New South Wales Supreme Court CITATION : Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd [2008] NSWSC 113 HEARING DATE(S) : 04/02/08, 05/02/08, 06/02/08, 07/02/08, 11/02/08 JUDGMENT DATE : 21 February 2008 JURISDICTION : Commercial List JUDGMENT OF : Einstein J DECISION : Contract construed. Parties directed to bring in short minutes of order to comprehend the findings CATCHWORDS : Contract - Construction - Consideration of principles - Admissibility of evidence of negotiations anterior to entry into of written contract - Dispute between developers as to proper construction of agreement treating with profit share arrangement - Complex of close issues of construction requiring consideration of what were and were not 'accounting practices' and/or 'the normal accounting practices of the defendant' - Whether or not the concept of an internal rate of return and the application of the formula to derive this rate were properly described as 'an accounting practice' or 'accounting practices' - Whether contract dictated the manner of calculation of an internal rate of return - Whether the discount rate to be compounded on a monthly basis or an annual basis - Consideration of discounting practices - Variation of contract CATEGORY : Principal judgment Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Gissing v Gissing [1971] AC 886 Haynes v Hirst (1927) 27 SR (NSW) 480. Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 CASES CITED : Lohar Corp Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 9177 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 McFadden v Snow [1952] 69 WN (NSW) 8 Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 Pitts v Adney [1961] NSWR 535 Prenn v Simmonds [1971] 1 WLR 1381 Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 TEXTS CITED : Lord Steyn, "The Intractable Problem of the Interpretation of Legal Texts" (2003) SLR 1 PARTIES : Liberty Grove (Concord) Pty Ltd (Plaintiff) Mirvac Projects Pty Ltd (Defendant) FILE NUMBER(S) : SC 50173/05 COUNSEL : Mr L Foster SC, Mr I Pike (Plaintiff) Mr M Slattery QC, Ms S Duggan (Defendant) SOLICITORS : Deacons (Plaintiff) Corrs Chambers Westgarth (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Thursday 21 February 2008 50173/05 Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd JUDGMENT The proceedings 1 The proceedings before the Court concern the proper construction of a profit-sharing agreement between two property development entities who entered into a contractual arrangement with respect to the development of a 7.04 hectare waterfront site known as "the Dulux site, Cabarita" ("the Site"). 2 The subject letter agreement was entered into on 14 April 2000 ("the Agreement") between Mirvac Projects Pty Ltd ("Mirvac") and Liberty Grove (Concord) Pty Ltd ("Liberty"). 3 In summary, the Agreement provided that: (a) Liberty would purchase the Dulux site at Cabarita and would hold such land as bare trustee for Mirvac; (b) Mirvac would indemnify Liberty and its guarantor Mr Alex Boyarsky [the principal and sole director of Liberty] of all liabilities in connection with the purchase of the Site; (c) Mirvac would carry out at a time and in a manner of its choice the development of the Site; (d) Mirvac would pay to Liberty a sum to the maximum of $100,000 after exchange (and upon presentation of invoices) for costs of tendering for the Site and the costs of the contract. 4 In consideration of Liberty's and Mirvac's obligations pursuant to the Agreement there was agreed a profit share upon the redevelopment of the Site. The Agreement provided that the profit share was to be calculated in accordance with the following critical clauses: "5. In consideration of both your [Mr Alex Boyarsky] and Liberty's obligations under paragraphs 1 – 4 above, Mirvac will: (a) carry out at a time and in a manner of its choice, a development of the Site ("the Development"); (b) pay to you to a maximum of $100,000.00 after exchange and upon presentation of invoices, your costs of tendering for the Site and Liberty's costs of the Contract; (c) If the internal rate of return based on an ungeared cash flow for the Development exceeds 10% then Mirvac will pay to you $350,000.00 on completion of the Development including sales; (d) If the internal rate of return based on an ungeared cash flow for the Development exceeds 20%, Mirvac will pay to you at the completion of the Development (including sales) the greater of: · $350,000.00; or · 20% of Mirvac's profit on the Development in excess of a 20% internal rate of return based on an ungeared cash flow. 6. In this letter, the internal rate of return is calculated by Mirvac in accordance with Mirvac's normal accounting practices." [During the hearing the parties from time to time referred to the actual profit on the Development in excess of the profit hypothetically achieved based on a 20% internal rate of return as the "Excess Profit". This internal rate of return of 20% and the Development's equivalent (hypothetical) profit figure was the maximum level of profit that Mirvac was not obliged to share with Liberty under the Agreement. Any amount of profit in excess of a 20% internal rate of return meant that Mirvac was obliged to pay to Liberty a 20% share of this Excess Profit. The IRR of 20% was therefore sometimes referred to as a "hurdle rate".] 5 Pursuant to the contract, Liberty purchased the Site as trustee for Mirvac and Mirvac commenced and subsequently completed the development of the Site. The Development was apparently carried out under the sole control of Mirvac and the sale of the last property on the Development was settled in about July 2005. The dispute between the parties 6 The dispute concerns the proper construction of the Agreement. There are a number of parameters relevant to that construction, many of these concerning close questions of accounting concepts and practices. One only of those issues concerns whether or not the concept of an internal rate of return, and the application of the formula to derive this rate, are properly described as 'an accounting practice' or 'accounting practices'. That very question is, of course, informed by the Court ascertaining the meaning which the contract 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. 7 In the result, the dispute in part relates to the appropriate method of calculation of the IRR on the Development. In short, the competing calculations may be summarised as follows: i. Liberty applies a discount rate that is compounded on a monthly basis. This is variously referred to in the evidence and pleadings as a "compounding" rate or "effective rate"; ii. Mirvac applies a discount rate that is compounded on an annual basis. This is variously referred to in the evidence and pleadings as a "non-compounding" rate or "nominal rate". 8 This difference in calculation produces the difference in quantum between the profit share as determined by Mirvac and the profit share as determined by Liberty. The balance of the differences in quantum are dealt with below. 9 Therefore, a principal issue is whether properly construed, the agreement dictates the manner of calculation of an IRR. The variation issue 10 Another central issue concerns Mirvac's claim that the Agreement was varied in early September 2005 in conversations said to have taken place between Mr Andrew Boyarsky (Liberty) and Ms Leanne Clifton (Mirvac's Senior Development Manager of Mirvac Projects Pty Ltd from 2002 and Development Manager on the subject Site Development from 2000 until completion), Mirvac contending that it was agreed that budgeted costs, rather than actual costs, would be used for the months of August and September 2005 in the calculation and finalisation of Liberty's share of the Excess Profit. Mirvac contended that the agreement was that Liberty would accept budgeted or estimated outflows for August and September 2005 whatever their quantum and however they were propounded. Mr Andrew Boyarsky disputes this contention. What is an internal rate of return (IRR)? 11 Before proceeding further it is convenient to make some brief observations as to an internal rate of return: i. The internal rate of return is typically used as a capital budgeting tool used by a firm or company to assess whether or not to proceed with a project. That is, is the IRR: a) sufficient to cover the hurdle rate, which should be the cost of debt and equity funds invested plus a margin to allow for risks, estimation errors and the like; and b) the best of the available investment opportunities (technically, net present value should be used for this decision). ii. In simple terms, the IRR is the yield or return on the investment. In essence it is akin to an interest rate. iii. Importantly, the outcome of the IRR calculation depends on what periodic cash flows are being assessed i.e. monthly, annual etc. In this case, monthly cash flows were assessed as is normal for property projects. iv. Project profits are sensitive to changes in monthly cash flows because of the intra year effect of interest on each month's cash flow and interest on that interest during the year. Interest on interest is referred to as "compounding". Almost all forms of corporate debt are subject to intra year compounding and this compounding effect should be reflected in the actual project profits. The practice of discounting 12 The reasons include several references to 'discount rate' for 'discounting back to present value'. It is convenient early in these reasons to make clear that the term 'discounting', refers to the mathematical process of converting a future sum of money so that it is stated in present value terms [or for any selected prior period]. The difference in value is due to the time value of money principle, by which the value of a sum of money received today is more valuable than the value of the same sum of money received in the future, due to reasons which include inflation, interest (opportunity to invest) and risk. The discount rate used in the process of discounting takes into effect these factors [cf Appendix G to Mr Lonergan's first report]. The dispute as to Liberty's profit share 13 By letter dated 7 September 2005 [Ex PX 550-555] from Mirvac to Liberty, Mirvac contended that its profit on the development of the Site, based on an ungeared cashflow was $70,718,000 [see the enclosed consolidated cashflow at [Ex PX 555], and that the profit on the development at a 20% IRR based on an ungeared cashflow was $59,874,000, and that as such Liberty's profit share pursuant to clause 5(d) of the Agreement was $2,168,837 (being 20% of the Excess Profit of $10,844,000). This sum was paid by Mirvac to Liberty on 12 January 2006 following the issue by Liberty of a creditor's statutory demand for payment of debts upon Mirvac in this sum. The payment took place under cover of a letter [Ex PX 569-570] from Mirvac's solicitors to Liberty's solicitors, stating that Liberty should ensure that the funds were retained as it was possible that some or all of the moneys would have to be refunded to Mirvac if Liberty proceeded with the Supreme Court proceedings and if the Court found that the appropriate methodology resulted in a profit share due to Liberty less than the subject amount. Further detail of the circumstances may be gleaned from the interlocutory judgment dismissing an application pursued by Mirvac on the first day of the hearing for security for costs, which to the extent relevant, may be regarded as imported into this judgment: [2008] NSWSC 48. 