Australian Cement v Adelaide Brighton

ACH's claims and the agreement of 30 March 1999 7 The present proceedings involve claims by ACH on the twofold basis to which brief reference has already been made. First, ACH complains that ABL was guilty of misleading and deceptive conduct contrary to s.52 of the Trade Practices Act 1974 (Cth) in certain respects in the period leading up to the execution of the agreement of 30 March 1999. In the alternative, ACH says that the sum it was paid by ABCL in consequence of the reduction of share capital of that company was not calculated in accordance with the applicable provision of the agreement and that a balance remains owing and payable to it. Both ABL and ABCL deny liability to ACH. 8 Central to both ACH's complaints is the part of the 30 March 1999 agreement concerning the cash sum to be paid to ACH. The operative provision (clause 3.5) reads as follows: "The Company [i.e., ABCL] must pay the Capital Return Amount to ACH as follows: (a) by payment of the Base Capital Return Amount on the Completion Date; and (b) by payment of the balance of the Capital Return Amount within seven days after final determination of the Capital Return Amount in accordance with Schedule 3." 9 The expression "Capital Return Amount" is defined by clause 1.1 as meaning "the amount determined in accordance with Schedule 3 (Capital Return Amount)". Schedule 3, in its paragraph 1, defines the Capital Return Amount as "the aggregate of the following amounts" and goes on to refer to: "(i) the Base Capital Return Amount; and (ii) the Adjustment Amount, being the aggregate of the following · such sum as represents a 49% share of the profits after tax of the Company for the 1998/99 financial year ('Financial Year'), as determined in accordance with paragraph 2 of this Schedule 3, and · an amount to take account of provisions raised in respect of and savings derived from Business Improvement Plan initiatives as determined in accordance with paragraph 3 of this Schedule 3 ('BIP Amount')." 10 Paragraphs 2 and 3 of Schedule 3 are thus made integral to the calculation to be made under paragraph 1 and should also be set out in full: "2. The profit after tax for the Company for the Financial Year determined in accordance with the Profit and Loss Statement of the Company for the Financial Year will be recalculated by backing out provisions for the closure of the Geelong works, net of applicable income tax provided for in the accounts. ACH will be entitled to 49% of the extent to which the recalculated profit after tax exceeds zero, less any dividends already paid by the Company to ACH in respect of the Financial Year. 3. The BIP Amount shall be calculated as follows: Provision raised in respect of business improvement plan initiatives at 31 December 1998 and other expenses in respect of the business improvement plan in the period 1 January 1999 to 30 June 1999 not included in the provision 7,029 Consultants fees 1,200 8,229 Less savings achieved to 30 June 1999 (3,250) 4,979 Less applicable income tax (1,792) 3,187 BIP Amount (49% share) 1,562 "

11 The first element of the Capital Return Amount (that is, the first of the two items to be aggregated), being the Base Capital Return Amount, was a fixed sum of $82,860,247. The second item, that is, the item to be aggregated with that fixed sum and designated the "Adjustment Amount" was itself the aggregate of two items, each to be derived from the financial statements of ABCL for the financial year to 30 June 1999 which, at the date of contract, still had some three months to run. In concept (although there is a substantial contest as to the details), the result for that financial year was to be adjusted by eliminating (the words used are "backing out") provisions for closure of ABCL's Geelong works net of applicable income tax and by adding back a provision and expenses relating to the BIP. 12 An understanding of the intent behind the items covered by the "Adjustment Amount" is assisted by an appreciation of the commercial context. ABL's attaining of 100% ownership of the share capital of ABCL upon the making of a substantial payment by ABCL to ACH was only one part of a wider re-arrangement of cement manufacturing ownership in Australia. The inter-relationship between that transaction and ABL's concurrent acquisition of the Cockburn cement interests in Western Australia has already been mentioned. A third aspect was the negotiation and execution of new cement supply agreements between, on the one hand, ABL with its substantially enhanced cement manufacturing capability and, on the other, CSR, Pioneer and ACH. The disengagement of ACH from ABCL provided a context in which new supply agreements came to be negotiated. Viewed during the period of negotiations in the first half of 1999, the totality of these moves on the part of ABL meant that it could, after completion, become able to effect substantial efficiencies and savings in addition to those identified by the BIP. Put shortly, its position would be that it had excess manufacturing capability such that it could be able to dispense with part of the capacity in both cement manufacturing and limestone processing.

ACH's Trade Practices Act claim 13 ACH's case under this heading is, in essence, that ABL represented to it that the items specifically mentioned in an ABL letter of 15 March 1999 (being the BIP costs and the Geelong closure provisions) were the only abnormal expense items likely to impact profit for the year to 30 June 1999 in a way relevant to the financial adjustment which came to be provided for in clause 3.5; and that, had ACH known of other such items then also regarded by ABL to be likely to have such an impact (being those related to closure of the Swan works and write-down of the Exmouth and Cement Mill 6 assets which, in the events which happened, had a negative financial impact resulting in a loss for ABCL for the year to 30 June 1999), it would have required those to be built into clause 3.5, which ABL would have accepted. ACH further says that, by reason of this misrepresentation, it became party to a clause which operated to its disadvantage and lost the opportunity to negotiate ameliorating changes. The relevant representations were made at a late stage in negotiations. Their significance is best understood in the light of those negotiations.

Operations of the ABCL board 14 As I have said, negotiations between ACH and ABL waned in the second half of 1998 when ABL became preoccupied with the Cockburn possibility. But intentions as between ACH and ABL still remained sufficiently serious to produce a consensus in the middle of 1998 that the ACH appointees on the board of ABCL should, in effect, stand aside and leave all day to day aspects of board duties to the ABL representatives. After that point, the ACH appointees did not attend board meetings until the formal meetings required in connection with the capital reduction which saw ACH quit ABCL and leave ABL as the sole owner. Nor did the ACH appointees receive full financial and performance information from ABCL after mid-1998. They received only limited reports each month. The two versions of the report for February 1999 are in evidence. The full report, made available to ABL appointees, occupies 38 pages. The abbreviated report, made available to ACH appointees, occupies 16 pages. The latter consists of summary financial information. The former contains as well detailed narrative reports by ABCL's chief executive and chief financial officer commenting on a number of commercial and market matters. This reflects a view, apparently generally accepted and uncontroversial, that ACH's impending role as a significant customer and non-shareholder of ABCL made it inadvisable for ABCL to continue to share such commercial and market information with it.

