New South Wales Supreme Court CITATION : State of New South Wales v John Marshall Fisher & Ors [2005] NSWSC 1315 HEARING DATE(S) : 4,5,6,7 October 2005 JUDGMENT DATE : 15 December 2005 JUDGMENT OF : Patten AJ at 1 DECISION : See paragraph 75 Astley v Anti Trust Ltd (1999) 196 CLR CASES CITED : Geoffrey W Hill & Associates etc v Squash Centre etc. (1990) 6 ANZ Insurance Case 61-012 Hungerfords v Walker (1989) 63 ALJR State of New South Wales - Plaintiff John Marshall Fisher - Frist Defendant PARTIES : Keith Arthur Bagley - Second Defendant Mathew John Fisher - Third Defendant FILE NUMBER(S) : SC 20938 of 1997 Mr G Lindsay SC with Mr R Dalgleish - Plaintiff COUNSEL : Mr J Stevenson SC with Mr E Muston - Defendants Crown Solicitor - Plaintiff SOLICITORS : Henry Davis York - Defendants LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION Patten AJ 15 December 2005 No 20938 of 1997 State of New South Wales v John Marshall Fisher & Ors. JUDGMENT 1 This is an action by the State of NSW in right of the Department of Corrective Services (the Department) against a firm of solicitors. 2 In 1991, it became the policy of the Department to "entice private sector business to use prison inmates labour and set up businesses within prison walls". A variety of businesses were considered for this purpose, including the manufacture of bread and bakery products within the gaol at Long Bay. 3 The Department decided to use the services of solicitors in private practice in connection with the project. The Defendants were chosen, at least partly, upon the basis of their brochure, two sections of which read: "ABILITY The partners of Thurlow Fisher are respected for their professional legal skills and experience in areas such as commerce, management, personnel and finance. They are a well-rounded team of professionals. When you consult Thurlow Fisher you receive legal advice from partners with both general mainstream and specialist legal knowledge ably complemented by ancillary commercial skills which makes certain that the advice you receive takes into account all interacting influences. The partners of Thurlow Fisher will advise you in a friendly, informal atmosphere conducive to the client gaining a rapid appreciation of the firm's advices. QUALITY The attainment and maintenance of quality is integral to the Thurlow Fisher philosophy. Thurlow Fisher has the skills and expertise to advise and act on your behalf in all major areas of the law. As a client of Thurlow Fisher you can be confident that your affairs are in capable hands. All advice and all legal services are provided by the partners each having their own specialist legal expertise and a total commitment to professional quality. Thurlow Fisher is a tightly knit team working together in the client's quality. This is the Thurlow Fisher way of ensuring client satisfaction – Quality, Quality, Quality. 4 Mr A E G Breen, as Strategic Marketing Manager, initially had relevant responsibility on the Department's behalf. He apparently contemplated that the Defendants as chosen solicitors would provide legal services in respect of each of the disparate business operations to be established in accordance with the Department's policy. The seeds of ultimate disaster were, if I may say so, plainly sown when, at Mr Breen's initial meeting with Mr J M Fisher, the responsible partner in the Defendants firm, Mr Fisher said: " I will draw up a pro forma agreement for you. This will expedite things. It can be used as a basis for each individual contract. I will be able to adapt the pro forma to the particular circumstances of each case." 5 Mr Fisher, however, indicated his awareness of potential problems when in submitting a draft agreement with his letter of 5 July 1991, he recorded: "Obviously it would be much simpler to draft an agreement where we were in receipt of specific instructions which particularised the terms of that agreement as it is not always possible or appropriate to have the same form of document accommodating for example processing or recycling to be carried out by a particular company on the one hand and the manufacture of specific items or objects from new raw materials on the other. We have looked at the various sample agreements with which you were good enough to furnish us and have relied mostly on that prepared by the State Crown. We would appreciate having your instructions should you wish us to prepare a particular agreement on behalf of Corrective Services Industries in respect of a specific project." 6 The draft, which accompanied Mr Fisher's letter, was necessarily in very non-specific terms. Its flavour may be derived from the essential operative provisions as follows: "In this Agreement numbered items such as "Item 1" refer to and incorporate the expanded description or definition which appears in the Schedule at the end of the document. THIS AGREEMENT is made on the date in Item 1 between CORRECTIVE SERVICES INDUSTRIES (Item 2) called 'INDUSTRIES' and the party described in Item 3, called "THE COMPANY". THE COMPANY is engaged in the activity described in Item 4 and INDUSTRIES has agreed on the following Terms and Conditions to make available the facility in Item 5. A. Services (sic) during the period in Item 6 will permit The Company at its cost to fit out the facility which The Company agrees to do. B. Services (sic) shall provide the personnel in Item 7 and the Company the supervision in Item 8. C. The term hereof is in Item 9. D. The Company will provide and be responsible for the matters in Item 10." The "items" in the draft were, again necessarily, little more illuminating. For instance items 4,5,10 and 11 read: "Item 4 Particular activity or Industry of the Company for the purposes of this agreement. Item 5: Example: (a) Factory in Block A (shown on the sketch plans annexed hereto) at St Heliers Correctional Centre, Muswellbrook. (b) Workshop Unit 4 South Windsor Industries complex. Item 10: The Company shall bear the costs and expense of equipping or fitting out the facility including the provision of all plant tools and equipment necessary for the particular process or the manufacture of the product involved in Item 4 and shall provide all raw materials and consumables necessary for the process or the manufacture and shall bear the cost of all gas, electricity, telephone or other services if not separately metered as determined by Industries in its absolute discretion on a monthly basis, wages and salary of the supervisor and his replacement and all transport costs of product plant equipment and raw materials. Item 11; The Company shall pay Industries as follows: $X for each A produced at the facility, and $Y per week for each prisoner employed, and $Z per hour for each hour of overtime worked, and in addition $B for every A produced over and above N in every week. (obviously this has to be varied from agreement to agreement depending upon the nature of the activity – whether it is a process or whether a finished product is being produced)." 7 In September 1991, officers of the Department negotiated with Hard Rock Bakery Pty Ltd (Hard Rock), a company incorporated for the purpose, for the establishment of a bakery. The principals of Hard Rock were Mr Kenneth Brown, now deceased and Mr Gary Fairley. 8 On 2 October 1991, Mr C Lynch, an officer of the Department, junior to Mr Breen, provided a letter of instruction to the Defendants regarding the proposed transaction with Hard Rock. The letter, omitting formal parts read: "We have agreed, in principle, to the above Company operating a bakery at the Long Bay Correctional Centre. Would you proceed with contract preparation for this venture based on the following information: 1. The Company's name is Hard Rock Bakery Pty Limited, ACN 053 824 230. Their registered office is located at 27 Stanley Road, Ingleburn NSW 2565. 2. The Agreement provides for the establishment of Private Sector Prison Industry within the Long Bay Correctional Centre. The Business Unit will constitute a Bakery and Pastry Products facility. The unit will manufacture bread for metropolitan prisons, along with a variety of other pastry products including fancy and specialised bread and rolls, cookies, tart shells and pizza bases for frozen/fresh markets. 3. The business Unit will be located in Unit No. 1 at the new industries complex at Long Bay. 4. Corrective Services will provide the facility and an initial inmate workforce of 15. The inmate workforce will be increased to 30 over a period of four months. In addition, the Department will provide up to 3 prison officers to assist with the operation and security of the business. 5. The Department will be responsible for the provision of services (gas, electricity, water, air) to the facility at points to be nominated by Hard Rock. Hard Rock will be responsible for the connection of plant and equipment to the service outlets. 6. Hard Rock will bear the costs of all services including power, water, telephone and waste disposal. 7. Hard Rock will provide sufficient management, plant, equipment and inmate training for the Business Unit to meet its objectives. 8. The Agreement covers a period of 5 years with an option to renew for an additional 5 years. 9. The Company has agreed to pay CSI according to the attached Schedule. In addition the Company will rebate C.S.I. at the rate of $0.02 per loaf supplied to the Department. Such rebate to be paid monthly. 10. The Company has agreed to provide bread to the Department of Corrective Services at the ruling State Contract price. The Company will invoice each institution directly on a weekly basis. Payment terms will be nett 30 days. Initial bread requirements are detailed in Attachment 2. The Department reserves the right to vary its consumption requirements in line with changing inmate populations. 11. Corrective Services Industries will invoice Hard Rock on the 30th of each month for both the facility fees and bread rebate fees. Service charges will be forwarded to hard Rock on receipt by Corrective Services Industries. 12. In regard to the handling and distribution of bread, C.S.I. will provide an initial issue of trays for transportation of the bread to the institutions. The Company will be responsible for the replacement of these trays in the event of their being lost or damaged. 