14 In calculating Liberty's profit share, the basic methodology adopted by Mirvac was as follows: i. It constructed a set of monthly cash flows by adjusting the actual monthly cash flows in respect of the Development project, so that the adjusted cash flows produced a derived IRR of approximately 20% (but not precisely 20%); ii. In calculating an IRR of 20% Mirvac utilised the default IRR formula of a computer spreadsheet program. The program returned a monthly compounding IRR of 1.67% which Liberty contends was then wrongly annualised by Mirvac by simply multiplying it by 12; iii. It then deducted those adjusted cash flows from what it said were the actual cash flows to get the Excess Profit; and iv. It ultimately paid to Liberty 20% of that Excess Profit calculated in that way. 15 Liberty takes issue with this calculation as incorrect, not in accordance with the Agreement and as fundamentally flawed. These matters will be dealt with below. The principles of construction 16 Clearly primacy must be given to the actual words used in a written contract. McColl JA in Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 at [69] enunciated the following principles: "[69] If the words used [in a written contract] are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate': Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109–110 per Gibbs J (as he then was). However, in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably. The more unreasonable the result a party's construction would produce, the more unlikely it is that the parties would have intended it. If the parties did intend an unreasonable result, it is essential that that intention be made "abundantly clear": L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251 per Lord Reid. [70] Dealing with the circumstances where there are internal inconsistencies in a contract, Gibbs J said "it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.": Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109. [71] Gibbs J's statement in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 that "the court should construe commercial contracts "fairly and broadly, without being too astute or subtle in finding defects", finds reflection in the statement in International Fina Services AG v Katrina Shipping Ltd ("The Fina Samco") [1995] 2 Lloyd's Rep 344 at 350 per Neill LJ (with whom Roch and Auld LL.J agreed) that the primary focus is the agreement itself which "must speak for itself, but … must do so in situ and not be transported to a laboratory for microscopic analysis". [72] Consistently with this approach, it has been held that if detailed semantic and syntactical analysis of a written contract lead to a conclusion that flouts business commonsense the contract must be made to yield to business commonsense: Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock; applied by Gleeson CJ, Gummow and Hayne JJ in Maggbury Pty Ltd v Hafele Australia Pty Ltd , above, at 198 [43]. In Maggbury , after referring to Lord Diplock's observations, Gleeson CJ, Gummow and Hayne JJ added: "what in respect of a particular contract comprises 'business commonsense', as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible"." 17 In Optus Vision Pty Ltd v Australian Rugby Football League Ltd [2004] NSWCA 61 Santow JA [with whom Meagher JA and Stein AJA agreed] at [22] referred with approval to what the trial judge had said concerning the observations of the High Court in Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 at 292–3: "In Codelfa [ Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337], Mason J (with whose judgment Stephen J and Wilson J agreed), had referred to authorities [[i]n particular, speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1383–1385 [1971] 3 All ER 237 at 239–241; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 261; and Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995–997 [1976] 3 All ER 570 at 574–576] which indicated that, even in respect of agreements under seal, it is appropriate to have regard to more than internal linguistic considerations and to consider the circumstances with reference to which the words in question were used and, from those circumstances, to discern the objective which the parties had in view. In particular, an appreciation of the commercial purpose of a contract: "presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating" [citing Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989 at 995-996; [1976] 3 All ER 570 at 574]. [cf Toll (FGCT) Pty Limited v Alphapharm Pty Limited (2004) 219 CLR 165 at 179 [40]]. 18 Such statements exemplify the point made by Brennan J in his Judgment in Codelfa at 401: "The meaning of a written contract may be illuminated by evidence of facts to which the writing refers, for the symbols of language convey meaning according to the circumstances in which they are used." 19 Santow JA at [23] continued: "To this I would add the observation of Lord Steyn, writing extra-judicially on "The Intractable Problem of the Interpretation of Legal Texts" (2003) SLR 1 at 7. After pointing to the shift from literal to purposive interpretation, he adds the caveat that it would be an oversimplification to say that there has been a homogenous shift towards a purposive interpretation of all legal texts. Nonetheless he says: "In a network of contracts governing a construction project, parties ought generally to be able to rely on the obvious meaning of the interlocking texts". 20 Hence I take it as axiomatic that: · the Court endeavours to give primacy to unambiguous words used in a written contract, this matter generally being approached in the manner outlined by McColl JA in Peppers Hotel Management, supra; · the proper approach seeks "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably been available to the parties in the situation in which they were at the time of the contract" (Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 citing Lord Hoffmann; Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; [1998] 1 All ER 98 at 114; Peppers Hotel Management Pty Ltd, supra at [66] et seq; · commercial contracts should be construed so as to be given a sensible commercial operation: Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-4; Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 per Giles JA at [64]. The general test of objectivity and the agreed rulings to objections 21 Nothing in the above authorities suggest anything otherwise than that in dealing with the instant construction issue, the general test of objectivity remains pervasive: cf Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 549 per Gleeson CJ, citing Lord Diplock in Gissing v Gissing [1971] AC 886 and in Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 at 502. 22 The fact is that there were only very few communications between the parties during the stage when the written Agreement was being negotiated. There was no claim that the Agreement was partly in writing and partly oral. Nor was there any claim to rectification made by either party. 23 Notwithstanding this situation, both parties in dealing with their respective objections to evidence pressed the Court to rule that the anterior negotiations be permitted 'subject to relevance'. To my mind as indicated to counsel at the time, such an approach would be likely antithetic to the principled approach where a written document was to be construed. 24 Nonetheless the Court was persuaded to rule as asked. The ruling was given relatively early and at a time when there were still veiled suggestions of the possibility of an amendment to plead that the Agreement was partly writing and partly oral. It was also true that some of the evidence which would come forward could conceivably go to the credit of one or other of the witnesses in relation to other matters that were separate to the construction question. 25 Ultimately the finding is that this evidence was of little or no assistance on the construction issue as it frequently descended into the realm of what the material witnesses had believed or thought was the intention of the other. 26 Of course the negotiations were admissible to the extent which they tended to establish objective background facts which were known to both parties and were the subject matter of the contract. But the negotiations otherwise, in consisting of statements and actions of the parties even if reflective of their actual intentions and expectations are not to my mind admissible on the construction issue. As Mason J points out in Codelfa, such statements and actions may reveal the terms of the contract which the parties intended or hoped to make - but are superceded by and merged in the contract itself. The soundness of this approach has a very respectable lineage including the following well-known and often followed observations: "It may be a matter of degree, or of judgment, how far one interpretation, or another, gives effect to a common intention: the parties, indeed, may be pursuing that intention with differing emphasis, and hoping to achieve it to an extent which may differ, and in different ways. The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get "agreement" and in the hope that disputes will not arise. The only course then can be to try to ascertain the "natural" meaning. Far more, and indeed totally dangerous is it to admit evidence of one parties objective -- even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition and in a world of give and take, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised." [Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381 at 1385] "As in so many branches of English Law in which legal rights and obligations depend upon the intentions of the parties to a transaction, the relevant intention of each party is the intention which was reasonably understood by the other party to be manifested by that party's words or conduct notwithstanding that he did not consciously formulate that intention in his own mind or even acted with some different intention which he did not communicate to the other party." [Lord Diplock in Gissing v Gissing [1971] AC 886 at 906] 27 To my mind the present is a very good example of why the Court is so constrained in its ability to look at prior negotiations for the purpose of construing a written document. The Court searches for the objective framework of facts within which the contract came into existence, and for the parties presumed intention in this setting. The terms of the Agreement of 14 April 2000 28 The terms of the letter Agreement [to be found in a letter from Coudert Brothers solicitors for Mirvac and addressed to Mr Alexander Boyarsky [Ex PX 165-166] and signed under the common seal of Liberty] were as follows: "1. Your company [Liberty] is to enter into a contract for the purchase of the Site ("Contract"). 2. You will guarantee the obligations of Liberty under the Contract. 3. Liberty will execute a declaration of trust in terms required by Mirvac in which Liberty will declare that it is a mere bare trustee of the purchaser's interest under the Contract for Mirvac. 4 You and Liberty will do all things required by Mirvac as directed from time to time in relation to the Contract and the Site. 5 In consideration of both your and Liberty's obligations under paragraphs 1 - 4 above, Mirvac will: (a) carry out at a time and in a manner of its choice, a development of the Site ("the Development"); (b) pay to you a maximum of $100,000.00 after exchange and upon presentation of invoices, your costs of tendering for the Site and Liberty's costs of the Contract; (c) If the internal rate of return based on an ungeared cash flow for the Development exceeds 10% then Mirvac will pay to you $350,000.00 on completion of the Development including sales; (d) If the internal rate of return based on an ungeared cash flow for the Development exceeds 20%, Mirvac will pay to you at the completion of the Development (including sales) the greater of: · $350,000.00; or · 20% of Mirvac's profit on the Development in excess of a 20% internal rate of return based on an ungeared cash flow. 6 In this letter, the internal rate of return is calculated by Mirvac in accordance with Mirvac's normal accounting practices. 7 Mirvac will indemnify you, Liberty and any guarantor and keep you and those others indemnified in relation to any liability whatsoever you and Liberty may incur in respect of or under the Contract provided you and Liberty act in accordance with the directions of Mirvac as stated in 4 above. 