Renewal of negotiations 15 The ACH-ABL negotiations resumed in earnest in December 1998. The idea of a price adjustment of the general kind eventually incorporated into clause 3.5 and schedule 3 first came up in January 1999. ACH had concerns about a provision for maintenance in the ABCL accounts. It regarded the provision as excessive and formed a view that the ABL influences within ABCL may be trying to reduce ABCL profits so as to paint a picture of the value of ABCL more favourable to ABL as the potential buyer of ACH's shares. On 22 January 1999, Mr Hammond of ABL wrote to Mr Brennan of ACH to confirm his understanding of the position they had reached in discussions over the previous month. The letter reads in part as follows: "We discussed the question of the effective date of the transaction now being 1st January 1999. This would therefore involve ABCL accounts as at 31st December 1998 which would be prepared in accordance with the accounting policy of ABCL. We will examine the question of adjustments to the accounts to reflect a financial position exclusive of non-recurring items which relate to future benefits : in particular, possible retrenchment provisions." 16 On 8 February 1999, Mr Moody, ABL's chief financial officer, sent a memorandum to Mr Hammond pointing out a problem with this approach, in that it would not be possible for ABCL to pay an increased dividend to ACH to cover the items in question. The memorandum (a copy of which was sent to Mr Nolan) read in part as follows: "Point 1.6 of your letter refers to adjustments to the accounts to reflect a financial position exclusive of non-recurring items which relate to future benefits. Your point anticipates an adjustment to the profit to allow a greater dividend to be paid to ACH to reflect the fact that certain expenses will only result in increased profit after they cease to be owners. This is because the valuation exercises carried out by the parties when negotiating the sale of ABCL did not anticipate the business improvement initiatives identified as part of the Booz Allen review, nor the cost of achieving them." 17 By early March 1999, matters had reached a point where the Cockburn acquisition was to proceed, the effective date of ABL's acquisition of the balance of ABCL had been fixed as 30 June 1999 (having previously been 31 December 1998 or 1 January 1999, as stated in Mr Hammond's letter of 22 January 1999) and there was some form of general consensus between ACH and ABL that, upon completion of that acquisition ACH should have the benefit of a price adjustment reflecting its share of the profits of ABCL from 1 July 1998 to 30 June 1999, exclusive of abnormal items of present expense or provisioning productive of future benefits, which benefits, of course, would accrue to ABL only. I shall refer to this as "the present burden/future benefit consensus". 18 Any doubt that ABL had become party to the present burden/future benefit consensus is laid to rest by the evidence of Mr Hammond. He was cross-examined as follows about the passage in the ABL's draft explanatory statement (to be examined in greater detail later) concerning increase in the ACH acquisition consideration by an adjustment referable to normal operating profits: "Q. Was it your understanding in the middle of March that it would be correct to say to your shareholders that the cash consideration of 82.4 million would be increased by a completion adjustment to reflect ACH's share of normal operating profits of ABCL? A. The question was did I think that it was reasonable to say that to shareholders? Q. Yes, as a correct statement of the position at that time? A. Yes. Q. Does it follow that, as at that time, it was why you were content to a formulation which contemplated that there would be a payment to ACH to reflect a share of normal operating profits as distinct from operating profits including abnormals? A. Yes. Q. Doesn't it follow that by mid March you were content commercially to live with a position which contemplated ACH receiving an adjustment and an adjustment prepared on a basis which did not take into account abnormal expenses such as Geelong, Swan and Exmouth? A. I think it does follow, yes." 19 Later, when Mr Hammond was questioned about events surrounding his letter of 22 January 1999 to Mr Brennan, the following cross-examination occurred: "Q. You say in paragraph 14 of your affidavit that one of the things you said to Mr Brennan at this time was that you resented the implication that ABL would somehow disadvantage ACH? A. Hmm, hmm. Q. He was suggesting that in effect ABL was seeking to burden ACH with expenses, for which it would receive no benefit; that's what he was saying to you? A. No, he wasn't. He was suggesting that there were items where we would adjust the accounts to disadvantage ACH; not relating to future benefits necessarily. Q. Well, if you look at what you say he said to you in paragraph 14 with respect to -- A. Yes, overprovisions. Q. - with respect to Berkinhead, he says, 'Costs of retrenchments over which we will have no control and will derive no benefits'? A. And changes in accounting policy, yes. Q. You recall saying something to the effect: 'Look, we are not going to disadvantage you unfairly'. That's what you said to him; something to that effect? A. To that effect, yes. Q. You weren't going to load up the accounts with expenses for which he had received no benefit, not then going to bring it to account, were you? A. No, we, weren't. Q. That's in effect what you said to him? A. Yes, but it was very specifically related to retrenchments. Q. I suggest the discussion was more general and there was specific reference to possible retrenchment provisions? A. I can't say. I believe it was a discussion about accounting in general terms. He was suggesting that we might disadvantage them through overprovisions." 20 ABL's position was confirmed when Mr Moody was cross-examined about the letter of 15 March 1999 which is set out in full in the next section of these reasons: "Q. Just looking at the first page, you say in the sentence commencing, 'We accept', that 'those charges substantially relate to profits expected to be generated in future financial periods and, as such, you should not be penalised for them'? A. Mmm mmm. Q. What did you mean by 'and as such you should not be penalised for them'? A. I am conceding that those two items, if charged to the profit and loss for that period, or if there was no other mechanism for adjustment, it would lead to a situation where they would not receive a share of profits at all. Q. But why were you saying that those two items were accepted as being items which should be excluded? A. Why? Q. Yes? A. We had been asked to include them as adjustments. Q. Why were you saying that they should be excluded for the reason that ACH shouldn't be penalised? A. Our criteria for allowing the adjustments, if you like, was that they - the sentences as they read, they were going to relate to profits expected to be generated in future periods and they were a cost that was going to be incurred in that financial year so we accepted on that basis that they were fair adjustments. Q. Because of the criteria? A. Yes. Q. And that criteria had been discussed in the meeting on 10 March, hadn't it? A. Yes. Q. And you understood that it had been the subject of discussion between Mr Hammond and Mr Brennan before that? A. Yes. Q. And you understood from what Mr Hammond had told you that there was agreement in principle between him and Mr Brennan that that criteria should apply to the adjustment? A. It was our criteria, is my understanding. Q. Your understanding was that ACH believed that that was the relevant criteria by which the decision as to whether something was in or out would be made with respect to adjustment? A. Yes, I agree. Q. And you knew at the time this letter was written that there were other items which would satisfy that criteria, didn't you? A. Well, as I have said, they didn't occur to me at the time of writing the letter. Q. I suggest to you that you knew that Swan satisfied this criteria that you have just described, as you understood it in March 1999? A. Yes."

The meeting of 10 March 1999 and ABL's letter of 15 March 1999 21 The main catalyst in the reaching of the present burden/future benefit consensus was a meeting on 10 March 1999 attended by representatives of ACH, representatives of ABL and the companies' respective solicitors. There are in evidence handwritten notes made at the meeting by Mr Nolan of ACH and a typewritten file note of proceedings prepared afterwards by Mr Hammond of ABL. Mr Nolan's notes include the following: "Dividend in relation to 1/1/99 - completion - Adjust for provisions w.r.t. [with respect to] future costs and benefits. - Anticipated to 30/6 · Retrenchments · Booz Allen · "

(It is not clear whether the last dot indicates something that was said which Mr Nolan failed to write down, or whether he made the dot in expectation of another item which never came.) 22 Mr Hammond's file note record of the relevant part of the meeting was as follows: "It was agreed that the transaction would (subject to completion of other conditions) take place with effect from 30th June 1999, as follows: Accounts would be prepared at that date, with the costs and benefits relating to the Booz Allen Improvement programme (which related to the future) removed. ABL will provide ACH with an estimate of the likely balance sheet and adjustments within a few days. Action: Moody A dividend amounting to the full profit would be declared before 30th June, and paid once final audited accounts had been prepared; It is likely that ACH's share of the profits for the 1998/99 year would mean that it could not all be paid out of unappropriated profits, and the excess (effectively the adjustment of the Booz Allen programme) would be an adjustment to the purchase price."