13. The Schedule of Charges is based on each inmate working a six-hour day. The arrival and departure of inmates and supervisors will be reasonably staggered to meet production requirements provided agreement is given by the Superintendent of the institution." The two attachments respectively read: Attachment One SCALE OF FEES Month No of Inmates Fee ($) 1 15 7,500 2 20 11,500 3 25 12,500 4 30 13,750 5and thereafter 30 17,950 Attachment Two BREAD REQUIREMENTS Day No of Loaves Monday 3,600 Tuesday 2,850 Wednesday 2,850 Thursday 2,850 Friday 4,800 9 A day later, 3 October 1991, Mr Breen wrote to Mr Fisher in terms which suggest that Mr Fisher had already been involved in a number of comparable transactions and that something more than a "pro forma" agreement was needed to meet individual circumstances. The letter which perhaps should have set off alarm bells read (again omitting formal parts): "I confirm that the following agreements need to be re-written to incorporate the amendments requested by Mr Paul Nash, A/Executive Director, Legal Branch and Legislation, Department of Corrective Services:- a. Gum Tree Pty Ltd (Kooka) The principals of this company understand that a new agreement is being drawn up and are quite willing to sign it upon receipt. It should be sent direct to Gum Tree. b. Moontrat Pty Ltd Charles Sammut's Solicitor has been advised that a new agreement is being drawn up and no doubt he will advise Mr Sammut of this fact. c. Smith Family Again a re-write is required. They are not aware that an amendment is to be made but I do not foreshadow any difficulty. d. Prestige Group (Australia) Pty Ltd This agreement is with Allen, Allen & Hemsley following a re-write by Keith Bagley. The inclusion of the Paul Nash amendments will be necessary upon its return and no doubt will then need to be returned to Allens unless you can agree to cosmetic changes over the phone. e. Billprau Pty Ltd (Picasso) This agreement is to be re-written to include Nash amendments. Ian Partland of Billprau has been advised and will sign upon receipt. The agreement should go direct to him. f. Smorgon Consolidated Industries Again, a re-write is required. A draft should be faxed to Boyd Dent at Wetherill Park and upon his verbal approval being received, two copies should be mailed to him for forwarding to the Smorgon Head Office in Melbourne for signature. Boyd Dent does not want the agreement channelled through his solicitor. g. Daly & Hall (Vibramatics) This agreement will require a re-write and should be returned to Daly & Hall for re-signing. h. Snowgoose Pty ltd No further action is required at this stage until an adequate supply of wood is guaranteed by the Forestry Commission. j. Hard Rock Bakery Pty Ltd Details from which this agreement will be drawn up were handed to you yesterday 2 October 1991… k. Edmondson Bros Pty Ltd The details for this agreement will be faxed to you by 4 October 1991." 10 The instructions contained in the letter of 2 October 1991, particularly those in paragraph 10 were vague and imprecise. In my opinion, they cried out for clarification yet Mr Fisher did not seek it. Rather he purported to embody his instructions within the pro forma document which he had previously drafted. He faxed a draft agreement to Mr Stephen Thorpe of the Department on 18 October 1991 and later, on 28 October, submitted an "Engrossed Agreement for execution" under cover of his letter to the Department marked for the attention of Mr Breen. 11 The agreement so submitted by Mr Fisher was, in my opinion, deficient in its failure to spell out clearly the respective obligations of the two parties and the timing of those obligations, given that the agreement related to the establishment, fitting-out etc. of a bakery within the grounds of the gaol at Long Bay, which, as it seems, the parties contemplated would ultimately provide bread and bakery products for all prisoners within the metropolitan area of Sydney. However, the particular deficiency which has loomed large in this litigation was the failure of the draftsman to address his mind to the intention behind paragraph 10 of the letter of instruction. 12 The introductory part of the agreement, prepared by Mr Fisher, followed the "pro forma". There followed a series of paragraphs lettered A to R, most of which referred to numbered "items" in the Schedule. The lettered paragraphs did not, however, refer to the important "item 18", which provided as follows: "Item 18 Hard Rock covenants to supply to the various institutions within the Department of Corrective Services the number of loaves as specified in Attachment 2." Of further relevance to the matters now in dispute are lettered paragraphs A, B, C and F and the "items" to which they refer: "A. CSI during the period in Item6 will provide the facility which Hard Rock agrees to equip. Item 6 The "Fit Out Period": Two months from the date hereof. B. CSI shall provide the personnel in Item 7 and the supervision in Item 8; Hard Rock shall be responsible for the other matters in Item 8. Item 7 Initially fifteen (15) inmates to increase to thirty (30) inmates over a four month period such inmates working a six hour day, the arrival and departure of inmates and supervisors to be reasonably staggered to meet production requirements subject to such variations as may be agreed from time to time with the superintendent of the Assessments Prison, Long Bay. Item 8: Hard Rock shall provide the overall management and operation of the business unit and undertakes to instruct and supervise the inmates in all necessary techniques. CSI shall provide three (3) prison officers to maintain the security of prisoners and assist in the supervision of their work. C. The term hereof is in Item 9. Item 9 The term hereof shall be Five (5) years commencing on the 25th November 1991 and terminating on the 24th day of November 1996 and if Hard Rock is desirous of taking a renewal of this agreement for a further term of five (5) years from the date of expiration of the term herein Hard Rock shall give to CSI notice in writing of such desire at least three (3) months but not more than six (6) months before the expiration of the term hereof provided that there then be no subsisting breach of the terms and conditions of this agreement CSI will at the expense of Hard Rock provide a form of agreement for that further term containing the same terms and conditions to this agreement mutatis mutandis however further provided that the license fee, the charge for inmate hours worked and rebate (hereinafter called "the fees") to apply for the further term shall be such amounts as shall be agreed between the parties provided always that should the parties fail to agree upon the amounts of the fees then the amounts of the fees shall be determined by an independent expert appointed by the President of the Institute of Arbitrators Australia and the said determination shall be final and conclusive and absolutely binding on the parties who shall share equally the cost of such determination. The parties expressly agree that such determination shall apply for the further term insofar as it provides for fees which are not less than the fees applicable during the term of this agreement. F. Costs fees and consideration are set out in Item11 subject to Item 15. Item 11: Hard Rock agrees to provide bread to CSI at the ruling State Contract Price. Hard Rock will invoice each institution directly on a weekly basis. Payment terms will be Net 30 days. Hard Rock will pay a monthly fee as set out in Attachment 1 headed "Scale of Fees" together with a rebate of $0.02 per loaf in respect of each loaf supplied to Corrective Services institutions together with the cost of all overheads including water, power, gas and telephone services. …………………………….. Item 15 The amounts to be paid by Hard Rock to CSI in accordance with Item 11 may be amended at any time during the term of this Agreement by agreement between the parties in which event Item 11 shall be amended accordingly. 13 Attachments 1 and 2 referred to respectively in items 11 and 18 were in these terms: Attachment 1 Month No of Inmates Fee($) 1 15 7,500 2 20 11,500 3 25 12,500 4 30 13,750 5 and thereafter 30 17,950 Attachment 2 Bread Requirements Day No of Loaves Monday 3,600 Tuesday 2,850 Wednesday 2,850 Thursday 2,850 Friday 4,800 14 Mr Breen, by letter dated 29 October 1991 to Mr Fisher, proposed some amendments to the agreement but did not touch on item 18. He asked that there be added to attachment 2 a specification of the bread which led to the addition of the words "Bread to be white, 680 grams, sliced, 21 slices in a plain plastic bag and to meet acceptable standards of freshness, and palatability". 15 Apparently, Mr Fisher incorporated the amendments suggested by Mr Breen and re-engrossed the agreement. On 31 October 2001, Mr Breen's last day of service with the Department, he sent the agreement incorporating the amendments to Mr Paul Nash, "A/Executive Director Legal Branch and Legislation", for perusal and execution by the Director General of the Department. At the same time, he sent other agreements to Mr Nash for similar action. 16 In his affidavit sworn 11 June 2004, Mr Nash explained his duties in 1991 in these terms: "As at 1991, my role with the Department involved provision of legal advice to senior executives and Branch Heads in the Department and to the Commissioner and Minister directly as required. In addition to my role, Legal Services of the Department at that time consisted of a further 6 solicitors who were predominantly engaged in work involving the cancellation of periodic detention orders and civil litigation concerning personal injury claims by prison inmates. The Department often instructed the Crown solicitor's Office and/or the private bar. Legal Services only dealt with commercial issues on an irregular basis, as such work was rarely required by the Department and was traditionally referred to the Crown Solicitor's Office. In respect to private sector prison industry agreements, my role was to review draft agreements forwarded to me by Mr Wayne Ruckley of Corrective Services Industries (CSI), and once CSI was happy with their substance, to check for any errors of form and then to submit them for execution by the Director-General. For example, it was my responsibility to ensure that the proper parties were named in an agreement for the purposes of execution and that the term of the agreement was correctly specified. It was not part of my role to check whether the agreements complied with the instructions supplied by CSI to the solicitors retained to draft agreements." 17 In relation to the agreement between the Department and Hard Rock received from Mr Breen on 31 October 1991, Mr Nash said: "I did not see the Department's letter of instruction to Thurlow Fisher dated 2 October 1991 in respect to the proposed agreement with Hard Rock Bakery Pty Ltd until long after the execution of that agreement by the Director-General. I do not recall discussing this particular draft agreement with anyone from Thurlow Fisher prior to its execution. On 20 November 1991, I spoke with Mr Ruckley about the formalities of execution of the agreement with Hard Rock Bakery Pty Ltd to the effect that it was not necessary for a single document to be executed by both parties and that there could be an exchange of executed counterparts. On about 22 November 1991 I received from Mr Ruckley a memorandum of that date, attaching a copy of the proposed agreement with Hard rock Bakery Pty Ltd which had been executed by Hard Rock Bakery Pty Ltd. On 25 November 1991, I worked on the same floor as the Director-General. On that day, I took the Agreement in to the office of Mr Graham and he signed the document in my presence. I signed on page 3 of the Agreement as the witness to Mr Graham's signature. The Director-General executed agreements for 6 private sector prison industries on the same day." 18 In the result the agreement between the Department and Hard Rock was executed by both parties and dated 25 November 1991. It was expressed to commence on 25 November 1996, subject to the right of renewal set forth above. Although Mr Fisher, in his evidence, suggested, correctly, that the dates were filled in by the Department without reference to him, it is difficult to see, in the light of the way the agreement was drafted, how any other dates could be inserted once the document was executed and dated. 