8 You and Liberty must keep the terms of this agreement, the declaration of trust and Mirvac's involvement with the Site confidential." The evidence leading up to the entry into of the Agreement 29 The evidence leading up to the entry into of the Agreement may be shortly summarised as follows: i. In or about early April 2000, Liberty was notified by Dulux that it was the successful tenderer to purchase the old Dulux site at Cabarita ("the Land"). Mirvac was an unsuccessful tenderer for the purchase of the Land. It remained interested in acquiring and developing the Land. ii. Liberty then reconsidered whether it wished to develop the land. Mr Alex Boyarsky (the principal and sole director of Liberty) subsequently had a discussion with Mr Geoff Levy of Wentworth Associates (then a director of Mirvac) to see if Mirvac was interested in taking over the purchase of the Land. iii. Liberty and Mirvac then entered into discussions whereby Mirvac would, in effect, take over Liberty's obligations as purchaser of the Land, and then develop the Land in return for paying Liberty a certain share of any profits derived above a hurdle rate or benchmark agreed between the parties. iv. Prior to entering into these discussions Mr Boyarsky was, and was known by Mr Broit of Mirvac to be, an experienced and successful property developer. Mirvac was also a large and successful property development company. v. According to Mr Alex Boyarsky, there was only one meeting at which the deal was struck. Mr Broit suggests there were two, although the second was merely confirmatory of what was discussed at the first, i.e. there was only one critical meeting. None of the witnesses who attended the critical meeting suggests that there was any discussion at all as to what was meant by IRR when Mr Broit used that expression at the critical meeting. vi. I accept as of substance counsel for Liberty's contention that whether there were one or two meetings is immaterial as it appears that the principal discussion (such as there was) took place at one meeting. Mr Boyarsky's account of what was discussed is to the following effect:- Mr Broit: "We are interested in buying the Cabarita site from you Alex. We propose to give you a profit share of 20% of the excess profit over a 20% IRR. We also want to acquire the site before 30 June because new GST laws will be introduced then." Mr Boyarsky: "How am I going to know what the numbers are? How am I going to be able to know how overheads are attributed to the project? And how do you deal with on-costs and disbursements?" Mr Broit: "We are a public company and we are audited. Everything is available and we have nothing to hide. We have no objection to you keeping tabs on the development. Once the development is completed, it will be easy to work out the costs and revenue. When it is all done it'll be obvious and we'll split the profits as agreed." vii. It was suggested to Mr Broit under cross-examination that at no meeting as he recalled that, did he say: "It will be done in accordance with Mirvac's normal accounting practice. We can document that". viii. His initial evidence was that this was what he had said. However on being pressed about the matter his evidence was that he did not recall using those specific words but that he did recall that he did say that Mirvac would do it in the way in which they did the accounting for every other project. ix. His evidence was that he may have used the words 'that it would be done in accordance with Mirvac's usual accounting practices' but that he could not recall the precise words he used and that the words concerning it being done in accordance with the Mirvac's usual accounting practices were technical terms and that that was not the way in which he talked in meetings like this [transcript 264]. x. The finding is that whether or not he used the exact words "It will be done in accordance with Mirvac usual accounting practices", the words which he used conveyed that particular proposition. But as the reasons show the significant fact is that the words were used in the document which came to bind the parties and there is no entitlement of any party to move away from that expression as binding them. xi. What is also clear is that the reference at the meeting to Mirvac being a public company and being audited (or to Mirvac's normal accounting practice) was in response to a concern expressed by Mr Alex Boyarsky as to Mirvac's allocation of common costs to the project. xii. Mr Levy's evidence was broadly confirmatory of the evidence given by Mr Broit. The Agreement xiii. After the meeting a draft letter agreement was produced and minor comments made on that draft. xiv. The agreement reached was evidenced in the above-described letter. The commercial objectives and background knowledge reasonably available to the parties 30 The evidence before the Court [and particularly the cross-examination of Mr Broit [T 265.1-267.27] discloses that 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, included at least the following matters: i. the proposed development of the Land was a significant or large development in terms of the number of buildings to be constructed on it; ii. the construction costs would be many millions of dollars, probably as much as $160-$170 million; iii. the revenues were expected to be in the order of $200 million; iv. the construction itself would take a considerable period of time, at least 3, 4 or 5 years; v. a 20% IRR in those circumstances would be a significant sum of money; vi. having regard to the above factors, there may be a significant amount of money involved in the profit share; vii. the development of the Land was going to have many cash inflows, and many cash outflows during the life of the construction. For the most part, those cash flows would happen frequently during the course of any given month, some of which might be large, and some small; viii. the relevant parties were each experienced property developers, who could be expected to know the intricacies of property development including the fact that if the IRR rate is high, or if monthly cash flows vary significantly, then project profitability is sensitive to the monthly interest on interest effect, and this should be taken into account in assessing project profitability. ix. because of the size of the project, the length of time it would take, and the periodicity and frequency of cash flows, it was appropriate to take into account and properly reflect the time value of money. The most appropriate way to do this in relation to a profit share, would be to base the profit share on an IRR, rather than a hurdle expressed in terms of a dollar figure; x. on a development such as this, if a monthly IRR were calculated, month by month, there would be compounding from month to month i.e. intra year compounding. 31 The objective background facts establish that the parties assumed that 'Mirvac's normal accounting practices' would be ascertainable by appropriate enquiry. 32 The finding is that the commercial objective which the parties sought to achieve in the Agreement was to provide for Liberty to receive a 20% share of any Excess Profit earned by Mirvac in carrying out the Development. Significantly, the Excess Profit was to be profit actually earned by Mirvac in the Development over and above the profit figure at an IRR of 20%, in that actual cash flows were to be used in its calculation [and not some hypothetical or adjusted cash flows]. [As an aside I note that this seems to have been confirmed in Mr Broit's letter to Mr Alex Boyarsky of 19 January 2001 [Ex PX 247] 33 In my view Mr Broit gave reliable evidence carrying out his best endeavours to recall the events which had happened in relation to the relevant meeting or meetings [which took place shortly before the draft letter agreement was produced and the final letter agreement was agreed to]. However, and for reasons already given, this matter was of little or no assistance in relation to the proper construction of the written document which emanated and bound the parties. Outlining the core events following the entry into of the Agreement 34 The core events subjected to reasonably close scrutiny through the evidence were as follows: i. In about late 2004/early 2005, Mr Alex Boyarsky, and Mr Andrew Boyarsky, visited the site and observed that the works in relation to the final stage were nearly complete. According to Mr Andrew Boyarsky, there was some minor landscaping work still to be carried out, which he anticipated would take several weeks. ii. On 9 November 2004, Mr Alex Boyarsky wrote to Mr Robert Hamilton as Managing Director of Mirvac, stating, in effect, that he hoped that Mirvac and Liberty Grove would be able to establish the profit share in accordance with the Agreement in the near future. A meeting was then arranged between representatives of Mirvac and Liberty Grove. That meeting was held on 16 December 2004, and was attended by Mr Alex Boyarsky, Mr Andrew Boyarsky, Ms Leanne Clifton and Mr Mick O'Brien, who was by then the CEO NSW Development of Mirvac Group. At that meeting, the Boyarsky's were provided with a Consolidated Cashflow report containing the costs of the project to October 2004, which were recorded as totalling $202,059,000. There is a dispute on the affidavit evidence as to exactly what was said at this meeting. I do not see it as necessary to resolve this dispute. iii. On 1 March 2005, Mr Mick O'Brien of Mirvac sent to Alex Boyarsky an up-dated Consolidated Cashflow report containing costs to January 2005. iv. On 21 April 2005, another meeting was held between the Boyarsky's and Ms Clifton and Mr O'Brien. At that meeting (or shortly thereafter) Mirvac provided to Liberty Grove a further Consolidated Cashflow report containing "actual" costs to February 2005 and "forecast" costs to the end of the project. The total cost to complete the Cabarita development were identified in the Consolidated Cashflow report as $210,879,000 together with a projected profit share payment to Liberty Grove of $2,152,607. v. On 2 May 2005, Ms Clifton sent to Mr Andrew Boyarsky the Statement of Expenditure Reports for each stage of the development to the end of July 2005. vi. On 13 May 2005 an email was sent by Liberty to Mirvac requesting further details of the consolidated cashflow. vii. On 17 May 2005, Ms Clifton sent to Mr Andrew Boyarsky an electronic copy of the Consolidated Cashflow handed over at (or shortly after) the 21 April 2005 meeting. viii. During July 2005, Mr Andrew Boyarsky and Ms Leanne Clifton exchanged email correspondence in relation to queries raised by Mr Boyarsky regarding the documentation which had been provided by Mirvac. This included an email dated 13 July 2005 attaching a summary of the items in the Consolidated Cashflow report in relation to which Liberty Grove sought an explanation, including a breakdown of the indirect costs, an explanation about the miscellaneous costs, a breakdown of wages and landscape costs, and an explanation about identified sundry items. ix. A meeting was then held on 2 August 2005 attended by Mr Andrew Boyarsky and Mr David Bennett on behalf of Liberty Grove, and Ms Clifton and Ms Deidre Hayes on behalf of Mirvac. There is a dispute on the evidence as to what was said at the meeting. x. It is clear that Mirvac agreed in the meeting to provide to Liberty Grove further information which encompassed at least a reconciliation between the costs in the costs transaction report and the Consolidated Cashflow which had been provided in April/May. It is also clear that it was agreed that there would be further consideration of that material once received. The Telephone Conversation(s) of 1 or 7 September 2005 xi. The most significant credit issue concerns the conversation or conversations which took place between Ms Clifton and Mr Andrew Boyarsky on or about 1 or 7 September 2005. These are set out in detail later in these reasons. On Mirvac's case, the conversation or conversations are the cornerstone of the contention that Liberty Grove agreed, for the purposes