Handwritten notes made at the meeting by Mr Moody of ABL did not refer to this matter. 23 On 15 March 1999, Mr Moody of ABL wrote to Mr Nolan of ACH. The letter was on the letterhead of ABL. Under Mr Moody's signature appears his title, "Group General Manager, Finance and Administration". A draft of the letter prepared on 12 March is in evidence and I am satisfied that the letter was drafted by Mr Moody while events at the meeting were fresh in his mind. It is appropriate to quote the letter in full: "Dear Norm RE: ABCL PRICE ADJUSTMENT I refer to our meeting of 10 March 1999 and in particular our agreement to make the acquisition of ACH's 49% of ABCL effective 30 June 1999. This would mean that ACH would be entitled to a 49% share of the profits after tax for the full year then ended. There are however two large items which may lead to substantial charges to the profit and discount [scil. loss] for the period, the effect of which is likely to result in a loss for the period. Those items are: (a) provision for closure of Geelong works; and (b) provision for redundancies and other costs associated with business improvement plan initiatives, less savings generated in current financial years. We accept that those charges substantially relate to profits expected to be generated in future financial periods and as such you should not be penalised for them. It is not possible to adjust dividends to reflect these issues. We therefore propose adjustments to the agreed purchase price of $82,409,000 as set out below: (a) Provision for Closure of Geelong Works The profit after tax for ABCL for the year ended 30 June 1999 will be recalculated by backing out provisions for the closure of the Geelong Works, net of applicable income tax provided for in the accounts. ACH will then be entitled to the 49% of the extent to which the recalculated profit after tax exceeds zero, less any dividends already paid to ACH for the financial year. ABCL's current forecast for profit after tax is approximately $4.5 million, prior to any provisions for the closure of Geelong. If a provision of closure of Geelong is raised and assuming ABCL's forecast is achieved this should result in an adjustment to the purchase price of $2.2 million. Please note that ABL in no way warrants the achievability of the ABCL forecast for the year ended 30 June 1999. We would propose that this adjustment would be paid once the audited accounts are available. (b) Business Improvement Plan Initiatives In addition to the above we would propose an adjustment to the purchase price of $82,409,000 as follows: $'000 Provision raised in respect of business improvement plan initiatives at 31 December 1998 7,029 Consultants fees 1,200 8,229 Less savings achieved to 30 June 1998 [scil. 1999] ( 3,250 ) 4,979 less applicable income tax ( 1,792 ) 3,187 49% share 1,562 We would be happy to submit our calculations to audit review. Greg Blackford is also welcome to interview John Oakes about the calculations. If you agree to the above proposals in principle we will instruct our lawyers to come up with the appropriate wording. If you require any further information, please do not hesitate to contact us. Yours faithfully" 24 This ABL letter plays a large part in ACH's case and it is appropriate to draw attention to certain aspects of it. It will be noted that, while neither of the contemporaneous notes of the 10 March meeting refers to the provision for Geelong closure, this is mentioned in the letter as one of "two large items which may lead to substantial charges to the profit and discount [scil. loss] for the period, the effect of which is likely to result in a loss for the period", the other being the BIP costs. ABL accepts that those charges relate to future expected profits and that ACH should not have to bear them. Mr Meagher SC, senior counsel for ACH, submitted, and I accept, that the letter may be taken as evidence of the meeting of 10 March having reached the present burden/future benefit consensus in the terms I have described, namely, that ACH's profit share equivalent for the year to 30 June 1999 should not be impacted by abnormal items of present expense or provisioning productive of future benefits which would accrue to ABL only. 25 The second significant point about ABL's 15 March 1999 letter is that it refers to two matters which may lead to charges to the profit and loss account of the kind relevant to the present burden/future benefit consensus. It does not say that those two are the only two. Nor does it say that there may be more. 26 The third feature of the letter is its reference to ABCL's "current forecast" of after tax profit for the year to 30 June 1999, coupled with the reference to what the price adjustment in favour of ACH should be, assuming elimination of provisions for Geelong closure and realisation of the profit forecast. That current forecast was extracted from the February 1999 board reports to which reference has already been made.

ABL's explanatory statement 27 By the time the present burden/future benefit consensus was reached and the 15 March 1999 letter was sent, ABL was well advanced in a process of preparing a notice of meeting and explanatory statement in connection with a meeting of its shareholders. That meeting was to be invited to pass resolutions enabling both the Cockburn and ABCL acquisitions to proceed. Specifically, it was to authorise, among other things, the issue of shares to the Rugby Group as consideration for the Cockburn acquisition and the issue of shares for cash by way of rights issue to provide part of the funds needed for the ABCL acquisition. The explanatory statement, as finally settled, contained information about "the merged company", that is, ABL as it would exist after the transactions had been completed. As it developed, the explanatory statement referred to the matters the subject of the present burden/future benefit consensus. It did so, of course, in the context of the wider field with which it was concerned. Draft 8 of 12 March 1999 and Draft 10 of 23 March 1999 are both in evidence, marked in such a way as to identify changes which make it possible to see also what was in Draft 9 of 18 March 1999. Draft 11 dated 26 March 1999 is also in evidence, as is Draft 4 dating from February 1999. Each of those drafts included in the ABL chairman's introductory letter: "As part of the restructuring, a series of rationalisation initiatives will be implemented, including closure of the Geelong Works, rationalisation of cement and lime operations in Western Australia and rationalisation of head office functions." 28 In the section "Overview of the Restructuring" appearing near the beginning there was reference to the price for ABL's acquisition of 49% of ABCL. The development of the reference to the price was as follows: Draft 8: "Cash consideration of $82.9 million".

Draft 9: "Cash consideration of $82.4 million. A completion adjustment will be made to reflect ACH's share of the normal operating profits of ABCL to the date of completion of the Restructuring".

