authority. The notion that directors of a company are not guilty of the tort of inducing breach of contract when, duly acting as directors, they commit their company to a course involving such breach was explained by Jordan CJ in O'Brien v Dawson ". His Honour then quoted extensively from O'Brien v Dawson (1941) 41 SR (NSW) 295 at 307-8 and continued at para [98]: "Central to this notion is recognition that the directors of a corporate contracting party are not in the position of outsiders influencing the independent volition of a contracting party capable of exercising volition for himself; and that it is the directors' volition which determines the making, the performance or the breach of the company's contract. The directors' volition is thus the company's volition." 91 Mr Sullivan QC accepts that proposition. His Honour, however, continued: "Within the confines of a group of companies where a holding company such as AW Baulderstone Holdings Pty Limited possesses, in relation to each of several wholly-owned subsidiaries, full and sole capacity to control the content of a corporate constitution (even to the extent of allocating to itself powers otherwise exercisable by the directors), to relieve the directors of the consequences of breach of duty by advance authorisation or retrospective ratification and to change at will the composition of the board of directors, it seems to me to be the case that the holding company like the subsidiary's directors, is not in the position of an outsider influencing the independent volition of the subsidiary." 92 Mr Sullivan challenges what his Honour wrote from "It seems to me". His Honour continued: "In such a situation, it is the holding company's volition which, sometimes formally by exercise of legal powers but often informally … determines the making, the performance or the breach of the subsidiary's contract. The holding company does not engage in what in Herring CJ described in Rutherford v Poole [1953] VLR 130 as 'actionable intervention'. There is really no 'intervention' at all. The subsidiary makes the relevant decision but that decision proceeds from an exercise of the holding company's will within and through the subsidiary, rather than upon it." 93 His Honour then found that if it were necessary to do so, he would conclude that neither the first nor the third respondent induced or procured any breach of contract by the second respondent. 94 With great respect to his Honour, I cannot share his view. The result reached in O'Brien v Dawson was based on the fact that there is an agency between the directors and the company and the company can only act through its agent, the directors. 95 The present case is not one of agency. Moreover, there is nothing in O'Brien v Dawson to justify the view that the real rationale of the case was that the directors were the directing mind of the company and thus there was no "independent volition of a contracting party". 96 The basal argument is that if material is known to people who constitute "the brain and nerve centre, the directing mind and will" of the holding company and a subsidiary acts in accordance with that directing mind, then the same consequence flows as if a director was involved. The words I have quoted derive from what was said by Denning LJ in a tenancy case H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1957] 1 QB 159, 172, though it was applied in a company case by Connelly J in Queensland Re Rossfield Group Operations Pty Ltd (1980) 5 ACLR 237, 242; [1981] Qd R 372, 377. 97 The analogy is completely imperfect and one must not allow nice sounding fuzzy dicta to take the place of proper analysis. 98 Indeed, I agree with Mr Sulllivan QC's submission that such a rule as suggested by his Honour could lead to the avoidance of contracts by the simple expedient of acting via subsidiary. 99 The appellant's case is that the substitution of SOL for DSC and any other breaches that occurred could only have taken place with the knowledge of the common directors of all the respondents. 100 It seems to me that there are at least two major problems with this case. First, that anything the directors did was inaction rather than action, and secondly, that it is very difficult to work out which company in the Baulderstone Group was the tortfeasor. 101 As to the first, it should be remembered that Roxburgh J said in British Motor Trade Association v Salvadori [1949] Ch 556, 565: "Any active step taken by a defendant having knowledge of the covenant by which he facilitates a breach of that covenant is enough." Unless the alleged tortfeasor company by itself its servants or agents takes an active step, it would not seem to be sufficient to make out the tort. There is no active step alleged against either the first or third respondents. 102 Although it is necessary to avoid this problem in the future, the argument on this matter merely raised points of academic interest and I do not propose to extend a judgment that is already too long by dealing with it in more detail. 103 The upshot is that, basically for the reasons given by the learned trial judge, the appeal should be dismissed with costs. 104 There is a cross appeal dealing with Barrett J's orders for costs which must now be considered. 105 This matter was dealt with in his Honour's second judgment ([2002] NSWSC 72) delivered on 22 February 2002 commencing at para 31. His Honour pointed out that the plaintiffs before him (including the present appellant) had succeeded against the present first and second respondents for reimbursement of expenses, but had failed in their "failure to appoint" claim against the defendants. His Honour indicated that the case was one involving separate issues, that one of those issues was dominant, namely "the failure to appoint" claim. In terms of evidence, submissions and treatment in the judgment, that claim involved a great deal more time and application than the reimbursement aspect. His Honour thought it appropriate to embark upon a percentage apportionment and, taking the view that the plaintiffs had achieved success to the extent of 20% against the first and second defendants, his Honour ordered that: "(2) That the first and second defendants pay 20% of the plaintiffs' costs of the proceedings … (3) That the plaintiffs 80% of the first and second defendants' costs of the proceedings … (4) That the plaintiffs pay the third defendant's costs of the proceedings …". 106 At paras 48 and following of the judgment his Honour considered the significance of a Calderbank letter dated 16 July 2001 expressed to be without prejudice except as to costs which offer was rejected on 25 July 2001. The amount which the plaintiffs recovered was very much less than the offer in the letter. 