19 There were then, what seem to have been, unanticipated delays in establishing the bakery. Eventually, according to the affidavit sworn 16 July 2004 of Mr W A Ruckley, a senior officer in the Department who seemingly assumed responsibility for the enterprise, some production commenced about 27 July 1992. Supply to various penal institutions continued progressively. During the first half of 1993, probably about April, the bakery established under the agreement was finally in a position to supply bread to all metropolitan correctional centres. However, even then, as it seems, the quantities of bread ordered and supplied fell well short of those specified in attachment 2 to the agreement. 20 Moreover, Hard Rock fell behind in the payment of fees due under the agreement which prompted Mr Ruckley to write on 12 January 1993 to Mr Brown, in these terms: "I refer to the facsimile advice forwarded by Steve Thorpe dated 6th January 1993 and our further discussion of the 12th January, 1993 in relation to the Hard Rock Bakery Private Sector business unit. As indicated in our telephone conversation, I am gravely concerned at the level of debt outstanding to CSI by your Company. I am further concerned at not being able to receive a precise timetable to reduce the debt to trading terms acceptable to CSI. Whilst the level of bread ration sales to projected Institutions has been restricted, this does not prevent Hard Rock Bakery from marketing the sales of bread products to other institutions. Further, the production of bread was never envisaged as the total productive activity of the business unit. It would appear that Hard Rock Bakery has not maximised opportunities in this area. As indicated in my telephone conversation, the level of debt due to CSI is unacceptable. I now seek your formal advice by the 15th January 1993 as to when the debt outstanding to CSI will be reduced to approved credit terms." 21 Mr Brown responded to Mr Ruckley's letter on 21 January 1993: "In reference to your letter dated 12/01/93 sorry I am late answering but I have been away for 1 week. Wayne as you know all our projections and budgets have been worked out on the quantities supplied in our contract with + 15% production allowance. As it stands your figures look to be out by 6,500 units/week. Approx. $16,000 per month off our turnover. It has taken nearly 6 months to reach this stage & we still do not have Windsor Jail. We have been pursuing contracts & other production possibilities but this takes time to organise as we have quite a few problems to overcome in relation to dispatch and production times. If you look at the letter sent to us from Mr Chris Lynch on the 13/08/92. We have been restricted to what customers we can supply (copy enclosed). I do not quite understand what you mean that the level of bread ration sales to projected institutions has been restricted surely the figures in our contract were straight from their purchases as there are only 8 prisons buying from us. It was never our intention to run the bread production for the prisons at a loss and if the units ordered were as in our contract. We would have no problems in meeting the rental as in our contract. If you look at our statements from you, I think you will need a computer to work out what we owe. The statements are wrong I have complained at least 3 times about this and then gave up. We have spent close to $150,000 more on the bakery than anticipated and this has affected our cash flow. But our major problem is we are $106,000 dollars short in our sales to the prison system in only 5 months. If this cannot be fixed and your production will not reach the level in our contract, I think we should re-negotiate the rental fees. I understand that you have up to now discounted the rental fee but this does not fix the units ordered and will only get worse as the discounting stops. Just another point we get an electricity bill and gas bill, e.g. Dec '92, which just states electricity $1062.07, No units used or readings or rates charged. Also the gas bill we just got 5 months on one invoice $5895.65 no units used or readings or rates charged. This is not correct how can we possibly check this. Wayne could you please advise me the amount we owe till end of Dec.'92, as I have 3 invoices for some months, and if it is possible to reach the production of 16,950 units per week for the CSI. If I know this I will get back to you with a proposal. We would like to work this out without getting involved with solicitors if possible." 22 Within a few days, Mr Ruckley contacted Mr Fisher by telephone and there was, according to his affidavit, the following conversation: "I said: We are facing difficulties in our contractual relationship with Hard Rock Bakery. Bread has not been ordered by correctional centres at the level indicated in the contract attachment and Hard Rock contend that this is in breach of contract. It is my firm view that it was never intended that correctional centres would be obliged to order bread that was not required by the Department Mr Fisher said: That is my view too, as the attachment was not intended to provide an obligation on the Department to purchase those quantities, but as a privilege to Hard Rock. The numbers are in the contract but it was intended that those numbers would be taken up only if you actually needed them. I will check the documents and get back to you." 23 Paragraph 83 of Mr Ruckley's affidavit reads: "I would never have allowed CSI and the Director-General of the Department to enter into the Agreement with HRB if I had understood or believed that the Department was going to be contractually bound to order the quantities of bread specified in Attachment 2, at any time, let alone for the 10 year period envisaged by the Agreement. It was my intention that those quantities would be indicative only, that is, to give the bakery an idea of the potential demand for bread of metropolitan correctional centres. Had I been alerted to the risk to CSI presented by the drafting of the Agreement and, in particular, Attachment 2 before the Department executed the Agreement, I would have sought further advice from Thurlow Fisher as to how best CSI should protect its interest." 24 Mr Fisher followed his telephone conversation with Mr Ruckley with the rather unhelpful letter of 29 January 1993: "We refer to our recent discussion regarding the "Bread Requirements" (Attachment 2) and the respective obligations on Hard Rock to provide and CSI to take the bread specified in the attachment. According to our instructions it seems that CSI does not now require the quantity of product specified in the attachment and Hard Rock contends that without CSI taking this quantity of product its operation is not viable or at least its financial commitment under the agreement should be adjusted. It seems to us that if CSI is unable to take the quantity of product stipulated in the attachment or if because of Hard Rock's consequently reduced output there is a consequent reduction in their need for inmates the obvious course is that a new set of financial arrangements between the parties should be negotiated because the scale of the operation would now seem to be smaller than was originally contemplated by the parties." 25 Thereafter, there were prolonged negotiations, in which Mr Ruckley was involved with representatives of Hard Rock. The fees payable by Hard Rock pursuant to the curiously drafted Item 11 and Attachment 1 were temporarily negotiated downwards and Mr Ruckley sought to enforce a directive that all metropolitan correctional institutions purchase the totality of their bread and pastry-goods requirements from Hard Rock. There was resistance by some correctional centres on various grounds, including alleged unsatisfactory product. 26 Mr Brown, outlined the problems which Hard Rock faced from the perspective of his role as a director of the company in his affidavit sworn 23 September 1999. He related the problems to the fact that orders for bread were much lower than 16,950 loaves per week as stipulated in the agreement. This, he claimed, reflected upon the financial viability of the project and rendered excessive the capital expenditure employed in fitting the bakery out. Mr Brown sought to have the fees payable under item 11 renegotiated and in that connection, as I have indicated, was partly successful. A letter from Mr Ruckley to Mr Brown dated 1 February 1993 read: "I refer to our meeting of the 29th January 1993 in which elements of the contractual agreement covering the Hard Rock Bakery private sector business unit were canvassed. Arising from that meeting I confirm that the following economic arrangements were agreed upon: i) Lease charges for the period 1.8.92 to 31.12.92 being revised to "$29,000. ii) Lease charges for the month of January, 1993 being set at $8,000. iii) Lease charges for the month of February, 1993 being set at $8,975. iv) Cartage charges for the period of 1.8.92 to 31.12.92 being paid in full i.e. $3,585.14. v) Electricity and gas charges for the period 1.8.92 to 31.12.92 being paid in full i.e. $10,777.41. vi) The total amount outstanding during the period the 1.8.92 to 31.12.92 is reduced by the amount already paid to CSI by your Company i.e. $12,630.86 plus $270.00 representing a contra adjustment for supplies made for public relations purposes. 27 Ultimately, however, Hard Rock in March 1994 commenced proceedings in this court against the Plaintiff, alleging a number of breaches of contract. The litigation eventually was referred to mediation by the Hon T Morling QC in March 2002, and in the result a compromise was agreed to. I will need to return to that subject in due course. 