Draft 10: "Cash consideration of $82.4 million. This figure will be increased by a completion adjustment to reflect ACH's share of the normal operating profits of ABCL from 1 July 1998 to the date of completion of the Restructuring". 29 All drafts also contained reference to benefits to be derived from the restructure. Three categories of benefits were mentioned: first, those expected from the BIP; second, rationalisation benefits in Victoria to be derived from the closure of the Geelong works and concentration of activities at the lower cost Birkenhead works; and, third, rationalisation benefits in Western Australia and in head office functions. The extracts which follow are from Draft 11. Nothing of significance turns upon minor differences in some areas of earlier drafts. 30 The statements about Geelong were more definitive than those about the Western Australia operations. Geelong was dealt with by the bald statement, "The Merged Company intends to close the Geelong Works". The corresponding statement about Western Australia was much less straightforward: "the Restructuring will allow a significant rationalisation of cement production in Western Australia. Cockburn Cement's operations in Western Australia will complement Adelaide Brighton's business by providing a broader base for sales. The combined business will have lower operating costs as a result of operating efficiencies and increased purchasing power." 31 In a subsequent section dealing with rationalisation benefits there was a stand-alone discussion of Geelong followed by a more general treatment of other matters: "Elimination of Overlap Adelaide Brighton and Rugby Group have, with the assistance of Booz Allen & Hamilton, identified a number of initiatives to rationalise the cement and lime operations in Western Australia and head office functions. These initiatives are expected to generate annual savings of at least $11.45 million. The savings are expected to be progressively achieved over a 12 to 18 month period." 32 The "Elimination of Overlap" matter was the subject of more detailed treatment in a later section, two paragraphs of which should be quoted: "Rationalisation of cement milling The Merged Company intends to mothball one mill at the Munster Works and focus the production of certain types of bulk cement on Munster Work's larger mill. The balance of bulk cement will be milled at the Swan Works. All bagging operations will be located at the Swan Works. This will reduce milling over capacity in Western Australia and increase mill utilisation and operational efficiencies. Rationalisation of lime operations. The Merged Company intends to rationalise its lime capacity in Western Australia by closing the lime kiln at the Swan Works (provided no other opportunities being explored to utilise this kiln are viable). Forecasts of lime demand in Australia indicate that significant surplus capacity would remain for several years if no such rationalisation occurred. The Merged Company also intends to consolidate the production of hydrated lime for the Perth region at the Swan Works allowing Cockburn Cement's hydration plant at Malaga to be closed and the site divested." 33 The financial impact of "Elimination of Overlap" was stated to include: "writedowns totalling approximately $19.7 million from the closure of the Swan Works' lime kiln; and approximately $4.7 million tax benefits associated with the closure of the Swan Works' lime kiln." 34 Draft 10 listed, among assumptions adopted for the discussion and financial profile of the merged company: "goodwill of [$173.1] million is incurred in the Restructuring. Goodwill has been calculated based on the balance sheets of ABCL and Cockburn Cement as at 31 December 1998 after allowing for: the writedown of the Geelong Works and the Swan Works' lime kiln to fair value. The total write down is assumed to be [$55.37] million. Tax benefits of $15.6 million are assumed to be available from these writedowns; and a revaluation of land of $25.7 million based on independent valuations obtained by Cockburn Cement. Goodwill is assumed to be amortised over 20 years;" 35 The impact of the merger on earnings for the year to 30 June 1999 was said to include, among other items: "… abnormal losses of approximately $37.2 after tax arising from the Restructuring relating to the closure of the Geelong Works (Section 9.3(i)) and the write down of various assets (Section 9.3(ii));"

The reference to "Section 9.3(ii)" is a reference to the earlier treatment of "Elimination of Overlap". 36 The explanatory statement included a pro forma balance sheet of ABL at 31 December 1998 adjusted to reflect the effects of the transactions shareholders were asked to approve. The pro forma was described as "based on the standalone balance sheets of Adelaide Brighton and Cockburn Cement at 31 December 1998", with a number of adjustments briefly described. One such adjustment was: · "Adelaide Brighton acquires 49% of ABCL for a cash consideration of $82.9 million. No allowance is made for potential completion adjustments. The fair value of the assets acquired is $59.6 million reflecting the asset write downs associated with the closure of the Geelong Works and the Swan Work's lime kiln;" · "significant asset write downs and some cash costs are incurred in closing the Swan Works lime kiln. The total cost including cash costs and asset write downs net of the expected tax benefit is assumed to be $16.3 million. Expected cash costs of $1.3 million for demolition are treated as a provision in the Merged Company's balance sheet;" 37 The significance of the several drafts of the explanatory statement in the present context is that they were furnished by ABL to ACH. The immediate purpose arose from the fact that ACH was a participant in one of the transactions the subject of the explanation to ABL shareholders. ABL had an interest in seeing that ACH had no concerns about the references to it and its role. In addition, ACH had made it clear to ABH that it wished to review in particular the treatment of the inter-conditionality of the ACH transaction with the Cockburn transaction. I am satisfied that Mr Nolan and Mr Blackford read the several drafts provided to ACH. I am also satisfied that, while neither of them read every word, each did read the sections I have quoted above, although principally for the particular reasons I have mentioned.

The KPMG reports 38 I have already noted that ABL's "acquisition" of ACH's shareholding in ABCL involved, in reality, cancellation of ACH's shares by means of a reduction of the share capital of ABCL to leave ABL as the sole shareholder. Under the capital reduction procedures in Division 1 of Part 2J.1 of the Corporations Law, a heavy onus was cast upon the ABCL directors to see that the proposed reduction did not materially prejudice the company's ability to pay its creditors. ABCL's board of directors consisted of ABL appointees and ACH appointees as already mentioned. 39 In order to obtain appropriate reassurance for the ABCL directors, steps were taken to have KPMG examine and report upon matters relevant to directors' assessment of the solvency impact of the proposed capital reduction. This was requested by Mr Brennan and Mr Nolan, the ACH appointees who had agreed to step aside from all but formal involvement at the ABCL board level. There are in evidence four KPMG documents - a draft opinion of 23 March 1999, a signed opinion of 25 March 1999, a further draft opinion of 26 March 1999 and a further signed opinion of 29 March 1999. Mr Nolan and Mr Blackford read all of these. Mr Brennan read the last but probably none of the others. 40 In each of these documents, KPMG sought to depict the financial position of ABCL itself as it would have been at 31 December 1998 had the composite ABL-ACH-Cockburn merger transaction taken effect at that point. KPMG made their assessment by reference to the draft explanatory statement, among other things. In the documents of 23 and 25 March 1999, KPMG showed, in tabular form, the balance sheet of ABCL alone as it was on 31 December 1998 and a pro forma balance sheet of ABCL alone as at that date adjusted to reflect the impact of the merger transaction. Among the adjustments specifically referred to were "write-off of Geelong assets" and "write-off of Swan lime kiln". The narrative included the following: "the write-offs in relation to Geelong and Swan reduce the net assets of the company by $80m. Although certain of the cash outflows associated with the closures do not occur until 18 months, the full impact of the known write-offs on the financial position should be included in determining the company's ability to pay its creditors." 41 The documents of 26 and 29 March 1999 compared with the actual 31 December 1998 position two post transaction pro forma balance sheets, designated A and B. Pro forma A reflected adjustments for only two factors, being new ABCL borrowing from ABL and the reduction of capital itself. Pro forma B added two further adjustments, "write-off of Geelong assets" and "write-off of Swan lime kiln". The narrative included the following: "The write-offs in relation to Geelong and Swan reduce the net assets of the company by $80m. Although the majority of the cash outflows associated with the closures do not occur until 18 months, the full impact of the known write-offs on the financial position have been included in determining the company's ability to pay its creditors in balance sheet B as a worst case scenario."