of the profit share calculation, to use, instead of actual costs, budgeted or forecasted costs post-July 2005 to be included in the cash flow in August and September 2005. This is a contention in respect of which Mirvac has both an evidentiary and ultimate onus of proof. The 7 September letter and the calculations underlying it xvii. By letter dated 7 September 2005 from Mirvac to Liberty Grove, Mirvac contended that its profit on the development of the Land, based on an ungeared cashflow was $70,718,000, and that the profit on the development at a 20% internal rate of return ("IRR") based on an ungeared cashflow was $59,874,000, and that as such, Liberty Grove's profit share pursuant to clause 5(d) of the Agreement was $2,168,837 (being 20% of the excess profit of $10,844,000). This sum was paid by Mirvac to Liberty Grove on 12 January 2006. xviii. Ms Clifton calculated the profit share either in conjunction with, or after discussion with Mr Broit. xix. The methodology adopted by Ms Clifton in calculating Liberty Grove's profit share as set out in the letter dated 7 September 2005, is set out on the CCWE at p.555 of Ex PX (tab 38). It may be summarised as follows:- a) Ms Clifton calculated the actual profit excluding interest on the development. This was done using the actual net monthly cash flows. The figure calculated was $70,718,000; b) Ms Clifton then calculated the actual IRR in relation to that actual profit, again using the actual cash flows. She did this using the computer programme Lotus 123. The IRR derived was 22.2%. Although not expressly stated by Ms Clifton, this was presumably derived from Lotus 123 calculating a monthly compounding IRR of 1.85% which Ms Clifton annualised by multiplying by 12. Because the annual IRR was greater than 20%, Ms Clifton then needed to proceed to calculate the excess profit above the benchmark or hurdle set out in the Agreement – a 20% IRR; c) Ms Clifton then adjusted the actual cash flows in relation to the development, by keeping the first 6 months net cash flows of the development (January 2000 to June 2000) constant, and then adjusting the remainder of the cash flows to 90%, so as to produce an annual IRR in respect of those cash flows, of 20%. In fact, what she produced was, even on her methodology, a benchmark IRR of 20.16%. These adjusted cash flows are set out in the adjusted cash flow column of the CCWE; d) In adjusting the cash flows so as to produce an IRR of 20%, Ms Clifton used a monthly IRR figure of 1.67%, purportedly because it was Mirvac's normal practice to annualise a monthly compounding IRR by multiplying by 12 and therefore (at least implicitly), because (she asserts that) it was Mirvac's normal practice to derive a monthly IRR from an annual IRR, by dividing the annual IRR by 12; e) The adjusted net cash flows were then added together to calculate the profit in respect of the adjusted cash flows ($59.874 million); f) The profit in respect of the adjusted cash flows was then deducted from the actual profit in relation to the development ($70.718 million - $59.874 million) to derive an alleged excess profit of $10.844 million; g) Mirvac calculated Liberty Grove's 20% share of that excess profit, i.e. 20% of $10.844 million, being $2,168,837. Events Post - 7 September xx. On 8 September 2005 Ms Clifton sent Mr Andrew Boyarsky an email advising him that the letter was coming. Mr Andrew Boyarsky's response to that email was "Thanks. I will get back to you once we have received and analysed the material". xxi. Mr Alex Boyarsky gave evidence that between 7 September and 28 October 2005 Liberty had protested that Mirvac's contention that an agreement [in terms of use of budgeted costs in the final profit calculation] was wrong: transcript 120.20. xxii. The proceedings were commenced on 15 November 2005. xxiii. On 12 January 2006, Mirvac paid $2,168,837 to Liberty Grove. Dealing with credit issues 35 There were precious few questions of credit ultimately pressed. Mr Alexander Boyarsky 36 Mr Alexander Boyarsky clearly had a very partisan interest in the result in the proceedings. He appeared to be reasonably well prepared for his cross-examination. His evidence is accepted as reliable where consistent with contemporary documents. From time to time he was faulted on his recollections. As the reasons make clear the Court has accepted as reliable Mr Broit's evidence that whether or not Mr Broit used the precise words "It will be done in accordance with Mirvac's usual accounting practices", the words which Mr Broit used conveyed that particular proposition. Likewise Mr Boyarsky's evidence that he did not know prior to April 2000 that Mr Levy was a director of Mirvac as at 14 April 2000 is rejected in favour of the evidence of Mr Levy: who had made plain that this fact was known by Mr Boyarsky at all times prior to the agreement, he having been a personal friend of Mr Boyarsky. Mr Levy's evidence was that "[he] knew and I told him". Mr Andrew Boyarsky 37 Here again Mr Andrew Boyarsky also clearly had a partisan interest in the result of the proceedings. He tended in the witness box to show his anger and frustration at what he clearly regarded as unfair dealing by Mirvac. In the result his evidence also requires to be very carefully monitored and tested against contemporaneous documents. The principal area in respect of which his credit requires to be adjudicated concerns the so-called variation issue already referred to. In this regard his evidence falls to be examined against that given by Ms Leanne Clifton. More is said in relation to this question in the reasons which follow. The evidence given by Ms Leanne Clifton 38 Ms Leanne Clifton presented as very cool and unflappable in the witness box. I gained the clear impression that she was extraordinarily well prepared for the cross-examination. I gained the very clear impression that she was very well acquainted with the central issues to which her cross-examination went. Unfortunately from time to time she tended to add to the detail otherwise given in her affidavit which makes the task of determining credit all the more difficult. Her evidence that Mr Andrew Boyarsky agreed in early September 2005 to the inclusion of forecasted costs in the cashflow in place of actual costs suffers from the changes to her affidavit evidence – the suggested 'full picture' not having been elicited save under cross-examination. Hence the finding that Mirvac did not on the balance of probabilities discharge its burden of proving the so-called 'variation'. Mr Broit 39 Mr Broit was obviously also well prepared for his cross-examination. He answered the questions put to him carefully. I was not able to discern his evidence is otherwise than generally reliable although the events in question did take place so many years ago. Other witnesses 40 No serious attack upon the credit of other witnesses was advanced by either party. As appropriate the reasons address particular matters, as for example the reliability of Mr Levy's evidence in terms of the initial pre-contract discussions. The proper construction of the Agreement 41 Counsel for Liberty contended that clearly the agreement had been stated briefly in the form of a letter and therefore did not set out in intimate detail all of the terms of the Agreement. Granted the brevity of the Agreement, it remains somewhat difficult to discern precisely what Liberty is able to gain from its brevity per se. There are only a limited number of routes available to the Court as aids to construing a written instrument signed as an Agreement. 42 I have already observed that there is no claim to rectification. One of the routes is of course by reference to terms which may be implied. Another is available where ambiguities are shown to exist. However, as the above described authorities have made clear, outside the Court's entitlement: i. to consider the circumstances with reference to which the words in question were used; and ii. from those circumstances, to discern the objective which the parties had in view - [in short to ascertain and appreciate the commercial purpose of a contract by being armed with the knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating]; it is difficult for the Court to do otherwise than to remain within the ambit of the words used by the parties in the instrument. 43 Certainly having regard to the general principles of construction earlier referred to and the background facts which should be taken to have been known by the parties as at the date when they became bound by the instrument, the Court must be careful to give clauses 5(d) and 6 a sensible and business-like meaning, reflecting business commonsense. Of course this presupposes that in relation to a particular dispute as to meaning, one can discern the relevant measure of what may be described as "business commonsense". In the joint judgment in Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 210 CLR 181 at [43] (Gleeson CJ, Gummow and Hayne JJ) observed in relation to this matter: "Of course, what in respect of a particular contract comprises "business commonsense", as an apparently objectively ascertained matter, may itself be a topic upon which minds may differ and in respect of which an imputed consensus is impossible." [recently referred to with approval by Basten JA in Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd [2008] NSWCA 5 at 27] 44 There is no doubt that this Agreement was reached between two sophisticated property developers, nor that it had at its essence a profit share arrangement in relation to a completed development. Nor is there any doubt but that, given the sophistication of the parties and the consequent reasonable appreciation of the time value of money and its effect on profit, unless the Agreement unequivocally so provided, it would flout business commonsense to conclude that the parties intended to permit one only of them to choose the method and adjust inputs to calculate the profit and the consequent profit share without proper regard to the time value of money, the concept of an IRR or the actual net cash flows to be used. 45 In general terms I accept as correct the submission put by Liberty that the proper construction of clauses 5(d) and 6 of the Agreement includes each of the following integers: i. The fundamental obligation is that contained in clause 5(d) of the Agreement, being for Mirvac to calculate the actual profit that is earned on the development once completed and then, assuming the IRR on the development exceeds 20%, to then pay to Liberty 20% of profit actually earned by Mirvac above that hurdle or benchmark, which was expressed by the parties as a 20% IRR, which I accept to mean a 20% per annum effective IRR, or more accurately the dollar equivalent of a 20% annual IRR. ii. Clause 6 of the Agreement is confined to ascertaining whether or not the IRR on the development has exceeded the required hurdle or benchmark rate – in this case 20%. Once it has been determined whether or not that hurdle or benchmark rate has been achieved, clause 6 ceases to have any operation. This is consistent with the ordinary meaning of the words used in clause 6. The words " the internal rate of return " when first used in clause 6 can only mean the actual internal rate of return of the completed development. Importantly, clause 6 was not intended by the parties to provide a mechanism whereby Mirvac could alter the actual profit on the development or, more importantly, Liberty's share of that profit. iii. The better view to that propounded by Mirvac, is that clause 6 does not permit Mirvac to alter that which it was required to calculate, namely an IRR, which is a well recognised concept in property development circles having a well accepted definition (as set out above). Rather, clause 6 was inter alia limited to the manner and means by which costs (in particular, common costs) would be allocated to the project. This is how a reasonable person in the position of the parties at the time of the contract – i.e. sophisticated property developers as at 14 April 2000 – would interpret the words "normal accounting practice" . [I interpolate that if it was appropriate to take into account the conversation which occurred between Mr Broit and Mr Alex Boyarsky at the meeting in the first two weeks of April 2000 than the above proposition would be very plain. This is because the conversation shows (based on either Mr Broit's version, or that of Mr Alexander Boyarsky) that clause 6 as it ultimately became, was directed at ensuring that Mirvac did not impermissibly "load" costs from other developments into the development the subject of the Agreement] iv. Normal accounting practices relate to the manner in which items are recorded in the accounts of an organisation. These are matters which normally affect the underlying accounts of an organisation and are designed to ensure that the accounts represent a true and fair view of the financial position of an organisation. Mirvac's accounts did not and do not incorporate IRR calculations. v. A reasonable person in the position of the parties at the time would not regard accounting practices as including idiosyncratic notions such as the expression of an annual IRR as being the monthly compounding IRR multiplied by 12. Such a practice is not an accounting practice but rather simply a means of expression. It does not affect the accounts in any way. In the present case, the expression of an annual IRR as the monthly IRR multiplied by 12, was purely a management reporting practice. 