107 The Judge held that the form of the offer made it incapable of triggering the automatic result in Part 52A rule 22 of the Supreme Court Rules. However, he ruled that the making of the offer should be taken into account when exercising the Court's broad discretion as to costs. 108 His Honour considered the decision of this Court in Nobrega v Trustees of the Roman Catholic Church of the Archdiocese of Sydney (No 2) [1999] NSWCA 133 and considered the test he should apply is whether the ordinary rule that costs are to be on a party and party basis should only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable. 109 His Honour held that the case was not clear cut and had a myriad of issues with complexity on which it would have been far from easy to predict the outcome in advance of full presentation of evidence. He did not hold that the party against whom costs were sought had acted unreasonably and thus ordered costs on the party and party basis. 110 Two submissions were put to us: (1) That his Honour erred in following the Nobrega case ; and (2) That his Honour erred in deciding that the first and second respondents pay 20% of the appellant's costs. I will deal with these matters in turn. 111 (1) Mr Macfarlan QC put that there was an error of principle to his Honour's approach, but recognised his submission would involve us departing from the decision of Nobrega. 112 No leave was obtained to challenge Nobrega, it may be it would not be necessary to obtain such leave but as the point can be dealt with fairly simply without having to consider the question of leave, I will do so. 113 The basis of the submission is that in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425, Rolfe J handed down a fully reasoned decision on the present point which occupies 30 printed pages, applying a quite different test to Nobrega and that the decision in Nobrega was made without any apparent reference to the Multicon case. 114 The last point made in the preceding paragraph is strictly speaking correct, but it is to be noted that in Nobrega Powell JA, who gave the leading judgment with which Priestley JA and Sheppard AJA agreed, referred to MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 140 ALR 707; 70 FCR 236, in which Lindgren J expressly declined to follow Multicon, see ALR 710-11; FCR 240. It is thus completely clear that the Court in Nobrega was aware of Multicon when it made its decision. 115 Since Nobrega, Multicon has been followed by Shepherdson J in Naomi Marble & Granite Pty Ltd v FAI General Insurance Company Ltd (No 2) [1999] 1 Qd R 518. 116 The Federal Court has made it clear in a number of decisions which were noted in Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, that the approach in MGICA rather than the approach in Multicon, is to be followed. 117 The matter was considered by this Court consisting of Mason P, Giles JA and Fitzgerald AJA in Skalkos v Assaf (No 2) [2002] NSWCA 236. The Court then referred to Nobrega and said: "Nobrega affirms the existence of an ultimate judicial discretion in these matters … . Mere failure to better a Calderbank offer is not conclusive in demonstrating unreasonableness or otherwise enlivening or precluding the exercise of the discretion to award costs. All circumstances in the case need to be considered and weighed up …". 118 Lloyd J, in the Land and Environment Court, considered these matters in Hofer v Howell (2001) 113 LGERA 391, 397. His Honour considered the authorities, noted that there was no statutory rule in the Land and Environment Court dealing with offers of compromise, and then said: "Although there are policy arguments in favour of putting the makers of compromise offers in a better position in relation to costs, these alone are not sufficient to justify department from the well settled principles relating to costs where the legislature has not seen fit to intervene. In the end, these policy objectives may be better served by recognising compromise offers within the existing discretionary framework than by introducing a new presumption. The applicant's rejection of what proved to be a reasonable offer by the respondent is, therefore, only one consideration among many to be taken into account in determining whether there are special circumstances justifying an order for indemnity costs." 119 On the issue of indemnity costs, I can see no reason why we should not continue to follow Nobrega and accordingly the Judge applied the right test, and his decision should stand. 120 (2) Mr Macfarlan QC made it clear that he did not seek to cavil with his Honour's apportionment of 20/80, but he did put forward the Calderbank matter in answer to the proposition that his client should pay 20% of the plaintiffs' costs. 121 Counsel concede that the existence of the Calderbank letter was a relevant matter to be taken into account when the Judge was exercising his discretion as to costs. 122 Mr Macfarlan QC points to the fact that his Honour did not mention the point when dealing with this aspect of the argument. On the other hand, Mr Sullivan QC points to the fact that just before dealing with the present point his Honour had considered the Calderbank letter in connection with the indemnity costs argument and it is almost inconceivable that he would not still have had it in his mind when dealing with the present point. Mr Sullivan puts that the matter of the apportionment of costs was a discretionary judgment, no error of principle has been demonstrated and the Judge's order should stand. 123 I am a trifle disturbed by the fact that there is no mention of this significant point in his Honour's judgment, but on balance, consider that I should uphold Mr Sullivan QC's submission. It is most unlikely that the point would not have been in the learned Judge's mind in view of what had gone before, the matter of costs was an extremely awkward one and needed his Honour to take into account a large number of matters which had occurred during the course of a very lengthy trial. 124 Accordingly, in my view, the cross appeal as to costs should be dismissed. 125 That then leaves the matter of the costs of the appeal. Mr Macfarlan QC submitted that the effect of the Calderbank letter should flow on to the appeal. 126 The acceptance of this proposition is excluded by the decision of this Court in Fotheringham v Fotheringham (No 2) (1999) 46 NSWLR 194. 127 Furthermore, the issues argued on this appeal were clear cut and straightforward and the Calderbank letter had no relevance to anything that was argued. 128 Accordingly, the appeal should be dismissed with costs; the cross appeal should also be dismissed with costs, limited to costs additional to those that would have in any event been incurred in the appeal. *********************** Last Modified: 04/14/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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