The ACCC submission 42 The last background document to be mentioned is ABL's submission to the Australian Competition and Consumer Commission in support of its application for authorisation of the merger transaction. 43 This document contained various references to Swan, including · "Secondly, ABL will rationalise its lime capacity in Western Australia by closing the lime kiln at the Swan works (provided no other viable opportunities to utilise this kiln are identified)". · "ABL currently produces limited quantities of lime in Western Australia (approximately 50,000 tonnes per annum). Following the restructuring, ABL will cease production at its lime manufacturing facility, lowering overall lime production costs". 44 A copy of the ACCC draft was supplied to ACH by ABL and read by Mr Nolan and Mr Blackford.

ACH's knowledge 45 It is clear from Mr Nolan's evidence that he was aware during March 1999 that the Swan lime kiln would very likely be closed as a result of the merger transaction. He was also aware, of course, that that was an asset of ABCL recognised as such in its financial statements. But, according to his own evidence, Mr Nolan did not think or expect that any expense or provision in relation to closure of the Swan lime kiln would reflect in the 30 June 1999 accounts of ABCL. The following passage from his cross-examination is instructive (the first question refers to a passage in one of the draft explanatory statements): "Q. When this document says: 'It is assumed the cash costs will qualify as a provision in the merged company's balance sheet', that's telling you something about the accounts of ABCL, isn't it? A. Not necessarily, that's what I said, it is telling me something about the accounts of ABL quite clearly, but that's the manner in which I would have interpreted the whole document. Q. So are you saying that you couldn't tell, necessarily, from this document what impact it would have on the accounts of ABCL? A. That's right. Q. Is that right? A. Yes. Q. Because there was a possibility that the accounting treatment for ABCL might have been different from ABL? A. Yes. Q. Now, you never asked any questions of anyone at Adelaide Brighton as to whether you correctly interpreted this document in that way? A. No, I didn't, but I can tell you why if you are interested. Q. Well, get it off your chest, what is the reason why? A. Well, the fundamental reason why is because of the manner in which we had been through the exercise that came out in Rick Moody's letter of request from that meeting of 10 March, that we weren't to be disadvantaged by one off abnormal and nonrecurring items and we believed that what we had been told in that letter and in that meeting was that there were two specific items and the letter effectively confirmed that. Q. Have you now completed everything you want to say to explain why you say you interpreted this document as not affecting necessarily the accounts of ABCL? A. I think so." 46 To the same general effect was the following passage: "Q. Now, given that you were told that the Geelong costs would be accounted for in both the ABL and the ABCL accounts at 30 June 1999, there was no basis at all for you to think the Swan Lime Kiln costs wouldn't be accounted for in exactly the same way, correct? A. No, I don't believe that is necessarily the case. Q. Why not, Mr Nolan? A. As I said before, because I just, we had discussed the issue in the context of that meeting on 10 March and the subsequent letters that we had received and the drafting of schedule 3 of the agreement to reflect what we believed were the only two adjustments that were going to appear in ABCL's accounts. My understanding was that any other issue that arose were post merger issues about the rationalisation of the business once the merger with Rugby had been completed. Q. Have you given you full explanation for not thinking that the Swan Lime Kiln closure would affect the ABCL accounts just as this document told you it would affect the ABL accounts? A. I believe so." 47 After Mr Nolan was shown the letter of 15 March 1999, his cross-examination continued as follows: "Q. This document here at 844 to 845 made no reference to costs of the Swan lime kiln closure, did it? A. That's correct. Q. And so you still regarded it as an outstanding candidate for inclusion in a completion adjustment amount, didn't you? A. I would have read this at the time in the context that it was no longer a candidate because it wasn't specifically referred to here. It says there are two large items which may lead to substantial charges and they were closures of Geelong, provision for redundancies and other costs associated with BIP. Q. Are you seriously saying you thought this letter covered all possible candidates for negotiation over a completion adjustment amount? A. With the possible exception only of the maintenance provision issue which was really left to one side but, yes. Q. So you did not regard it as dealing with all the possible candidates for a completion adjustment amount, correct? A. As I said, without the maintenance provision argument but, yes. Q. Because the maintenance provision argument alone meant it was not a complete statement of possible candidates for a completion adjustment amount, correct? A. That's what I said. Q. And you also knew that ABL was going to incur costs of closing the Swan lime kiln as at 30 June 99, correct? A. Yes. Q. And you had no basis for thinking that ABCL, once it was a wholly owned subsidiary of ABL, would do anything different, did you? A. We did. This letter actually led us to believe it was going to be treated differently. Q. Do you honestly say you regarded this letter as telling you apart from maintenance provisions what all the possible candidates were for negotiating over the completion adjustment amount? A. Yes I do. Q. Even though you knew of an outstanding debate over the maintenance provision and even though you knew that at least ABL in its accounts at 30 June 99 would have very substantial abnormal costs associated with the Swan lime kiln closure? A. Yes, that's correct." 48 Much later in the cross-examination, the following exchange occurred: "Q. And if Mr Moody had told you on about 15 March that the only abnormal costs for ABCL at 30 June, which would yield future benefits, were Geelong and the business improvement plan, then you would have thought he was either adopting a negotiating position or he had forgotten about some of the other issues such as maintenance and Swan? A. Yes, or that he was going to treat them differently." 49 It is clear from Mr Nolan's evidence that three matters were firmly in his mind as relevant to the treatment ACH was to receive by way of special provision based on the ABCL financial statements, whether as dividend or price adjustment. The first was the long standing item involving maintenance provision. The second was the BIP initiatives, particularly staff retrenchments. The third was Geelong the closure of which was entrenched in his consciousness as being a significant consequence of the impending transaction. Beyond that, however, he did not associate the rationalisation initiatives foreshadowed in the draft explanatory statements, the KPMG documents and the draft ACCC submission with balance sheet impact at the ABCL level. There were, I think, two reasons for this. First, Mr Nolan did not see those other initiatives as having the same degree of concrete reality, in a cause and effect sense, as Geelong. They were, as he put it, "post merger issues", although he did concede in cross-examination that he was aware that a write-off for Swan would occur in the ABL accounts for the year to 30 June 1999. This leads to the second point. He regarded the Swan closure and other "post merger issues" as an ABL matter, rather than an ABCL matter - even to the extent of thinking that ABL would take the resultant charges and provisions into its accounts without any negative impact in the accounts of ABCL, the company owning the relevant assets. Mr Nolan was cross-examined closely on whether he really thought the charge could be taken by the parent alone. While not professing any accounting expertise, he was firm in adhering to that understanding. 50 Mr Nolan's appreciation of matters was confirmed in his mind by what was said at the meeting on 10 March 1999 and by ABL's letter of 15 March 1999. Because the letter referred only to provisions for the Geelong closure and for BIP costs and did so by reference to protecting ACH from charges expected to produce profits in future periods, Mr Nolan thought that those items were the only ones relevant to that general issue. This apparent appreciation on Mr Nolan's part continued at all material times after the receipt of the letter. 51 I have concentrated on Mr Nolan's evidence under this heading because he was the main actor within ACH. Mr Brennan and Mr Blackford also gave evidence of many of the same events. Mr Brennan's involvement was more remote. After the January 1999 meeting in which he and Mr Hammond participated and which prompted Mr Hammond's letter of 22 January 1999, Mr Brennan did not have any significant interaction with ABL personnel until the latter part of March. Mr Blackford only had sporadic contact with ABL. His main role was to support Mr Nolan, principally by reviewing draft documents and providing inputs for Mr Nolan to use in his discussions with the other side. The evidence of both Mr Brennan and Mr Blackford was consistent with that of Mr Nolan, even to the extent of the assumption that items such as any Swan lime kiln write-down might be recognised in the 30 June 1999 accounts of ABL without being similarly treated in the accounts of ABCL. I should record here that Mr Blackford, although ACH's chief financial officer, was an economist by training. Like Mr Nolan, he had no accounting qualification; nor did Mr Brennan.