46 In the result, properly construed [in the light of the commercial purpose of the contract considered against the background, the context, and the market in which the parties were operating], the agreement required Mirvac, once the development was completed, to calculate the actual effective IRR in relation to the completed development. I accept as correct Liberty's contention that, assuming this IRR was in excess of 20%, Mirvac was then required to calculate the profit in excess of a 20% IRR. This calculation could have been carried out in accordance with the net accumulated value approach set out by Mr Lonergan in his reports. This involved subjecting the opening monthly balance of the accumulated net monthly cash flows to a compounding rate of 1.5309% to September 2005. Alternatively, the methodology adopted by Mr Hall could have been used, but with a monthly rate of 1.5309% and not 1.67% as used by Mirvac (and assumed by Mr Hall). Both methods would have been compliant with the Agreement. The alleged errors in Mirvac's calculation of the Excess Profit Mirvac's approach to the calculation of the Excess Profit 47 I will proceed to set out under sub-headings the main aspects of Mirvac's approach to calculating the Excess Profit, the substance of each party's key contentions, the important evidence before the Court and the Court's ultimate findings. The basic methodology adopted by Mirvac in calculating the Excess Profit and Liberty's resulting profit share 48 Mirvac constructed a set of monthly cash flows by adjusting the actual monthly cash flows in respect of the Development, so that the adjusted cash flows produced an IRR of (approximately) 20%. 49 In calculating this IRR of 20%, Mirvac utilised the default IRR formula of a computer spreadsheet program, either Lotus 123 or Microsoft Excel [there being no material difference for present purposes]. The program returned a monthly compounding IRR of 1.67% which Mirvac then 'annualised' by multiplying it by 12. 50 Mirvac then added the actual net monthly cash flows of the Development, and then deducted from this, the sum of the adjusted net monthly cash flows to derive the purported Excess Profit figure. [This issue of adjusting the net monthly cash flows is dealt with further below.] 51 Mirvac calculated the Excess Profit to be $10,844,000, with Liberty's resulting 20% profit share amounting to $2,168,800. [It should be noted that although the actual steps undertaken by Mirvac may have differed from what appears to have occurred, the end result is the same in that the Excess Profit calculation is substantially carried out on the above bases.] Whether the IRR referred to in the Agreement is a reference to an 'effective' rate or a 'nominal' rate? 52 In the process of calculating what they considered to be the Excess Profit, Mirvac in effect interpreted the Agreement's reference to a 20% IRR in clause 5(d) to mean a 'nominal' IRR and not an 'effective' IRR. 53 Mr Lonergan provided a detailed explanation of the concepts of nominal rates of return and effective rates of return. Nominal rates do not represent the actual underlying rate of return on a given project or investment. It is a rate of return that is quoted without reference to intra-year compounding, if any were to exist. The effective, or 'real' rate of return takes into account the important component of any intra-year compounding and as such provides an accurate underlying rate of return that is achieved. The effective rate of return can be derived from the nominal rate, if the nominal rate includes a qualifying reference as to the compounding period, eg 20% pa compounding monthly [see Mr Lonergan's first report [58] ff]. Further, the derivation of an annual effective rate of return for multiple projects is a common comparative base for all rates of return [Mr Lonergan's first report at [67]] and in this way, assists a firm or company to compare the economic return on projects. 54 The Agreement, specifically clause 5(d), did not clearly articulate whether the stipulated internal rate of return benchmark of 20% was in reference to an annual effective IRR of 20% or rather to an annual nominal IRR of 20%. In their calculations, Mirvac in effect purported to apply a nominal IRR of 20% [and even in doing so, as Mr Lonergan notes, inaccurately derived a nominal IRR of 20.16% pa, and not 20% pa, during its "adjusting of cash flows" process discussed below]. 55 Mr Lonergan's evidence [at [69]], which is accepted, was that in his experience it was standard practice [where the effect is material] for IRRs to be stated in annual effective terms. In the context of Liberty and Mirvac's agreement, Mirvac's budgeted [and actual] cash flows were accounted for on a monthly basis and were subject to periodic compounding [monthly], hence the use of an annual nominal rate of return would not have reflected the cash flow reality of the Project. This is, again, because the annual nominal rate of return assumes that periodic (intra-year) compounding does not occur, whilst the actual cash flows are indeed subject to periodic compounding. Mr Lonergan noted that in the context of the Agreement and proposed property development, the difference between the effective (real) and nominal underlying profitability as derived by the corresponding rates of return would have been material [at [73]]. The finding is that the background knowledge which would reasonably have been available to the parties in the situation in which they were in at the time of the contract, included the fact that on a development such as the one proposed at the Site, there would have been compounding from month to month (i.e. intra-year compounding) if a monthly IRR were calculated, month by month. 56 I proceed to set out below, as extracted from Mr Lonergan's first report at [104], the formulae by which to derive a monthly compounding (monthly) discount rate based on an annual effective IRR of 20% and a monthly discount rate based on an annual nominal IRR of 20%. Effective Nominal Annual effective rate = (1 + i ) n – 1 Annual nominal rate = i x n 20% = (1 + i ) 12 – 1 20% = i x 12 1 + 20% = ( 1 + i ) 12 0.20 = i 1.20 = ( 1 + i ) 12 0.20 / 12 = i = 1 + i 0.16667 or 1.6667% = i 1.015309 = 1+ i 1.015309 – 1 = i 0.015309 or 1.5309% = i Where: i = the periodic compounding monthly rate. n = number of compounding periods in a year 57 I am unable to discern any reason why in light of the standard practice for IRRs which Mr Lonergan put forward, the instant Agreement would be otherwise construed than referable to an effective IRR of 20%. As accepted by Mr Broit, part of the background knowledge of these experienced parties was the appreciation of the importance of the real underlying rates of return on a project and its corresponding profit figure. This is consistent with the finding that upon the proper construction of clause 5(d) and 6 of the Agreement, it referred to an actual effective IRR of 20%. This is the meaning which the document would have conveyed to a reasonable person in the position of the parties at the time. 58 Indeed, Mr Hall did not, it seemed to me, put forward any cogent reason to the contrary, for the reason that he was instructed to assume and apply the method of deriving the monthly required rate of return of 1.67% [by dividing the IRR of 20% by 12, rounding to 2 decimal places]: the assumption being that this was in accordance with Mirvac's normal accounting practices and he thus eschewed any need to provide an opinion [T 316.40]. 59 It follows that the monthly required rate of return that should have been used in the calculation of the Excess Profit was 1.5309%. Mirvac's approach in calculating IRRs 60 Mirvac adduced evidence that what it did in calculating the IRR in the process of deriving the Excess Profit was in accordance with Mirvac's normal practice in preparing "feasibilities". More specifically, Mirvac expressed an annual IRR as being the monthly compounding IRR [automatically calculated by the computer spreadsheet program when monthly cash flows are entered], multiplied by 12. It was Mirvac's case that its normal accounting practices did not use an effective IRR that took into account intra-year compounding. What is the Feasibility? 61 Mirvac's contention was that clause 6 referred to a custom made 'software system' called "Feasibility" which Mirvac had used since the early 1990s and was designed by Mr Broit. The Feasibility system is set up by Mirvac using the computer spreadsheet software Lotus 123 [prior to 2005] and/or Microsoft Excel [sometime around or after 2005] (see Mr De Vries' affidavit of 7 August 2007 at [10]). There is no material difference between the software for present purposes. 62 I appreciate that the Feasibility system is used by Mirvac for two purposes: i. To conduct a feasibility study to determine whether a prospective development, with the relevant business assumptions [and forecasted cash flows], meets the internal benchmarks set by Mirvac for an acceptable rate of return before Mirvac will decide whether to proceed with the investment or project; and ii. To use Feasibility as a project management monitoring system. Data is entered into the Feasibility showing the actual costs and revenue in relation to the project, rather than the assumed (or forecasted) costs and revenue. Month by month, the budgeted cash flows are replaced by accounting staff with entries reflecting actual cash flows for the life of the project. 63 At each month, the software can be utilised to present a running IRR calculation so that project managers can have the current IRR of the project for the purpose of project management decisions. At the end of the project, the software also provides a report on the completed project showing the final IRR. It is this final report on the Cabarita Development [subject to the use of budgeted cash flows for the August and September 2005 months] which was used to calculate the IRR on the Development and any resulting Excess Profit. The standard IRR formulas of a computer spreadsheet program versus Mirvac's annualised IRR 64 It is not in dispute that in calculating an IRR of 20%, Mirvac utilised a standard or default IRR formula of a computer spreadsheet program such as Lotus 123 or Microsoft Excel and then annualised the result of 1.67% by multiplying that percentage figure by 12. Put simply, the computer spreadsheet program automatically calculated the rate of return per time interval for the range of cash flows occurring at regular intervals [Ex P6] – that is, a periodic compounding rate that corresponds with the frequency of cash flows being analysed. Since the Development's range of cash flows were recorded monthly, the computer spreadsheet program's formula calculated the IRR as a monthly compounding rate. Mirvac then 'annualised' this monthly compounding IRR of 1.67% by multiplying it by 12 [which does not give the true effective annualised rate]. The result is a rate expressed on an annual nominal basis. I understand that the Feasibility calculates this Mirvac-specific annualised IRR automatically since the tailored formula has been set up within the Feasibility by Mirvac personnel [see Mr De Vries' affidavit of 7 August 2007 at [16]-[20]]. 