28 In the cross-examination of Mr Ruckley, Mr J Stevenson SC who appeared with Mr Muston for the Department, challenged, in effect, what was said by Mr Ruckley in paragraph 83 of his affidavit quoted above. There was this exchange: "Q. You do not see any difference in representing, as I suggest you did, that the department's requirements would be a minimum of 16,950 loaves on the one hand and saying on the other hand that the department was not obligated to purchase such quantities in the future? A. I see tensions in all commercial negotiations. Q. Can I suggest this to you, that what you made clear to the Hard Rock people was that they could count on at least sales of 16,950 loaves per week at a minimum? A. They could expect to get that, yes, but not carte blanche, that is the point I am trying to make. Q. And that you did not say anything to the effect that the department reserved to itself some discretion to order less than that? A. You keep on telling me I did not say and I keep on telling you I did say it, that forms part of my affidavit. Q. I know that and I am challenging you about that, you understand that, don't you? A. Well, I am challenging the proposition. Q. In the next sentence of the passage at the top of page 9 you say, "Naturally, the quantity which the department purchases at any particular point in time will be that required for the given inmate population?" A. Yes. Q. "The department reserves the right to vary its consumption requirements with changing inmate population."? A. Yes, I do not see anything remarkable about that. Q. You know that last sentence I have read is exactly the same words as appear in the letter of instruction to Mr Fisher? A. Yes. Q. That is why you have got it? A. They were my words originally, so is not unusual I would exercise those words, I was the inspiration for those words. Q. You know exactly those words appear in the letter of instructions to Mr Fisher, don't you? A. Yes. Q. Your position is the words are in line with what you said to the Hard Rock people on 17 September? A. Yes. Q. Didn't you also say to the Hard Rock people at the meeting something to this effect, "You must be able to guarantee that your side of it, the bakery, will have the necessary capacity to make and exceed the projected figures of 16,950 loaves each year? A. Yes. Q. Did you also say something to this effect, "You must be able to guarantee the production of 16,950 with an allowance of 15 per cent per annum", did you say that? A. Yes. Q. And you said something like, "We do not want to be in a position where the baker cannot supply all our bakery requirements"? A. Yes. Q. And that, in fact, was your position? A. Yes. Q. It was just pointed out to me that I just put to you a while ago the proposition that it was 16,950 loaves per annum and you answered, yes. I think you understood my question to be 16,950 per week? A. I did, yes. Q. The deal that was agreed on 17 September in 1991 was this, was it not, that Hard Rock could count on supplying at least 16,950 loaves per week? A. Yes. Q. But that that might increase if the prison population increased? A. Yes. Q. And that they should be ready to meet that increase if as expected it occurred? A. Yes. Q. The figure of 16,950 loaves a week is a figure that Mr Lynch, as you understand it, got from Mr Cook? A. Yes. Q. I think you have agreed with me that it was represented to the Hard Rock representatives on 17 September 1991 that that was the figure that they could expect to be the requirement when production commenced? A. Not when production commenced, it was always on the basis that there would be a phased introduction. Ultimately, it would become 16,950 but it was always understood principally from an operational aspect that it would not be possible to start at 16,950 and that there would be a phased introduction to 16,950. That was always understood by the parties. Q. You are talking about operational kick in? A. Yes. Q. Nonetheless, you are representing to the Hard Rock representatives that the department's requirements at the time production commenced would be 16,950? A. Would be expected to be, yes." 29 In my opinion, the statement of Mr Ruckley in paragraph 83 of his affidavit should be accepted. It seems to me extremely unlikely that, if his mind were directed to it, he would have agreed or recommended that the Department become obligated to purchase, without qualification, a fixed quantity of bread per week for a period as long as 10 years. Moreover, his evidence on the subject seems to be supported by internal records to the effect that the bread quantities stated were intended to be indicative only. Although Mr Stevenson, in his closing submissions, questioned the relevance of paragraph 83 of Mr Ruckley's affidavit on the ground of his lack of authority to determine the contractual terms of dealings with Hard Rock, I am of the opinion that the evidence established that Mr Ruckley was, for all intents and purposes, the responsible officer and that the Director General, who had ultimate authority, more probably than not, would have accepted his recommendation. 30 There is also a further piece of evidence which I regard as important in considering paragraph 83 of Mr Ruckley's affidavit and the liability of the Defendants. In his affidavit sworn 7 June 2004, Mr Stephen Thorpe, another Senior Officer of the Department involved with the Hard Rock agreement said that he received and read the draft agreement submitted by Mr Fisher on 18 October 1991. He wrote some comments upon it including underneath attachment 2, "Are these nominal figures or minimums?" He then had a telephone conversation with Mr Fisher which he deposed to as follows: "I said: I have received the draft contract from you. There are a number of issues I have with the draft contract. These are: (a) there is no annexure B (b) Item 11 should include gas (c) Item 19 should be deleted We will be addressing the following issues: (d) the location of the silo (e) access to the warehouse (f) bread specification (g) the number of hours in a normal work day. The bread requirements in Attachment 2 are these nominal figures or minimums? Mr Fisher said: These are indicative figures." 31 Cross-examined upon the subject, Mr Thorpe told Mr Stevenson that he prepared a memorandum to Mr Lynch of his conversation with Mr Fisher but omitted from it a reference to attachment 2 because his query regarding that attachment had been satisfied by Mr Fisher's response to his question. 32 Mr Fisher, in his affidavit sworn 18 October 2004, said that he could not recall the conversation with Mr Thorpe, "but I do not believe that I said to him (or to anyone) anything to the effect that the figures in attachment 2 were "indicative". At the time my state of mind was that the bread requirements in attachment 2 of the draft agreement between (Hard Rock) and (the Department) were the minimum amounts of bread that the Department was to purchase. 33 On any basis, of course, Mr Fisher did not even purport to include in the agreement he prepared a provision giving effect to that part of paragraph 10 of his letter of instruction whereby the Department sought to reserve "the right to vary its consumption requirements in line with changing inmate population". 34 Both parties in the proceedings before me seemed to accept that item 18 in the agreement as drafted by Mr Fisher obliged Hard Rock to supply, and the Department to accept, at least 16,950 loaves per week for a term of at least 5 years and potentially 10 years. In my view, it is difficult to interpret item 18 in any other way. 35 Mr Fisher addressed this subject in his affidavit. In paragraphs 17 and 18 he deposed: "It is, and was in October 1991, my practice to consider whether provisions a client requests to be included in an agreement are commercially sensible and likely to be accepted by the party with whom my client is negotiating. Further, it is, and was in October 1991, my practice to inform my clients of my views about any such matter. I do not remember reading paragraph 10 of the 2 October letter. My reaction on reading paragraph 10 of that letter now is that, based on my experience, a party in the position of Hard Rock Bakery would be unlikely to agree to a clause to the effect of the part of paragraph 10 in which CSI sought to reserve the right to vary its consumption requirements in line with changing inmate populations as such a clause would give CSI a unilateral right to vary the contract in a way which could very well have serious and adverse financial consequences for Hard Rock Bakery. I am sure that my reaction to a suggestion that such a clause be included in the contract with Hard Rock Bakery would have been the same then as it is now. For that reason, and consistently with my practice as outlined above, I am sure that I would have conveyed this point of view to Lynch. I cannot now remember why I did not include in the draft contract a "reservation of rights" clause of the kind specified in paragraph 10 of the 2 October letter. I do not believe that I simply overlooked the instruction to include the reservation of rights clause. It would have been inconsistent with my usual practice simply to overlook such an important instruction. For those reasons, I believe that, consistent with my usual practice, I told Lynch that I did not believe Hard Rock Bakery would agree to include such a clause." 36 Mr Fisher was cross-examined by Mr G Lindsay SC, who appeared with Mr R Dalgleish as counsel for the Plaintiff. As the issue of Mr Fisher's apparent failure to address fully paragraph 10 of his letter of instructions is central to this case, it is appropriate, I think, for me to record some extracts from the cross-examination upon the subject: "Q. One of the central, perhaps the central document in these proceedings, you appreciate is a letter of instructions that was dated 2 October 1991? A. Yes. Q. And you touch upon that in your affidavit in paragraph 13, do you see that? A. Yes. Q. And you say there that you cannot now remember actually reading that letter? A. That's right. Q. And that continues to be your evidence? A. Yes. Q. In paragraph 17 of your affidavit you refer in the third sentence, and again the letter of 12 October, do you see that? A. Yes. Q. Where you say you do not remember reading paragraph 10 of the 2 October letter, do you see that? A. Yes. Q. And that continues to be your evidence, does it? A. It does. Q. Paragraph 10 of the letter was the paragraph that dealt with the topic of the provision of bread to the Department of Corrective Services, do you recall that? A. Yes. Q. It is the paragraph that referred to attachment 2? A. Yes. Q. And it is a paragraph also that contained the words "The department reserves the right to vary its consumption requirements in line with changing inmate population"? A. Yes. Q. So your evidence is that you do not remember reading that paragraph at all -- you do not at all remember reading that paragraph, more accurately? A. That's correct. Q. You came in time to prepare the agreement dated -- that agreement dated 25 November 1991? A. Yes. Q. And do you accept that in that document prepared by you there is nothing in the document at all that deals with the sentence I read out to you from paragraph 10 relating