The Exmouth write-down 52 Little has been said to this point about a provision for reduction in the carrying value of ABCL's 51% shareholding in Exmouth Limestone Pty Limited. As has been noted already, ABCL obtained limestone from Exmouth for its Swan operations. Closure of the Swan lime kiln would reduce the demand for limestone from that source and it would follow that the assured market for its product enjoyed by Exmouth would decline. 53 A write-down of ABCL's investment in Exmouth would therefore be a natural by-product of any decision to close the Swan lime kiln. References to a provision for closure of the lime kiln should therefore be regarded as including a reference to a resultant write-down of the Exmouth investment in the accounts of ABCL.

The conduct alleged to be misleading and deceptive 54 The first step in assessing ACH's s.52 claim is to identify the conduct said to be caught by the section. As I understand the submissions made by Mr Meagher for ACH, the conduct is the making of express and positive statements in the ABL letter of 15 March 1999 which were incomplete but nevertheless allowed to stand in the guise of a complete and accurate representation of the matters with which that letter dealt. The incomplete statements, it was said, conveyed to relevant ACH personnel the message that the Geelong closure and the BIP initiatives were the only large items of which ABL was aware which would lead to substantial charges in ABCL's accounts for the year to 30 June 1999 - or, at least, the only such items of a kind relevant to the principle that ACH should not be required to bear the burden of charges likely to be productive of profits in future periods when ABL would enjoy 100% ownership of ABCL. The main vehicle by which this message was conveyed was ABL's 15 March 1999 letter. Further, Mr Meagher submitted, Mr Hammond and Mr Moody were aware during the whole of March 1999 of additional items of that description, specifically, a provision for the closure of the Swan lime kiln and a provision for write-down of the investment in Exmouth Limestone. Because of that knowledge on the part of Mr Hammond and Mr Moody, Mr Meagher said, the representation that there were only two relevant items (Geelong and BIP) was incorrect when made and remained incorrect at the time the agreement of 30 March 1999 was concluded. 55 Mr Jackman, counsel for ABL, emphasised that the quality of representations must be judged in the light of all the circumstances. Particularly relevant, in his submission, is the acknowledged appreciation of ACH personnel (particularly Mr Nolan) that there was a high likelihood of substantial abnormal losses being accounted for at 30 June 1999 in respect of the Swan lime kiln closure. I have no hesitation in accepting that submission. But it leaves the point that each of the three ACH officers who gave evidence on the matter stated a belief (albeit one uninformed by accounting expertise or advice) that such losses could and would be taken at the ABL parent company level without impacting the ABCL stand-alone position. 56 Mr Jackman described this as "an unexpressed idiosyncratic view" held by the three ACH witnesses. It was "unexpressed" because it was apparently not stated to anyone at the time and did not appear in any affidavit, emerging, in each case, only in cross-examination. And it was "idiosyncratic" because, on the expert evidence given by Mr Anderson regarding accounting standards and accounting principles (which I accept), it was quite at odds with accounting orthodoxy. It is doubtful that any of the three had come to a considered view on this, as distinct from jumping to a conclusion, perhaps after the event and as a matter of convenience. Nevertheless, all three professed the understanding to which I have referred. 57 I have concluded that, in the week or so before 30 March 1999, ACH knew, through its relevant officers, that there was, in an abstract sense, a likelihood of substantial abnormal losses beyond those for Geelong and BIP being booked in the 30 June 1999 accounts of ABL and that, while ACH had the abstract means to appreciate that those losses would be recorded not only at the ABL consolidated level but also at the ABCL stand-alone level, its officers had failed to make that connection in their minds. 58 But the whole of the context must be examined. After mid-1998, ACH consented to taking a passive role in the affairs of ABCL. It was in the process of relinquishing its position so that its erstwhile joint venture partner would acquire 100% ownership. From that point, in my view, ACH tended to regard ABCL as an ABL responsibility. The Cockburn possibility emerged after this stand-off position had become a reality. ACH played no part in the negotiations with Cockburn or in the planning of the integration of the Cockburn operations with those of ABL and ABCL in Western Australia. That was entirely the business of ABL and was viewed by ACH accordingly. ACH did, however, take an interest in the east coast integration and rationalisation plans as they were relevant to its own future operations, particularly in view of its emerging position as a major customer of ABCL under the supply contracts which were to form part of the separation package. Geelong was therefore more firmly in the consciousness of ACH officers than was Swan. 59 ACH had developed some mistrust of ABL in relation to accounting matters within ABCL, particularly after the separation plans had begun to take shape. It was suspicious that the provision for maintenance had been inflated by ABL so that ABCL, while still a joint venture company, would, to the immediate detriment of both its shareholders, absorb an unnecessarily high charge against current profits in order to obtain future advantages for the one shareholder who would remain in the future. This suspicion caused ACH to pursue with ABL the question of a general principle for the negotiations which would see ACH appropriately compensated, in the eventual transaction, for any such charges against current profits. ABL, for its part, accepted the general principle which, after all, represented no more or less than common commercial decency, particularly in the context of a joint venture. That point was reached in the correspondence of early 1999 and the principle was confirmed at the meeting of 10 March 1999. 60 Then came the ABL letter of 5 March 1999. Its crucial passages are: "There are however two large items which may lead to substantial charges to the profit and discount [scil. loss] for the period, the effect of which is likely to result in a loss for the period." "We accept that those charges substantially relate to projects expected to be generated in future financial periods and as such you should not be penalised for them." 61 Mr Jackman emphasised that the letter said, "There are however two large items", not, "There are however only two large items". It did not, in explicit terms, represent that the two mentioned were the only two. But it is perfectly clear to me that that is the message it conveyed. The letter was meant by its author to cover the relevant field and to be understood by its recipient accordingly. It was not, to my mind, a negotiating ploy, with the author saying to himself as he sent it, "I shall try this incomplete version and wait to see if they will realise I have not mentioned all the items and then come back with an attempt to have more included". Mr Moody's evidence was clear. He had himself overlooked the other large abnormal items which would adversely affect profit. As he said in cross-examination, "they didn't occur to me at the time of writing the letter". He also said in cross-examination that he had known from some time in February 1999, as a result of a calculation done for him by Mr Oakes, that there would be a write-off of some $20 million in relation to the Swan lime kiln, also that that matter had come up in discussions with Grant Samuel about the developing explanatory statement. The omission of reference to this write-off from the 15 March 1999 letter, oversight though it may have been, is surprising enough. More surprising is the fact that Mr Moody never took steps to identify the oversight to anyone at ACH and to correct it. Most surprising of all is his explanation: "Q. You didn't consider, at the time, that Mr Nolan or Mr Blackford were entitled to have an expectation that if the letter of 15 March was materially incorrect, you would point it out if you were aware of it? A. Well, I believed we did point it out by giving them copies of the draft explanatory memorandum." 