65 Mirvac accepts that this annualisation process ignores the fundamental basis on which the IRR formula of the spreadsheet program works [i.e. Mirvac ignored the effect of monthly compounding, or assumed that it did not occur when in fact it is accepted that it did], but contends that Liberty is in error when it claims that clause 5(d) required Mirvac to calculate the IRR on an effective basis. Mirvac submits that it is entitled to use its approach of compounding on an annual basis because it is Mirvac's established practice in calculating IRR's in its Feasibility system, and is allowed for under clause 6 of the Agreement that stipulates that the IRR is to be calculated by Mirvac "in accordance with Mirvac's normal accounting practices." To my mind, the calculation of an IRR, even though established as normal practice for the various uses to which the Feasibility system is put by Mirvac, does not necessarily mean that it is to be accepted as a normal accounting practice. 66 Liberty's general construction of clauses 5(d) and 6 is accepted as correct in that clause 6 is referable inter alia to the manner and means in which costs would be allocated to the project. Clause 6 did not permit Mirvac to alter that which it was required to calculate, namely the actual real IRR achieved on the Development, which as Mr Lonergan explained, has a well accepted definition. The "internal rate of return" in clause 6 is not modified or qualified by any other part of clause 6. 67 The concept of "normal accounting practices" was not sought to be exhaustively defined by either party, but I accept Liberty's contention that it at least relates to the manner in which costs and revenues were recognised and recorded in Mirvac's accounts. The making of entries into a computer spreadsheet constituting the Feasibility and the allocation of particular items of cost and revenue in that spreadsheet involve the application of accounting practices. They were the actual inputs that ultimately went into deriving the actual effective IRR achieved on the Development. 68 I reject the proposition that the 'idiosyncratic' expression [in the sense of being Mirvac-specific] of an annual IRR [as the monthly IRR multiplied by 12] is to be described as an "accounting practice". 69 The inclusion of the manner in which costs and revenues are recognised and recorded in accounts, among other accounting aspects of the Development, as "accounting practices" appears to be accepted as common ground between the parties. Mirvac drew the Court's attention to the Macquarie Dictionary definition of "accounting", contending there was no indication that this ordinary meaning should not be employed in the Agreement: "the theory and system of setting up, maintaining, and auditing the books of a firm; the art of analysing the financial position and operating results of the business firm from the study of its sales, purchases, overheads, etc..." Mirvac suggests that integral to this ordinary definition is not only the setting up of books, but maintaining and using the systems of analysis. Even if this is accepted as so, it has not to my mind been established that these systems of analysis [or more specifically the use of IRR analysis to gauge financial performance] is part of the practice of "accounting" as distinct from being an investment or capital budgeting tool as referred to by Mr Lonergan. 70 The Agreement did not permit Mirvac to alter the fundamental nature of an effective IRR. The actual set of cash flows for the Development were to be prepared and used to calculate the real underlying rate of return, as referred to in the evidence of Mr Lonergan, embodied by an effective rate of return. The inconsistency between what was actually happening to the net monthly cash flows [monthly compounding] and what Mirvac's annualisation process represents to be happening, is observed by Mr Lonergan to gives rise to logically inconsistent and incorrect outcomes [see Mr Lonergan's first report [97]-[98]]. 71 As observed by Mr Lonergan, the effect of Mirvac's process in calculating the purported "Excess Profit" figure was that it resulted in a figure that was smaller than in reality. The resulting rate of return derived by Mirvac multiplying the monthly compounding rate by 12 understated the effective annual IRR and in turn understated the Excess Profit since it implicitly assumed that the Development's cash flows compounded only annually. Adjusting certain of the cash flows by a 90% factor 72 Mirvac's approach of working out the hypothetical amount of profit achieved on the Development represented by an IRR of 20%, as carried out by Ms Clifton, was to adjust certain of the actual cash flows in relation to the Development so as to derive a purported 20% annual IRR. 73 Leaving to one side the issue dealt with above as to the appropriate monthly required rate of return to be applied, Liberty contends that the adjustment to the actual cash flows in the process of calculating the Excess Profit is fundamentally wrong. 74 Ms Clifton's evidence was that in her calculations of the benchmark profit [i.e. the profit at an IRR of 20%] the first 6 months of net cash flows on the Development (January 2000 to June 2000) were kept constant and were not adjusted by the 90% factor. Ms Clifton's explanation for not adjusting the first 6 months of net cash flows, but adjusting the balance of the net cash flows, was that the first 6 months involved costs [including the cost of acquiring the Site and associated transaction costs] that were known to both Liberty and Mirvac [presumably at the time the Agreement was entered into] and gave the 'fairest result to both parties' [T 242.40-53]. 75 Ms Clifton's evidence was that the remaining net cash flows were then adjusted by a percentage to produce an IRR of 20% at the end of the Development [T 241-242]. By working backwards to calculate an accumulated cash flow that would achieve a hypothetical 20% IRR on the Project, an constant adjustment factor of 90% [that is, the reduction of the net cash flows by 10% apart from those from the first 6 months] on the balance of the net cash flows was seen by Ms Clifton, in consultation with Mr Broit, to be a most fair and reasonable result [T 242.29 ff]. 76 With the adjusted net cash flows purportedly generating an IRR of 20% at the end of the Development, these net cash flows were added together to calculate the purported (hypothetical) profit figure at the target IRR of 20%. The actual profit was calculated by summing together the unadjusted net monthly cash flows of the Development. The difference between the actual profit achieved on the Development and the hypothetical profit was calculated to be the Excess Profit. Liberty then received 20% of this Excess Profit as its profit share. 77 Liberty contends that the Excess Profit figure was to be the profit actually earned by Mirvac and not based on hypothetical notions of profit. In particular, Liberty complains that actual cash flows were to be used by Liberty and not some hypothetical or adjusted cash flows [as per Mr Broit's letter to Mr Alex Boyarsky of 19 January 2001 [Ex PX 247]]. Clearly the 90% cash flow adjustments made by Ms Clifton in calculating the 'base' amount [that is, the hypothetical profit with an IRR of 20%] from which to calculate the Excess Profit, were purely arbitrary. 78 Mr Broit conceded that the adjustment of net cash flows was not mandated by the Agreement [T 277.17-36] as did Ms Clifton who admitted that the particular method, in her opinion, was not necessitated by the Agreement. It was simply an arithmetical way to adjust the cash flows which were calculated or contrived to derive a profit amount equivalent to a 20% IRR, which in her opinion was selected as a way of doing that which she thought was required for the purpose of the Agreement [T 244.9; see also Mr Broit's cross-examination at T 277.39]. 79 Mr Lonergan demonstrated in his report of 28 June 2007 at [79]-[80] that, in theory, there are an infinite number of cash flow combinations which would yield a 20% IRR [or nominal IRR of 20.16% as calculated by Mirvac]. The sum of each of those cash flow combinations would be different, and accordingly the process of adjusting actual net monthly cash flows could be fitted to yield a desired Excess Profit amount. 80 A further error in Mirvac's "adjust the cash flow" approach that Mr Lonergan identified [at [86]] was that it made no allowance for the time value of money on the early period cash flows that it wholly allocated to the Excess Profit figure. It was also conceded by Mr Hall that this approach involved only a "crude" application of the time value of money principles required to be applied [T 312.25; T 312.50; T 314.5]. 81 Mr Hall's evidence was similar to Mr Lonergan's evidence in that he did not see it as necessary for Mirvac to adjust the cash flows at all and did not adopt such a method [T 317.20; T 318.2]. In calculating the benchmark profit figure, Mr Hall used the actual cash flows from the Development and as instructed by Mirvac's solicitors, assumed the use of a monthly cash flow discount rate of 1.67%. In order to calculate the benchmark profit figure, Mr Hall discounted to 'present value' [as at the start of the Development] using a monthly discount rate of 1.67% [said to be equivalent to an annual nominal rate of 20%] the actual net cash flows of the Development and added these discounted cash flows to determine the net present value (NPV) of the Development cash flows. The NPV calculated in this way was said to equal the present value [as at the start of the Development] of those profits in excess of the profit figure equivalent to an IRR of 20% [that is, the 'excess profit' stated in terms of its value as at start of the project]. This Excess Profit figure then needed to be restated in terms of the present value as at the end of the Project by calculating the future value of that amount using the same discount rate over the intervening period. This resultant future value of the Excess Profit was then multiplied by 20% to achieve the profit share figure owing to Liberty. [See [25] of Mr Hall's report.] 82 Mr Hall and Mr Lonergan pointed out that the "discount back to the beginning then roll forward to the end" approach of Mr Hall and Mr Lonergan's "net accumulated value approach" were very similar and that, provided the inputs were the same, their respective approaches should yield exactly the same result [T 301.20-302.32 per Mr Lonergan; T 306.34-41 per Mr Hall]. Mr Lonergan's approach involved compounding ("rolling forward") the net cash flows to the end of the Development. The material difference was the monthly discount/compound rate used by Mr Hall (1.67%) and Mr Lonergan (1.5309%), and for reasons explained above, Mr Lonergan's use of 1.5309% as the monthly discount/compound rate was the appropriate rate. 83 For the reasons and inadequacies referred to above, it is inappropriate to accept Mr Hall's evidence that the method used by Mirvac gave effect to clauses 5(d) and 6 of the Agreement. Notably, he added that other approaches may also have been available and may even have been considered superior in theoretical terms. 