to a reservation? A. Yes. Q. Would it be accurate to say that you are at a loss really to understand how that came to be, that there was no omission, that there was no reference in the agreement to that reservation? A. No, I refer you to paragraph 17 of my affidavit, which does not suggest that I was at a loss. Q. Perhaps that gives us an opportunity to look at the structures of your affidavit a little more broadly than that. I will certainly give you a chance to come back to paragraph 17, but would this be a fair reading of your affidavit; first of all, you have no actual recollection of a number of events that occurred back in the 1990's? A. That's right. Q. But you have endeavoured to reconstruct events based upon the information that you believe is available to you? A. And knowing my habits as a solicitor. Q. First of all, there are a number of matters in respect of which you say in your affidavit you have no actual recollection? A. Yes. Q. And that continues to be your evidence -- A. Yes. Q. -- today. Secondly, in your affidavit you endeavour to reconstruct events, is that right? A. Yes. Q. And you do so on a couple of bases, is that so? A. Yes. Q. One of those bases you say is what you believe to have been your practice as a solicitor? A. That's right. Q. Would it be accurate to say that in so far as you have endeavoured to reconstruct events a factor in your reconstruction is a belief on your part that you could not possibly have been negligent? A. I think that's correct. Q. It is something inside you that repels any suggestion that you may have been negligent? A. Yes. Q. Do you concede that you might nevertheless have been negligent? A. I might. Q. Do you concede that you might simply have overlooked the reservation sentence in paragraph 10 of the letter of instruction? A. No. Q. You don't concede? A. I don't concede. Q. That is a possibility? A. No. Q. Do you concede the possibility that you may have failed to appreciate the significance of the reservation sentence? A. No. Q. In your affidavit you do say, correct me if I am wrong, that you regarded what I call the reservation sentence, as quite important? A. Yes. Q. And can we take it that reconstruction as you have told us you have done, you would in 1991 have regarded it as quite important? A. Yes. Q. And you would have regarded it as quite important to the task that you had to perform? A. I regarded it as quite important because of its -- the effect that it might or might not have had on the viability of the deal. Q. Could you -- as they say these days -- unpack that for us, could you explain what you mean by that? A. CSI was engaged in endeavouring to establish industries within the prison system and I felt in looking at this deal that had been -- that I was receiving instructions about, as I have said in paragraph 17, I felt, or I feel now, that the omission of that proviso was quite deliberate. Q. We will take that in a couple of steps, if we may. Do you feel it was quite deliberate as an omission on your part? A. Yes. Q. Why do you say you feel that was quite deliberate on your part? A. Because its inclusion would have injured the deal. Q. Can you explain that please? A. If CSI were to have reserved the right to have reduced the quantity of bread it was going to take then Hard Rock would have been disadvantaged, and for that reason might not have been prepared to execute the document. Q. When you say might not have been prepared to execute the document, do you mean to say that you did not at any time communicate to Hard Rock the desire of the department to have the reservation included in the agreement? A. That is correct. Q. I think you tell us in your affidavit that you personally were not involved in any negotiations with Hard Rock? A. That's right. …………………………………….. Q. You knew, did you not, when you read the -- can we take it that when you read the letter of 2 October 1991 you realised that paragraph 10 of the letter was important to the department? A. Yes. Q. And you realised, or you would have realised, would you not, that the whole of paragraph 10 was important to the department? A. Yes. Q. You have referred a number of times to paragraph 17 of your affidavit? A. Yes. Q. Were you referring in paragraph 17 to the first sentence to your practice to consider whether provisions a client requested to be included in an agreement were commercially sensible and likely to be accepted by the other side? A. Yes. Q. Can we take it that when you saw paragraph 10 of the letter dated 2 October you formed some view as to whether paragraph 10 was commercially sensible? A. I believe that I did but I don't remember. Q. This is part of the process of you endeavouring to reconstruct events? A. Yes. Q. Can we take it that you believe in this process of reconstruction that you formed the view that some part of paragraph 10 was not commercially sensible? A. I believed that I did. Q. Are you able to assist us as to what part of paragraph 10 you believed was not commercially sensible? A. Yes, the latter part of which would have given the department the right to reduce its bread requirements. …………………………………………………….. …………………………………………………….. Q. Item 18 together with attachment 2 represents, doesn't it, your drafting response, if I can put it that way, to paragraph 2 of the letter dated 2 October 1991? A. Yes. Q. It doesn't follow literally the wording of paragraph 10 of the letter of instruction, does it? A. No. …………………………………………. Q. And the word covenants I have suggested is one of those changes. A. Yes. Q. So that you have turned your attention to, or you did turn your attention, may we assume, to the introduction of lawyers' language to deal with the instructions contained in paragraph 10? A. Yes. Q. Jumping ahead just for the moment, we know, do we not, that on 19 January 1993 you wrote a letter to the Department of Corrective Services? A. Yes. Q. And if you want to refresh your memory about that it is in the bundle that you have before you at page 281; would it assist you to have some yellow post-it tabs to mark the pages? A. Yes. Q. In the first paragraph of that letter dated 29 January 1993 you refer to the respective obligations on Hard Rock to provide and CSI to take the bread specified in the attachment, do you see that? A. Yes. Q. In writing that were you intending to refer to what appears in item 18 of the agreement? A. Yes. Q. And it is your evidence I understand from your affidavit that you believe that back in 1991 you deliberately intended that the department upon execution of the contract or the contract coming into force would have an obligation to take the bread specified in attachment 2? A. Yes. Q. And that obligation you tell us in your reconstructed belief was an obligation to take these attachment 2 quantities as minimum quantities? A. That's right. Q. It was your intention, was it, that from the time the agreement became an operative contract that obligation to take minimum quantities would arise? A. I believe so. Q. That was what you intended? A. I believe I did. Q. If you can put the letter of 29 January 1993 to one side for the moment, I would like you to return with me please to the agreement of 25 November 1991, and that agreement in what might loosely be described as a preamble on page 190 of exhibit A provided for a term, a contractual term, referable to item 9 in the contract? A. Yes. Q. And that term is elaborated in item 9 at page 194 of the exhibit as being a term that commenced on 25 November 1991? A. Yes. Q. And item 9 there provides for what might be described as an initial term of five years coupled with an option for a further 5 years? A. Yes. Q. But the term as set out in item 9 was to commence on 25 November 1991? A. Yes. Q. Can we take it that in drafting the document you intended that the obligation for which item 18 of the contract applied was an obligation that commenced on 25 November 1991? A. I think that the document as it was originally prepared had blank spaces in the second and third lines of item 9, and those dates were inserted at the time the document was executed, presumably, by CSI. That is not my writing. Q. You were the draftsman of that contract? A. That's right. Q. To move perhaps away from the precise date 25 November 1991 but to look at the matter in terms of principles, you drafted this document, did you not, on the understanding you tell us now, that the quantities of bread referred to in item 18 were minimum quantities? A. Yes. Q. So that you proceeded on the basis that throughout the term of the contract the department was to be under a legal obligation to order the quantity of bread referred to in attachment 2? A. Yes. Q. That was an obligation which was to commence immediately upon the agreement being made? A. Yes. Q. So that -- incidentally, if you go to attachment 2 there are references there to five days of the week, do you see that? A. Yes. Q. And there are no references to Saturday or Sunday? A. That's right. Q. Is that something about which you inquired? A. I beg your pardon? Q. Is that something about which you inquired? A. I don't recollect having done so, I think that the attachment 2 was faxed to me by CSI and was then incorporated into the agreement, and I think I presumed that the figures which appear in that attachment were generated by CSI and were intended for me to include them and indeed they were included. Q. Can we take it that you simply took those figures and incorporated them in the draft agreement? A. Yes. Q. And I don't pretend to be a mathematician, I am told those figures add up to 16,950 loaves, do you accept that? A. I haven't added them but if you tell me that's the total -- Q. It's a lot of bread? A. Yes. Q. It's a lot of bread on a weekly basis? A. Yes. Q. And in this contract, and in particular item 18, it was your intention, was it not, that from the outset of the contract, the department will have an obligation to accept, to order that quantity of bread? A. Yes. Q. 16,095 loaves, or whatever it might be? A. Yes. Q. From the outset of the contract? A. From the date that appears on page 5. Q. When you refer to those dates, you refer to more particularly 25 November 1991? A. Yes. Q. You knew, did you not, that the bread that was to be the subject of this supply was bread to be baked at the bakery to be established? A. Yes. Q. To be established at Long Bay? A. Yes. Q. It was not a bakery which was in existence as at November 1991, was it? A. No. Q. Did not occur to you that there might be some incongruity in the department being obliged to buy bread from a bakery that was yet to be established? A. I don't remember it having occurred to me. Q. Is it something that you say you simply didn't turn your mind to? A. As I say, I believe when the document was prepared those dates were not in it and I think they were inserted by CSI. Q. Be that as it may, did you turn your attention to the timing of commencing of the agreement on the