62 The accounting records of ABCL were, at the relevant time, under the control of ABL personnel, the ACH appointees to the BCL board having stepped back in the way already described. Decisions about future integration and rationalisation involving ABCL were solely ABL decisions. ACH was reliant on ABL for information on those matters and on their financial impact at the ABCL level. Mr Moody was, at all material times, the chief financial officer of ABL. In the context of what I have called the present burden/future benefit consensus (that is, the understanding reached between ACH and ABL as to neutralisation, for ACH, of present charges against ABCL profit productive of future benefits for ABL alone), Mr Moody, in his capacity as ABL's chief financial officer, wrote a letter to ACH for the express purpose of giving it information on how that understanding would be carried into effect. By oversight, he omitted from the letter a very important element in such a way that the recipient could fairly assume that that element did not exist. His response to the question why he did not take steps to volunteer the missing and important item after realising his oversight was that he did - by continuing, after 15 March 1999, with a process which had begun in February and under which ABL supplied to ACH drafts of a document of some 80 closely printed pages covering a multitude of matters concerning the overall restructure and containing, in various places, a few references from which relevant information could be gleaned. 63 It seems that Mr Moody seriously intended to suggest that the omission from the 15 March 1999 letter was somehow remedied by his continuing to place before ACH haystacks in which the relevant needle was buried. He never said, "Everything in my 15 March 1999 letter is subject to anything and everything to the contrary you may happen to glean from a close reading of every word on every page of the explanatory statement drafts we shall continue to send you". He simply let the 15 March 1999 letter stand as the last word from ABL in the specific dialogue of several months duration on the question of insulation of ACH from the effects of current year charges productive of future year benefits. 64 I have already mentioned the focus of the ACH officers as they read drafts of the ABL explanatory statement and the draft ACCC submission. Neither of these was in any sense an ACH document or a document to which ACH was expected to contribute content. By the first, ABL would communicate with its own shareholders. By the second, ABL would put its case to the regulatory authority. ACH was therefore very much a by-stander which, as its officers saw it, was being given, as a matter of courtesy, an opportunity to review drafts in which ACH and its role were discussed. The mindset of the ACH officers was conditioned accordingly as they read the drafts. It was never put to them that the drafts should be regarded as a vehicle by which ABL intended to communicate qualifications to the direct communication in its 15 March 1999 letter. 65 But even if ACH had been cautioned that it should read the 15 March 1999 letter subject to anything and everything it might glean from the explanatory statement drafts, it would still have been left in the position of not realising that the upwards price adjustment it expected would not be forthcoming. And this would have been so even though the drafts drew attention to matters such as the expected closure of the Swan lime kiln. The final version of the short passage describing the price adjustment applicable to the acquisition of ACH's shares in ABCL was the version which first appeared in Draft 10. This referred to a fixed sum cash consideration and then said that this figure "will be increased" by an adjustment reflecting ACH's share of "the normal operating profits of ABCL" for the relevant period. (Draft 9 had also referred to "normal operating profits"; furthermore, the section of relevant drafts referring to "Merged Company Assumptions" in the context of earnings forecasts said that no adjustment had been made for "ACH's entitlement to ABCL's normal operating profits up to completion"). The italicised words are, of course, not emphasised in the original but they need to be emphasised here. When Mr Nolan or Mr Blackford or Mr Brennan read the words "normal operating profits" in the drafts, he would have arrived at the quite understandable conclusion that there would be an increase over the stated fixed sum cash consideration if there was a "normal operating profit" and that this would be so regardless of the magnitude of that "normal operating profit". And the reference to a profit which was both "normal" and "operating" would have provided, to experienced businessmen such as them, reassurance that items not referable to the ordinary run of business - such as one-off items accommodating restructuring - would neither reduce nor increase the profit with which the adjustment was concerned. On that footing, such information as could be gleaned from the explanatory statement drafts as to intentions to record one-off restructuring losses in respect of particular facilities involved in the discussion of "overlap" would have been seen by such a reader as irrelevant to the price adjustment. 66 Mr Moody was asked in cross examination what he understood by "normal operating profit". His replies were what I can only describe as evasive obfuscation. He confirmed that he had an accounting qualification. The cross examination then continued: "Q. The expression 'normal operating profit' is an expression with which you are familiar? A. Yes. Q. Sorry, I didn't hear? A. Yes. Q. That is an expression which refers to the operating profit or loss of the entity before taking into account abnormal items? A. There is no technical definition of normal operating profit. It could be interpreted a number of different ways. I am not trying to be cute, but that is correct. Q. If one uses the expression 'normal operating profit' as distinct from 'operating profit', what is one seeking to denote by the word 'normal', in your understanding? A. If we were looking for - there are a number of different items extraordinary items, abnormal items. There are items that relate to future events, past event. Depends. You could interpret it to mean ongoing maintainable earnings. That would be one definition. Q. Normal operating profits means operating profits not taking into account abnormal or extraordinary items, doesn't it? A. I don't necessarily agree. I think abnormal items, not necessarily - an abnormal item is abnormal by virtue of its nature or size. In effect they have removed all requirements. The definition no longer applies. I have taken it out because it was prone to misunderstanding."

67 After Mr Moody said he had "taken it out because it was prone to misunderstanding", it was pointed out to him that the expression "normal operating profit" did indeed appear in the explanatory statement drafts. Following some questioning as to how those words came to be included and who had composed them, the following cross examination occurred: "Q. When you got draft 10, did you address the question, what was meant by normal operating profits? A. I don't recall. I don't recall that clause at all. Q. I suggest to you that the clause was put in there to reflect what might be described as a commercial consensus between ABL and ACH that the completion adjustment would be done on the basis of normal operating profits as distinct from operating profits which included abnormal items. Do you agree? A. Probably, yes." 68 Mr Moody allowed the unaltered and unqualified letter of 15 March 1999 to go forward to ABL's solicitors as the template for the drafting of what became clause 3.5 and schedule 3. More will be said about that later.