84 I accept that there was no theoretical justification for the adjustment of certain of the net cash flows to determine the benchmark profit figure equivalent to an IRR of 20%. I accept as correct Mr Lonergan's evidence that the adjustment process adopted by Mirvac would lead to an arbitrary benchmark profit figure, with resulting effects on the Excess Profit figure. [There is of course utility in the Court receiving expert evidence on close questions of accounting and financial valuation theory. However the Court ultimately determines the proper construction of the Agreement and the repetition of the expert's evidence is not to be taken as an abrogation of the Court's function. Nevertheless, the basic fundamentals of arithmetic, the difference between nominal and effective rates of return as well as the impact of intra-year compounding, are areas in which the Court can be aided by the experts. In relation to the valuation of the Excess Profit on the Development, in light of Mirvac's erroneous approach, an alternative theoretically justified approach that complies with the agreement is required.] 85 I accept that either of Mr Hall or Mr Lonergan's approach could have been adopted in order to give effect to the proper construction of the Agreement, with the stipulation that Mr Lonergan's monthly required rate of return of 1.5309% was to be applied as the monthly compounding/discount rate [which was the equivalent to an annual effective IRR of 20% as I accept was required by the Agreement]. Allocation to the development of approximately $7,210,000 in costs alleged to have been transferred by Mirvac out of the development 86 Mr Lonergan raised a concern with the accounting treatment of these funds. 87 The amounts that are said to represent this sum comprise six transactions recorded in the Cost Transaction Report "Cost Ledger Closures" but are recorded in the consolidated cash flow. It is asserted by Liberty that these amounts should not be utilised in the consolidated cash flow in circumstances where the costs have been "closed" in the Cost Transaction Report. 88 These costs are properly accounted for in the consolidated cash flow as they were actual costs incurred in connection with the development project comprising: a) marketing costs; and b) a bookkeeping entry. 89 As to the marketing costs incurred by the project for its marketing: these were removed from the Cost Transaction Report as they were not "costs" for the purposes of Mirvac's statutory reporting obligations. 90 The costs that comprise the bookkeeping entry were the costs that related to Stage 1B. These costs were not "written off" but rather were transferred to another job number so that they could be monitored individually for the purposes of a separate financing arrangement. This was an internal bookkeeping exercise only and does not indicate that the costs were not in fact included in the project. 91 Each of the costs which comprise the $7,210,000.00 were costs properly incurred in the project and therefore appropriately used in the calculation of the profit share pursuant to the Agreement. 92 Once Mr Lonergan's concerns were addressed by Mirvac's evidence he did not appear to continue to press this issue. In his report in reply he does not contest the explanation for this accounting treatment is wrong. Nor does Liberty appear to challenge the evidence of Ms Clifton that explains this accounting treatment. I accept the unchallenged evidence as to the treatment of these funds as explained by Ms Clifton. Rounding Errors 93 I accept that the calculations made by Mirvac lack mathematical precision. Given the size of the project, and in particular the large numbers involved, a lack of mathematical precision has a substantial impact on the outcome of the excess profit calculation under the Agreement. 94 It is not in dispute that the adjusted net monthly cash flows used by Ms Clifton produced, when annualised by her by multiplying the monthly-derived IRR by 12, a stated annual IRR of 20.16%. It also cannot be in dispute that the Agreement required the annual rate to be 20%, which must mean, if one was to use two decimal places, 20.00%. 95 To demonstrate the arbitrary effect of mathematical imprecision, Mirvac could have calculated the nominal IRR [using their exact methodology] such that the nominal IRR equalled, for example, 19.50001% [which rounds to 20%]. This would have derived an excess profit figure of some $14.00 million [as compared to Mirvac's calculated figure of $10.8 million]. The excess profit figure of some $14 million could then have been multiplied by 20.4999% [which rounds to 20%] in order to derive Liberty Grove's profit share of some $2.9 million [as compared to Mirvac's current figure of $2.1 million]. 96 Mr Lonergan has correctly calculated the excess profit figure on the basis that the annual IRR is 20.00%, and not 20.16%. Reconciling Mirvac's cost transaction report showing total costs at $195,343,192 with Mirvac's cashflow report recording total costs in the sum of $210,076,000 97 Ms Clifton explained that these amounts could not readily be reconciled because they were referring to different accounting concepts. No questions were asked of Mr De Vries or Ms Clifton in relation to this issue in cross-examination. Their evidence about the reconciliation is accepted. The issue as to Mirvac's timing in the recognition of costs 98 Liberty complains that Mirvac did not allocate all the costs in relation to the Development to the months in which those costs were paid by Mirvac, but rather allocated the timing of some costs to when they were posted or entered into their accounting system ("Posting Date"). The Posting Date of some costs were months prior to the months in which the costs were actually paid by Mirvac. Further, Mirvac is also shown to have part-paid certain invoices and paid the balance at a later date – yet recorded the entire payment as having been made at the earlier date of posting to Mirvac's accounting system. In effect, these approaches resulted in the recognition of cash outflows being earlier than when they were actually incurred, thus reducing the profit for the purposes of the Excess Profit calculations due to the time value of money. This I acknowledge was of benefit to Mirvac. 99 Liberty relies on clause 5(d) of the Agreement which it contends clearly required the IRR to be based on actual cash flow [i.e. when the money was actually received or paid out by Mirvac] and not on the Posting Date. The answer to this contention seems to be that clause 6 of the Agreement allows the IRR to be calculated by Mirvac in accordance with their normal accounting practices. The question then is: whether the date on which costs and revenues are recognised by Mirvac constitutes an "accounting practice"? I accept that timing issues in relation to the recognition of costs and revenues fall within the ambit of accounting practices. The question that follows is: whether the practice of using the Posting Date as the date on which costs are recognised is established by Mirvac to be one of their normal accounting practices? Mirvac's evidence [see Ms Scovazzi's affidavit of 2 August 2007 at [20] who was not required for cross-examination by Liberty] was that the method of recognising costs on the Posting Date [and revenue on the settlement date of property sales] was and remains the only practice of recording costs and revenue on a development since she has been employed by Mirvac in 1994. 100 Hence: i. I accept that the recognition of costs as at the Posting Date was in accordance with Mirvac's normal accounting practices. No evidence was adduced to the effect that this was not a normal Mirvac accounting practice. Mirvac was thereby entitled to recognise costs as per the Posting Date and to use these costs in their calculation of the IRR as per clause 6 of the Agreement. ii. Liberty's contra contention is rejected: vide that there existed a 'fundamental obligation' created by clause 5(d), namely that Mirvac had to calculate an IRR on "an actual" cash flow basis, in the sense of when the money was received or paid out, rather than in accordance with the way actual costs ("actual" used in this latter context to be in contrast to "budgeted") were recognised in accordance with Mirvac's normal accounting practices. Mirvac's use of budgeted costs rather than the actual costs for August and September 2005 101 This suggested error made by Mirvac in its calculation of the Excess Profit and resulting profit share is dealt with in what follows. The variation issue 102 Mirvac contends that the Agreement was varied by oral agreement between Ms Clifton and Mr Andrew Boyarsky on or about early September 2005 such that: "… the parties agreed to assume for the purposes of the Agreement that notwithstanding that the development was not finally settled, Liberty's profit share pursuant to cl.5(d) of the Agreement would be calculated on the basis of the actual cost of the development incurred up to and including 31 July 2005 and the agreed forecasted costs for the remainder of the development consolidated into the months of August and September 2005." 103 Liberty disputes that the Agreement was varied in the manner contended for by Mirvac. In particular, Liberty asserts firstly there was no conversation sufficient to found a variation, and secondly, that even if there were conversation that could amount to a variation, that Mr Andrew Boyarsky lacked the requisite authority to bind Liberty through that conversation. 104 Ms Clifton's evidence in chief, constituted by her affidavit sworn 6 August 2007 as corrected in the witness box to change the date from 7 September 2005 to 1 September 2005 and to conclude the conversation with Andrew Boyarsky saying "OK", was to the following effect:- On 1 September 2005, I made a telephone call to Andrew Boyarsky. We had a conversation to the following effect:- Ms Clifton: "I have reviewed the Project Feasibility and the Consolidated Cashflow Report. I have updated the actual costs and revenue figures in the Cashflow Report until July and re-forecasted the costs to complete. I have also reconciled the Consolidated Cashflow and the Expenditure Report, which I will send to you in the post." Mr Boyarsky: "We would like to finalise this agreement and Mirvac should provide a final letter to Liberty Grove covering the profit share system." Ms Clifton: "Not all costs have been completed yet. There are some outstanding invoices and there may also be some future defects claims due to the 7 Year Defect Liability period. These budgeted future costs should be accounted for in the few months after July 2005." Mr Boyarsky: "I agree, otherwise costs and invoices could continue to filter in for some considerable time." Ms Clifton: "In past Mirvac developments, such as Newington, we have allowed $1500 for each dwelling to meet Mirvac's potential liability for any defects to these premises. As Cabarita was built to a higher quality than Newington, we will only allow for $1000 per dwelling." Mr Boyarsky: "OK." 105 According to Mr Andrew Boyarsky, he had one conversation with Ms Clifton on 1 September 2005, and another conversation on 7 September 2005. He gave evidence that the 1 September conversation was to the following effect:- Mr Boyarsky: "You were going to get back to us by the end of last month with a response to our queries." Ms Clifton: "It's coming. It's a couple of days away." [I interpolate to note that in their final written submissions counsel for Mirvac contended that both Ms Clifton as well as Andrew Boyarsky had ultimately agreed during the litigation that the conversation took place on 1 September but only disagreed as to who rang the other. This contention was incorrect, Mr Andrew Boyarsky having contended that he had had two conversations with Ms Clifton, the first on 1 September 2005 and a later conversation on 7 September 2005]. 