one hand and commencement of the obligation to buy large quantities of bread? A. I don't remember having done so. ……………………………….. …………………………………………… Q. If you go to paragraph 10 of the letter of instruction at page 89 of exhibit A? A. Yes. Q. You see there in the second part of that paragraph there is a sentence that refers to attachment 2? A. Yes. Q. And it commences with the word "initial"? A. Yes. Q. Did you make any inquiry of the department as to what was meant by the word "initial"? A. I don't recollect having done so, but I think I understand it. Q. Can we proceed on the basis that what you did was that you received the letter of instruction dated 2 October first of all? A. Yes. Q. And reconstructing, you believe you read the whole of paragraph 10? A. Yes. Q. And you formed the view about the meaning of the word "initial"? A. Yes. Q. And you then acted upon that view without any further communication about it with anybody from the department? A. I believe so. Q. Did you turn your mind to what was meant by the concept of bread requirements? A. I don't recollect having done so. Q. Did you turn your mind at all to the concept of bread requirements in the context of the particular bread rations that each inmate might have? A. I don't believe so. Q. Did you turn your mind to the meaning of the concept of "inmate population"? A. I don't believe so. Q. Did you turn your mind to the meaning of the expression in paragraph 10 "consumption requirements"? A. I don't believe so. Q. Putting it together perhaps, did you turn your mind to the meaning of the expression, "Varied its consumption requirements in line with changing inmate population"? A. I don't believe so. ………………………………………… ………………………………………… ……………………………………….. Q. Did you turn your mind to the possibility that if the bread specified in schedule 2 of the agreement imposed a minimum legal obligation on the department, the department might end up with more bread than it could handle? A. I think I presumed that the department knew what it's bread requirements were and that is why they stipulated it. Q. When you say you presumed -- A. That's reconstruction, because I don't remember. Q. And accepting that what you are doing as an exercise now, is the exercise of reconstruction, is it your evidence that reconstructing the events, you didn't actually turn your mind to the topic of whether the department might be over-ordering, so to speak? A. I don't believe so. Q. When you say you presumed something, is that a way of saying you didn't turn your mind to it at all, you believe, you just acted upon an assumption? A. Yes. Q. Can we take it from that that you certainly did not say to anybody associated with the department, "Hey fellers, be careful, you might be obliging yourself to order more bread than you can use"? A. I didn't say that. ………………………………….. ………………………………….. ……………………………………. …………………………………….. Q. And the reconstruction all flows back to your belief now that you held a belief back in 1991 that the figures were minimum figures? A. Yes. Q. Do you agree that there is nothing in the letter of instruction dated 2 October 1991 about "minimum figures"? A. Yes. Q. You agree? A. Yes. Q. When you read paragraph 10 of the letter of instruction can we take it that you read the last sentence about the department's proposed reservation? A. What is the question? Q. You recall, don't you, the last sentence of paragraph 10 referred to the department reserving the right to vary consumption requirements etc? A. Yes. Q. You agree that doesn't in anyway embrace the concept of the figures in attachment 2 as being a "minimum"? A. Yes. Q. The word "vary" is consistent, is it not, with the downward movement of the figures in attachment 2? A. Yes. Q. You say that you turned your mind to that, or you believe you did? A. I believe I did. Q. And it is your turning your mind to that that led you to the view that from Hard Rock's perspective that was not commercially sensible? A. That's right. Q. You were endeavouring to accommodate what you presumed to be the reaction of Hard Rock? A. That is what I believed. 37 Although the Plaintiff did not call Mr Lynch, who is no longer in the public service, I regard as unlikely Mr Fisher's suggestion that he told Mr Lynch of his view as to the commercial impracticability of the reservation referred to in paragraph 10 of his letter of instruction. He stops short of asserting that Mr Lynch accepted his advice and amended the instructions. Moreover, he made no note of what one would think he regarded as an important conversation, he made no attempt to confirm it by letter and, so far as the evidence relates, he made no mention of speaking to Mr Lynch either in his conversation with Mr Ruckley at the end of January 2002, or in his subsequent letter referring to that conversation. 38 Mr Lynch was a junior officer. There was no suggestion in the evidence that he had authority to agree to the deletion of the reservation referred to in paragraph 10 of the letter of instructions. I draw no inference from his absence from the witness box. 39 These proceedings were commenced after the action commenced by Hard Rock but before it was finalised. After pleading the Defendants retainer to prepare an agreement between the Department and Hard Rock, the duty to exercise reasonable care and skill, and the breach of such duty, the pleading particularised inter alia: "(d) The written agreement dated 25 November 1991 with Hard Rock Bakery Pty Limited prepared by the defendant and executed by the plaintiff: (i) required by Item 18 to the Schedule to the agreement that the Department purchase from Hard Rock Bakery Pty Ltd the quantities of bread set out in Attachment 2 to the Schedule of the agreement; (ii) included in Attachment 2 to the Schedule to the written agreement the daily "Bread Requirements" that had been set out in Attachment 2 to the letter of instruction; (iii) did not contain any reservation on the part of the plaintiff or the said Director General of Corrective Services to the effect that the Department reserved its right to vary its consumption requirements in line with changing inmate populations. (e) The defendant failed to enquire of the plaintiff: (i) precisely what was intended by the two relevant sentences in the letter of instruction; (ii) what was intended by the word "initial" in the first sentence; (iii) what was the precise basis on which the numbers of loaves in Attachment 2 were arrived at; (iv) precisely what changes in inmate populations would necessitate a variation in consumption requirements: (v) whether or not the plaintiff intended that it be able to vary consumption requirements if the actual populations of metropolitan correctional centres varied from the projected populations on which Attachment 2 was based; (vi) whether or not the plaintiff intended under the agreement to be able to vary consumption requirements in accordance with the bread ration required by the actual populations of metropolitan correctional centres from time to time; (vii) whether the plaintiff intended to be able under the agreement to only receive and pay for the actual bread requirements of metropolitan correctional centres and no more. (f) The defendants failed to prepare a draft agreement which, if executed, would have enabled the Department to order bread in accordance with bread requirements based on the actual inmate populations of metropolitan correctional centres from time to time. (g) The defendants included item 18 of the Schedule to the written agreement and Attachment 2 to that Schedule without qualification whatsoever." 40 The Defendants denied breach of contract and negligence; denied damage; and asserted that any loss or damage suffered was materially contributed to by the Plaintiffs' own negligence in failing to properly review and consider draft documents and failing to give proper instructions. It became common ground, however, that the defence of contributory negligence cannot be maintained in respect of the count against the Defendants in contract (Astley v Anti Trust Ltd (1999) 197 CLR1.) 41 In his submissions on liability, Mr Stevenson conceded that the accidental omission of a "rise and fall" provision giving full effect to paragraph 10 of the letter of instruction would constitute a breach of the Defendants' obligations. He submitted, however, that the court should conclude that Mr Fisher sought instructions from Mr Lynch and omitted a "rise and fall" clause, in accordance with his instructions. 42 I am unable to accept that submission which is not based on positive evidence but only on Mr Fisher's belief as to what he would have done, in accordance with his usual practice. As I have already recorded, there was no evidence that Mr Lynch had any relevant authority. Mr Fisher's evidence on the subject when cross-examined by Mr Lindsay was very unconvincing, and none of the surrounding circumstances seems to me to provide his contention with any support whatsoever. He made no note of what would have been a very important conversation and he wrote no letter of advice. Moreover, in my view, the agreement itself was very poorly drafted in virtually every aspect and demonstrated a considerable lack of application to what was sought to be achieved. Even the controversial item 18 leaves to be implied, in order to give it commercial efficacy, that the Department would purchase the bread which the item required Hard Rock to manufacture. 43 In my view, the Defendants plainly failed to exercise reasonable care and skill, both in the drafting of the agreement, and in failing to seek clarification of the instructions conveyed to them. In my view, they had an obligation to seek such clarification as the reservation stated in paragraph 10 of the letter of instruction was not, in my view, capable of meaningful translation, in the form it was expressed, to a formal agreement. It would certainly have been quite inappropriate for Mr Fisher to determine for himself, as may well have been the case that the reservation regarding bread quantities would be commercially unacceptable to Hard Rock and should therefore be ignored. (See Geoffrey W Hill and Associates etc. v Squash Centre etc. (1990) 6 ANZ Insurance Case 61-012) 44 Mr Stevenson submitted that Mr Fisher's failure to include the bread quantity reservation in the agreement he drafted, caused the Department no loss in any event. The difficulty with that submission is, as I have already indicated, that, in my view, the reservation as expressed, without more, was incapable of being simply reproduced in an agreement intended to be legally binding. Such a reproduction would, I think, have been void for uncertainty. Although Mr Fisher did not even do this, his breach of contractual obligation was, in my opinion, his failure to seek clarification of unclear instructions. If he had done this the probability, I think, is that the Department, directing its mind to the problem, would have spelled out the contractual obligation to which it was willing to commit itself. Indeed, I think it likely that focussing the Department's attention upon bread quantities in the context of an enforceable obligation to purchase those quantities would likely have revealed that the estimates were wrong, as indeed they were, partly, as it seems, because they were prepared for a different purpose and were predicated on future prison population estimates which, in the outcome, did not eventuate. 45 What I glean from the documents and evidence, for what it is worth, is that the Department intended and was willing to oblige itself to do no more than require all of its institutions within the Sydney metropolitan area eventually to purchase all their bread and pastry requirements from Hard Rock. What I am satisfied is that the Department was not willing to bind itself to purchase a fixed quantity of bread for a lengthy period. At most, in that connection, it was willing to indicate its likely requirements. In my opinion, cursory enquiry by Mr Fisher would have revealed those matters which may, or may not, have been acceptable to Hard Rock but that was not for Mr Fisher to say. 46 The Defendants, in my view, should be held liable for the damages flowing from the fact that, due to their negligence, the Department entered into an agreement containing a long term obligation to purchase large quantities of bread for which it had no need without right of review. Such damages in this case are, however, by no means easy to quantify although the principle is clear that the Department is entitled to full compensation for the loss it sustained in consequence of the Defendants' wrong, subject to the rules as to remoteness of damage and to the Departments duty to mitigate its loss. (Hungerfords v Walker (1989) 63 ALJR 210 at 215) 47 In its Further Amended Statement of Claim, the Department particularised the damages which it seeks as follows: (a) Hard Rock Bakery Pty Limited commenced proceedings against the plaintiff as defendant alleging, among other things, that the plaintiff engaged in conduct in breach of s42 of the Fair Trading Act 1987 and breached the said written agreement in and after July 1992 by not ordering bread at the rates specified in Attachment 2 to the agreement and claiming damages. (b) The plaintiff paid the defendants their professional costs and disbursements of and incidental to the preparation and execution of the said agreement. (c) The plaintiff has paid the sum of $280,243.39 in costs and disbursements for legal services in relation to the proceedings brought by Hard Rock Bakery Pty Limited against the plaintiff as defendant. (d) The plaintiff settled the proceedings instituted by Hard Rock Bakery Pty Ltd (No 20122 of 1994) on25 march 2002 at mediation before the Hon T Morling QC. The Terms of Settlement provided that there be a verdict and judgment for Hard Rock Bakery Pty Ltd in the sum of $1,122,500.00 inclusive of all costs and interest. (e) The plaintiff paid to Hard Rock Bakery Pty Ltd the sum of $1,122,500.00 on or about 24 April, pursuant to the Terms of Settlement." 48 In light of those particulars, it is appropriate to turn to the claim actually made by Hard Rock against the Department. Its Second Further Amended Statement of Claim, after pleading the agreement of 25 November 1991 and the obligation under item 18, to purchase 16,950 loaves of bread per week, alleged breaches of that obligation for each month up to the date of the pleading. 49 Damages were claimed for those breaches. They were also claimed under a number of other heads, including failure to provide prison inmate labour as promised; false and misleading representations during negotiations prior to contract as to likely future bread requirements; and as to the market for other products both within and outside correctional institutions (whereby Hard Rock was induced to pay higher licence fees than it would have otherwise agreed to pay and suffered other detriment); failure to provide sufficient entry and access to the bakery for management and operational purposes; and refusal to renew the agreement notwithstanding exercise of the option for renewal by Hard Rock. 50 Mr Lindsay submitted, as I understand it, that if the Defendants had fulfilled their contractual obligations, it is unlikely that any agreement would have been entered into with Hard Rock. However, it is, I think, by no means clear that the obligations which the Department was willing to undertake, as I have set out above, would have been unacceptable to Hard Rock with, or without, an indication of the quantities of bread likely to be ordered. Documents generated by Hard Rock, or referring to negotiations in which it was represented during September 1991, make the point that it insisted on a ten year term, in order to recover its investment, and also indicated that it was concerned to have the right to supply all bread requirements of metropolitan prisons but make no mention of guaranteed quantities as opposed to "projected" numbers of loaves. 51 Although litigation commenced by Hard Rock against the Department was pending and there was still disputation between them, on 1 July 1996, Hard Rock gave notice of its desire to renew the agreement. The notice met this response: "Dear Sirs, RE: Licence Agreement I refer to your company's purported notice dated 1 July 1996 pursuant to Item 9 of the Agreement dated 25 November, 1991. The company's offer to renew the said Licence Agreement is rejected on the basis of the company's breaches of the terms and conditions of the Agreement. Some, if not all, of those breaches of the Agreement are the subject of the cross claim filed against the company in Supreme court Common Law Division proceedings No. 20122 of 1994. The Commissioner of Corrective Services and Corrective Services Industries reserve their right to rely on all other breaches of the Agreement. Yours faithfully Wayne Ruckley Director, Corrective Services Industries." 52 In a subsequent letter of 22 November 1996, Mr Ruckley, on behalf of the Department, extended "the term of the agreement for a further period of one month to 24 December 1996. If this extension is availed of by your company, it is to be upon the remaining terms and conditions of the Agreement dated 25 November 1991." 53 Before the mediation of its action against the Department by Mr Morling in March 2002, Hard Rock amended its original Statement of Claim to claim in respect of the refusal (wrongly so it was alleged) of the Department to extend the agreement and to claim damages for loss suffered during a notional second term of the agreement. 54 The parties also arranged for experts to quantify Hard Rock's claim. It retained Star Dean Willcocks and the Department retained Mr Mariano Rossetto of Crestani Services, a firm of Chartered Accounts. 55 The Department also sought the joint opinion of counsel, Mr David Cowan (now Senior Counsel) and Mr Dalgleish as to the prospects of the Departments success in the litigation and as to the likely damages it may have to pay. 56 The joint advice (which had been preceded by an earlier advice of Mr Cowan alone in May 1995) dealt seriatim with Hard Rock's claim as at March 2002. The advice may be summarised as follows: 1. Hard Rock had reasonable prospects of success in respect of the count for failure to order bread at the rate specified in the agreement. In counsel's opinion, having regard to the opinions of Star Dean Willcocks and Furzer Crestani and after making allowances for unpaid and reduced fees payable by Hard Rock to the Department under the agreement. Hard Rock's entitlement to damages up to 24 December 1996 should be assessed at $26,990. 2. The Department had reasonable prospects of success in respect of the count, alleging that the Department failed to provide inmates as required by the agreement for the purposes of the bakery business. 3. That the Department was vulnerable to damages in respect of alleged false and misleading conduct under the Fair Trading Act in respect of representations regarding the quantities of bread which it would require, and that the metropolitan correctional institutions would purchase all their bread requirements from Hard Rock. Counsel thought that the Department had reasonable prospects of success in respect of other alleged false representations 4. That the Department had reasonable prospects of success on the count, alleging breach of an implied term in the agreement to allow entry and access to the bakery. 5. In respect of a count, which alleged wrongful refusal to renew the agreement, the joint advice said: "Whether one party's obligation to perform is dependant of the other party's obligation to perform is determined by the intention of the parties and is to be decided by construing the agreement. See generally: Carter and Harland: Contract Law in Australia, 3rd ed at paras 1805 to 1811. In our opinion it is more probable than not that the Court will find at least that the obligation of the defendant to order bread and the obligation of the plaintiff to pay the monthly fee were inter dependent and that the plaintiff was unable to pay the monthly fees provided for in the agreement because of the lack of bread orders. The plaintiff will no doubt also argue that it was not obliged to pay even the reduced monthly fees for this reason. The plaintiff will no doubt also argue further that the implied term to the effect that the defendant permit entry and access to the bakery and the two express terms that the plaintiff provide the overall management and operation of the bakery and instruct and supervise the inmates were also interdependent. Similarly, it is open to the plaintiff to argue that plant, tools and equipment present in the bakery were adequate to fill the bread orders received. In our opinion there is a real risk that the Court will refuse to find that the plaintiff was in breach of the agreement when it purported to exercise the option for renewal and was thus entitled to a renewal of the term for a further five year period. If this be the case, the plaintiff will necessarily succeed in respect of the fifth count." 