106 Mr Andrew Boyarsky said that the 7 September 2005 conversation was to the following effect:- Ms Clifton: "I've updated the costs and revenue figures in the cash flow report and re-forecasted the costs to complete. I'll send you the updated cash flow, but there are still some costs coming in. What do you want to do about them?" Mr Boyarsky: "What are you proposing? If we don't bring this thing to an end it'll go on forever. Are you proposing to not pay us until the last invoice is dealt with?" Ms Clifton: "How about I summarise the forecasted costs and account for what I think they will be." Mr Boyarsky: "You do what you've got to do so we can finalise this matter. Send it to us and we'll have a look at it." 107 On Ms Clifton's version of events, Mr Andrew Boyarsky agreed on 1 September 2005 to include forecasted costs in the cash flow in place of actual costs. 108 On Mr Andrew Boyarsky's version, all that he agreed to (on 7 September 2005) was that Liberty would consider the materials provided to Mr Boyarsky by Ms Clifton, and then get back to Mirvac. Deciding the issue 109 Both parties addressed careful submissions each contending that the witness called by the other gave unreliable evidence and should be disbelieved. The fact is that in particular ways and at various times during the course of giving evidence, each of Mr Andrew Boyarsky as well as Ms Clifton gave answers suggesting, at the least, that their recollections were from time to time in error. This is by no means an unusual circumstance where the events in question took place some considerable time ago. The experience of the Court is that witnesses tend, over time, to come to believe that events did occur or did not occur. Contemporaneous documents and other reliable evidence will often make quite plain that a witness' recollection was faulty. This is not to say that the witness intentionally lied on oath. The Court deals with questions of reliability on the balance of probabilities aided by contemporaneous documents. 110 In relation to the present controversy the matter stands as follows: i. There is something to be said in support of the proposition that clearly during the run-up to the September conversations and communications Liberty had been agitating for the matter to be brought to a close having been interested in finalisation over an extended period. Indeed an initiative for the profit share calculation to be finalised had come from Liberty in its letter to Mirvac of 9 November 2004. Mr Andrew Boyarsky was aware that if the project was not finalised in or about September 2005, Liberty may have to wait for any payment for months or possibly years. Hence it is Mirvac's case that the motivation in Liberty to have the Project finalised when there were still costs to be incurred and taken into account over an indefinite period was powerful. The submission is that unless Mirvac was prepared to agree to abandon taking into account project costs after 31 July 2005, if early finalisation were to be achieved, Mr Andrew Boyarsky needed to agree to some system which would permit using budgeted costs in the final Mirvac calculation. Absent the use of budgeted costs the project simply could not be finalised within the time frame desired by Liberty. The submission is that the objective indicators make it highly probable that some such arrangement must have been made. ii. On the other side of the equation the case pursued by Liberty is that: a) Ms Clifton initially swore to the conversation having occurred on 7 September 2005 and to Mr Boyarsky having not agreed to her proposal. b) She then swore two further affidavits in the preparation of which she directed her attention to the conversation, but did not change her account as to either the date on which it occurred, or what was said. c) It was only in the few days prior to giving her evidence, having considered the documentary material and attempting to reconstruct her account to fit with the documents, that Ms Clifton changed her account. d) She was able to offer no satisfactory explanation for the late change to her evidence. e) this permits Liberty to contend that the only explanation is that the change was based on a reconstruction, with an eye to the issues in the case, and not an actual recollection: a difficult area to adjudicate with certainty. iii. The finding is that Ms Clifton must have appreciated the significance of the conversation at the time that she swore each of her three affidavits, it having previously been pleaded as the basis for an alleged agreement. iv. Ms Clifton gave evidence under cross-examination that (a) Neither Mr Alexander Boyarsky nor Andrew ever said to her words to the effect that they would accept budgeted outflows in respect of August or September 2005 for the purposes of their contract with Mirvac at any time prior to 1 September; (b) the first time that a proposal for using budgeted figures for August and September was raised was on 1 September when she advised Andrew that the budgeted costs for the two months would be of the order of $550,000 [this matter not having been included in her affidavit]: transcript 236.12. v. On Ms Clifton's account, Mr Boyarsky agreed to Ms Clifton using figures which were [with the exception of the 7 year defects liability allowance] entirely within the discretion of Mirvac/Ms Clifton. Ms Clifton conceded that for Mr Boyarsky to have given her carte blanche to put in whatever she liked for August and September in terms of costs would be absurd. vi. Mr Boyarsky's version, namely that Liberty would consider the figures put forward by Ms Clifton, seems inherently rational and hence more likely to have occurred. vii. Yet the pressing by Mr Andrew Boyarsky for finality to have the project finalised tells in favour of Ms Clifton's version. 111 The evidence given by Mr Alexander Boyarsky that between 7 September and 28 October Liberty had protested that Mirvac's contention that an agreement [in terms of use of budgeted costs in the final profit calculation] was wrong, was left by Mirvac's counsel in an unsatisfactory state where the issue of without prejudice correspondence was not clarified: leading to some suggestion, never implemented, that Mirvac would seek to reopen: transcript 120, 121, 340. Hence unless Mr Alexander Boyarsky's evidence of the protest be rejected as unreliable, the fact of the claimed protest has a clear significance. 112 As I see it the matter stands as follows: i. Mr Slattery elicited from Mr Alexander Boyarsky the propositions that: (a) there was correspondence between the parties across the period 7 September and 28 October which was without prejudice; (b) during this period of time the plaintiff initiated a without prejudice communication to Mirvac in which it was asserted that the inclusion in the final calculation of profit of budgeted costs to complete after 31 July was wrong or was not agreed to Liberty. ii. It was put to Mr Slattery that there may be unfairness in the cross examiner asking the witness a question which was framed as requiring the witness to 'leave aside' without prejudice letters: this was because during cross examination witnesses are required to answer questions truthfully and if they were unable to put aside a without prejudice chain of communications, they may have difficulty in treating with the subject matter in terms of giving a full answer. iii. This is not the first time when without prejudice communications, if there were any, may be admitted into evidence: (a) Authorities dealing with the position when without prejudice communications objected to were admitted include, at the least, the decision of the New South Wales Court of Appeal in Lohar Corp Pty Ltd v Dibu Pty Ltd [(1976) 1 BPR 9177] where there was discussion by Hutley JA [at pages 9182 and 9183] of the privilege which may arise from the cloak of without prejudice being abused, as for example for the purpose of misleading the Court which, unless the materials were admitted, would not be in a position to negate a particular inference. (b) McFadden v Snow , a decision of Kinsella J, is referred to in the joint judgment, [1952] 69 WN (NSW) 8 at 10, as is Pitts v Adney [1961] NSWR 535 where Walsh J, as his Honour then was, adopted with approval what Kinsella J had said, and admitted into evidence "without prejudice" offers where suppression of knowledge of the terms of the offers would have led to false inferences as to the financial capacity of the offeror: cf Haynes v Hirst ( 1927) 27 SR (NSW) 480 . iv. In light of the evidence given by Mr Alexander Boyarsky, an evidentiary onus fell upon Mirvac to prove that there had not been any such without prejudice communications and it failed to discharge that onus. v. Against this background it was not open to Mr Slattery to contend that the evidence given by Mr Alexander Boyarsky on this matter requires to be rejected as unreliable. 113 Notably Liberty also takes a number of technical points which essentially amount to the contention that there was no intention to bind Liberty in terms of the intent to enter legal relations to vary the extant contract; that there was no completed offer and acceptance; that Mr Andrew Boyarsky had neither actual authority nor ostensible authority to bind Liberty to the suggested variation. 114 In my view Mirvac, who bore both the evidentiary as well as the ultimate onus of proof, has not established its case in terms of the suggested variation. There exist too many uncertainties which remain inchoate. 115 Further, the words used by Mr Andrew Boyarsky in what I accept was part of the conversation between himself and Ms Clifton of about 7 September 2005 namely "[y]ou do what you've got to do so we can finalise this matter. Send it to us and we'll have a look at it" are not suggestive of finality in a transaction as significant as a variation to the letter Agreement. 116 For those reasons it is strictly unnecessary for the Court to determine the authority issue. I do not propose therefore to treat with that issue. 117 Hence, Mirvac was required to calculate the Excess Profit and resulting profit share with the actual cost as incurred for August and September 2005 in accordance with the Agreement, and Mirvac was in error in using the budgeted costs for these months in their calculation. The way forward 118 The net effect of the above findings and their flow on effect in the calculation of the correct Excess Profit amount need to be dealt with by the parties. Short minutes of order 119 The parties are directed to bring in short minutes of order to comprehend the findings on which occasion costs may be argued. Rulings on evidence 120 There were a number of agreed rulings on the parties' respective objections to one another's evidence. The somewhat unusual agreed approach was to identify the agreed ruling as "admit subject to relevance". Against that background the approach which has been taken is as follows: i. The reasons are self-explanatory with respect to the anterior negotiations which could be taken into account in terms of credit questions arising but which material was of little or no assistance on the construction issue. ii. With respect to the plaintiff's objections to the defendant's evidence, in every instance but for the fourth sentence of paragraph 30 of the affidavit of Mr Broit of 16 August 2007, where an agreed ruling was 'admit subject to relevance', the ruling is "allow the evidence". The fourth sentence of paragraph 30 of Mr Broit's above-described affidavit is however rejected. iii. A number of the affidavits read by the defendants required to be closely treated for relevance where the deponents were unable to give evidence as to past practices because, at the material dates, they were not employed by Mirvac. The approach taken is to treat with these matters as matters of weight. iv. With respect to the defendant's objections to the plaintiff's affidavits the rulings are: a) as to the affidavit of Mr Andrew Boyarsky of 26 September 2007, paragraphs 4 - 9 are allowed; b) as to the affidavit of Mr Alexander Boyarsky of 18 June 2007 paragraph 22 and the first sentence of paragraph 23 are rejected. The balance of this affidavit is allowed; c) each of the other objections to the plaintiff's affidavits are disallowed. 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.