57 Dealing with calculation of damages for the second 5 year period of the agreement, the joint advice said: "Mr Dean-Willcocks' calculations for his scenarios 3 (ten years) and 6 (five years) are, as stated above, $3,079,601 and $572,636 respectively. The difference between these sums, $2,506,965, represents his calculation in respect of the second five year period. We have already referred to the fact that his calculations are not based on actual prices or costs. Nor do they take any account of the difference between the monthly fee provided for in the agreement and the reduced fee actually charged. Finally, according to Mr Rossetto, he has significantly understated the defendant's direct costs; taken no account of risk factors such as equipment failure; and has failed to have regard to income actually earned by the plaintiff in the second five year period. Mr Rossetto was not asked to calculate the plaintiff's damages in respect of the second five year period. The plaintiff's gross profit per loaf calculated by him as at December 1996 was 69.2 cents per loaf. Mr Rossetto opined that variable operating expenses accounted for 20% of this gross profit. When applied to 16,950 loaves per week as provided for by the agreement, this extrapolated (.692x80x16, 950x52x5) to $2,439,715 over five years. This amount should be reduced by two amounts. First, $1,077,000 for fees (which we have assumed to be $17,950 per month as last provided for in the agreement) over five years as provided by the agreement. Secondly, $102,112 being the total income of the plaintiff, including wages paid to Mr Brown, during the second five year period: see Furzer Crestani Services' report dated 19 April 2001 at page 26. The sum thus arrived at is $1,260,603." 58 In the outcome, inclusive of interest, counsel recommended that for the purposes of mediation or settlement, their instructing solicitors should obtain instructions to negotiate up to the sum of $1,614,984. At the mediation, agreement was reached whereby the Department consented to a verdict by Hard Rock against it in the sum of $1,122,500 inclusive of costs and interest. 59 As to whether damages in this action should have any regard to the notional second term of the agreement, Mr Stevenson referred to the evidence of Mr Ruckley. At paragraph 64 of a statement forming part of exhibit A, he said: "The Hard Rock Bakery was in most respects a program and commercial disaster. The poor and antiquated capital configuration, the lack of management prowess, the lack of planning and the complete lack of a customer focus brought about an extraordinarily difficult operational environment for CSI staff and inmates and by extension contributed to an operation which conceivably could not possibly operate on a profitable basis. This might be contrasted to the Bakery which replaced the Hard Rock Bakery i.e. the Reg Boys Bakery. This has to be considered in the context that the Reg Boys Bakery occupies the same facility, is in the same Correctional Centre utilising the same CSI staff manager and the same Departmental customers. The Reg Boys Bakery has been an outstanding success in program, commercial and customer service terms. It has been awarded the status of CSI Business Unit of the Year for the last 2 years i.e. 1998 and 1999. The program and commercial performance of the Hard Rock Bakery and Reg Boys Bakery are stark in contrast. The changes which have occurred are the installation of plant and equipment which are friendly to the task at hand and the withdrawal of Mr Brown and Mr Fairley from the program." 60 Mr Stevenson cross examined Mr Ruckley regarding this paragraph and there was the following exchange: "Q. Going back to paragraph 64 on page 566 you say the poor and antiquated capital configuration, you then refer to a lack of management prowess, lack of planning and complete lack of customer focus, they were all reasons you had? A. Yes. Q. For refusing to allow the option to be exercised? A. Correct. Q. And the complete lack of customer focus which came to your attention as a result of complaints? A. Yes. Q. From institutions? A. Yes. Q. So is it fair to summarise your view about the Hard Rock Bakery venture this way, that they were the wrong people with the wrong equipment? A. That is a fair summation. Q. And in the second sentence of paragraph 64 you contrast the Hard Rock experience with that of their successors, Reg Boys bakery? A. Yes. Q. And you say there that Reg Boys Bakery occupied the same facility, used the same CSI staff manager and the same Departmental customers but were successful? A. That's right. Q. When you say they had the same facility, are you referring to plant or space within the gaol? A. Structural building, the industrial facility. Q. So Reg Boys were conducting their bakery from the same point? A. Premises, yes. Q. When did negotiations with Reg Boys commence? A. Reg Boys is a former member of the Labour Council of New South Wales who contributed a lot to the development. Q. Is Reg Boys a person? A. He certainly is. Q. So Boys is his surname? A. Yes. Q. Do you recall when negotiations with Mr Boys commenced? A. No, Mr Boys was not involved in the bakery operation, the bakery was named after Mr Boys. Q. When did negotiations start with whoever it was that was operating the Reg Boys Bakery? 61 Moreover, in my opinion, the predicament of both the Department and Hard Rock may be directly attributed to the negligence of the Defendants in failing, first to clarify their instructions, and then in failing to prepare a document which gave proper effect to those instructions. 62 It follows that, in my view, there was no break in the causal chain and damages are to be assessed as if Hard Rock had an agreement with the Defendant which did not expire until 24 November 2001. Further, that the Defendants' negligence obliged the Department to purchase bread at the rate of 16,950 loaves per week throughout the period subject to the terms of the agreement. 63 Of course, the damages to be assessed in this case are not those of Hard Rock but those of the Department. Mr Lindsay submits that this assessment has already been done, in that the Department agreed to a verdict at mediation for significantly less than the sum recommended by experienced counsel following a lengthy and careful review of the issues. 64 Despite the force of Mr Lindsay's submission, I do not think that I should accept his proposition without some independent examination of the situation, if for no other reason than that the compromise did involve causes of action not attributable to the Defendants' wrongdoing, albeit causes of action which at best involved relatively small amounts of damages. 65 In respect of the period up to 31 December 1996, the loss suffered by Hard Rock and claimed against the Department should have been capable of mathematical calculation. But the experts differed. Mr Dean Willcocks calculated $572,636 and Mr Rossetto $416,618. However, according to the joint advice of counsel, these figures required adjustment and in the outcome, as indicated above, counsel assessed the damages of Hard Rock up to 24 November 1996 at only $26,990 and presumably this figure was relied on at mediation. 66 In respect of the period up to 24 November 2001 when the agreement was only notionally in place, the matter is much more difficult. In effect Hard Rock was being compensated for the loss of a chance to make profits, a notoriously difficult exercise, but one, which of course, the courts have frequently to face. 67 In valuing Hard Rock's damages for the period from December 1996 to December 2001, Messrs Cowan and Dalgleish had the benefit of Mr Dean Willcocks' assessment of $2,506,965. They did not have the benefit of a formal assessment of damages from Mr Rossetto but in the joint advice, they extrapolated his assessment for the period up to the end of December 1996 and calculated that his assessment of the profit would have been $1,260,603. They preferred that figure to Mr Dean Willcocks assessment and used it (with interest adjustments) to base their advice that the Department should, in the mediation, be willing to negotiate up to $1,614,984. 68 However, according to Mr Rossetto's affidavit sworn 5 October 2005 after the joint advice but before the mediation, he conveyed his assessment for the period of 5 years beyond December 1996 to Mr Dalgleish by telephone. The assessment he conveyed was a loss of profit of $1,077,000 but said that against that, fixed operating expenses should be deducted. He estimated those at $735,000 for the 5 years of which the largest amounts were depreciation - $200,000 and the salary of Mr Brown - $500,000. 69 This deduction led to his assessment of Hard Rock's loss for the notional extension of the agreement at $627,000. However, if one adds back the notional salary of Mr Brown which, I think, may arguably be appropriate, the result closely approximates the figure of $1,287,593, calculated in the joint opinion. 70 In the result, with some qualifications, I think that the amount agreed upon by the Department in its litigation with Hard Rock should be regarded as its loss flowing from the negligence of the Defendants. The first qualification is that Hard Rock's cause of action, as mentioned, encompassed matters for which the Defendants were not responsible and this factor cannot be entirely ignored. Secondly, the calculations for the second period do not, I think, take any, or sufficient, account of problems which may, in any event, have beset the bakery, such as those identified by Mr Ruckley, of antiquated equipment and poor management. There was also the likelihood that the fees payable to the Department would be adjusted upwards and, moreover, the possibility that the Department if it had not wrongly refused to extend the agreement, could have mitigated its losses y purchasing bread from Hard Rock. Doing the best I can, I would discount this aspect of the Department's entitlement to damages from the sum claimed of $1,122,500 to the sum of $800,000. 71 In expressing the above conclusions regarding damages, it will be apparent that I have rejected the three reports of Mr John Williams, Chartered Accountant. Those reports were admitted into evidence subject to the objections of Mr Lindsay. I reject them because they approach the assessment of damages, solely on the basis of movement of prison populations between November 1991 and November 1996. As indicated, I am of the opinion that this is not the correct way of approaching the Department's loss as a result of the Defendants' negligence. 72 The other head of damages claimed by the Department relates to its own costs of the proceedings brought by Hard Rock. These were quantified at $280,243.39. The Department is not, I think, entitled to that sum in full, as the costs related to matters which did not involve the Defendants, including the contention that the option for renewal was not validly exercised. I think it would be just to allow the Department 75% of the sum claimed viz $210,183. 73 Upon the award of $800,000, I will allow interest at 9% per annum from 24 April 2002, when the Department paid the agreed verdict to Hard Rock, until today. Such interest totals $262,356. 74 Upon the award of $210,183, I will allow interest on the basis sought by the Department in its schedule of loss and damage, handed up during the course of the trial. Such interest, I have calculated at $152,275. 75 I make the following orders: 1. Verdict and judgment for the plaintiff in the sum of $1,424,814 inclusive of interest to today. 2. Defendant to pay Plaintiff's costs. 3. Exhibits may be returned. 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.