Conclusion on ABL's conduct 69 Relevant materials furnished by ABL to ACH in the period leading up to 30 March 1999 may be regarded as falling into two classes. The first class is material directly referable to and expressly prepared in relation to what I have called the present burden/future benefit consensus. The second class is material produced for some other purpose but containing information relevant to the present burden/future benefit consensus. 70 The first class contained two items, namely, ABL's 15 March 1999 letter and the draft of clause 3.5 and schedule 3 based closely on that letter. The letter contained express representations which, viewed in isolation, were both misleading and deceptive in the sense that they did not convey a full and frank message and were therefore likely to lead the recipient into an erroneous understanding of the matters with which the letter dealt. The second class, being the drafts of the explanatory statement, the KPMG drafts and signed reports and the ACCC drafts, contained information which should, at the least, have generated suspicion as to the completeness and accuracy of the content of the first class. 71 ACH chose to place particular reliance on the materials in the first class. Those in the second class entered the consciousness of the ACH officers but, it seems, failed to arouse the suspicion to which I have referred. They knew of the likelihood that the Swan lime kiln would be closed as a result of the transaction. They did not, they said, connect this with the likely content of the ABCL accounts for the year to 30 June 1999, even though impact at that level was clearly to be inferred from the approach taken by KPMG in injecting the effects of the forthcoming transactions into the stand-alone balance sheet of ABCL as at 31 December 1998. Their belief or assumption that, whereas the Geelong closure provision would be taken at the ABCL level (and then reflected in the ABL consolidated position), any Swan closure provision would be taken at the ABL level only was both illogical and objectively unwarranted. 72 The fact that ACH should have become suspicious upon receiving and considering the material in the second class is not, however, sufficient to deprive the material in the first class of its misleading and deceptive character. A plaintiff is not denied the appropriate remedy for misleading and deceptive conduct because of a failure on behalf of the plaintiff to check the accuracy of the relevant representation: Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302; Sutton v A J Thompson Pty Ltd (in liq) (1987) 73 ALR 233; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546. This is the case where a solicitor has been instructed to make all relevant inquiries (Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd) and where the relevant books and records which would indicate the falsity of a representation are available for inspection but are not inspected (Neilson v Hempston Holdings Pty Ltd). Here ACH, through Mr Brennan, Mr Nolan and Mr Blackford, failed to connect the second class of material with ABL's letter of 15 March 1999. ACH's failure to question the representations in ABL's 15 March 1999 letter by reference to the second class of materials provided to ACH by ABL does not absolve ABL of liability under s.52. 73 I conclude, therefore, that ABL engaged in conduct proscribed by s.52 by delivering to ACH the 15 March 1999 letter and allowing that letter to stand without subsequent steps by ABL to notify ACH, by reference to the letter, (a) that provisions for the closure of the Swan lime kiln and for write-down of the value of the investment in Exmouth Limestone were additional large items of the same nature and quality, for the purposes of the letter, as the provision for the closure of the Geelong works; and (b) of the expected magnitude of those additional large items.

The history of clause 3.5 and schedule 3 74 Clause 3.5 of and schedule 3 to the agreement of 30 March 1999 were drafted by Minter Ellison, the solicitors for ABL. In their letter of 28 March 1999 to Gilbert & Tobin, ACH's solicitors, Minter Ellison said: "We attach the adjustment schedule (Schedule 3) dealing with the Capital Return Amount for inclusion in the Acquisition Agreement. It is in fairly general terms, along the lines of Rick Moody's letter of 15 March 1999 to Norm Nolan." 75 The draft prepared by Minter Ellison was thus based closely on ABL's 15 March 1999 letter. The draft was reviewed by Mr Nolan and Mr Blackford who, through Gilbert & Tobin, passed back comments. There is in evidence a copy of the draft schedule 3 prepared by Minter Ellison which carries handwritten notes made by Mr Blackford. Against the part which, in a slightly modified form, became paragraph 3 (quoted earlier in these reasons) defining the "BIP Amount", Mr Blackford wrote "Any more likely?" 76 This, to my mind, shows that ACH was alive to the possibility that schedule 3 might need adjustments to reflect the position it expected to achieve, consistently with the representations made to it by ABL. Those representations were based on a concept of "normal operating profit". Those were the words used to describe the basis of adjustment in the draft explanatory statement. And "normal operating profit" was, I suggest, what ACH expected to be the basis of the price adjustment as eventually provided for in the contract. 77 But Schedule 3 never incorporated any concept of "normal operating profit". In paragraph 2, it took as its starting point "the profit after tax for the Company for the Financial Year determined in accordance with the Profit and Loss Statement of the Company for the Financial Year". This is what might be termed an after tax bottom line figure calculated after all items of revenue and expense have been taken into account, whether operating items, abnormal items or extraordinary items. For "normal operating profit" to be derived from that starting point, some adjusting mechanism was obviously required. 78 The adjusting mechanism provided for in schedule 3 eschewed generalities. It was very specific. Having defined the starting point just mentioned, paragraph 2 of schedule 3 provided for only one adjustment, namely "backing out" of "provisions for the closure of the Geelong works, net of income tax provided for in the account". ACH's entitlement was then stated to be 49% of the bottom line figure after that single adjustment - plus, of course, the separate "BIP Amount". 79 ACH should have realised that this did not lead to any generally defined "normal operating profit". There might have been other items, whether revenue or expense, outside the "normal operating" specification. ACH took no steps to guard against that possibility by insisting upon some general exclusion of abnormal and extraordinary items. It was content to agree to a provision which dealt specifically with two items only, being provisions for closure of Geelong and provisions in respect of the BIP. 80 It is clear to me that ACH took this attitude because of what it had been told in ABL's letter of 15 March 1999. Indeed, Mr Blackford gave evidence to that effect: "Q. You could have raised with ABL and ABCL a different approach to paragraph 2 which might have referred to the profit after tax, but before abnormals for ABCL, couldn't you? A. Yes, we could have. Q. You didn't take that course, did you? A. No, we didn't. Q. You took the risk that the closure of the Geelong works were the only provisions which were going to be backed out of the after tax profits of ABCL for paragraph 2? A. Yes, we took that risk, now that it is seen to be a risk. At the time it did not appear to be a risk, because it was the only one that we were aware of and were led to believe would happen. Q. You knew of the possibility, at the very least, that ABCL would account for the Swan closure costs of 30 June 1999? A. By the way this was put to us I did not recognise that as a possibility. Q. You did recognise that as a possibility though, didn't you, by 30 March 1999? A. I recognised it as a possibility, but took assurances from the way this was presented to us that it would not happen. Q. Recognising it as a possibility, this draft of schedule 3 left you exposed to the risk that that possibility would eventuate, isn't that right? A. It did leave us exposed to it. Q. You knew that at the time? A. No, I didn't know that at the time. I didn't recognise that at the time. Q. I suggest to you if you didn't recognise it at the time, that is only because of your failure to appreciate the obvious at the time, do you agree with that? A. No, I don't agree with that."

81 In terms of specific information actively drawn to its attention by ABL, ACH was aware of the provisions for Geelong and BIP as relevant to the price adjustment. Furthermore, ABL's letter of 15 March 1999 had effectively represented that they would be the only items. But it must also be accepted that ACH was actually aware of other distinct possibilities (even probabilities) which it should have realised could impact the profit. I refer in particular to the Swan lime kiln closure possibility of which its officers had become aware through the explanatory statement drafts, the KPMG report and the draft ACCC submission. 82 There is another point as well. Clause 3.5 and schedule 3 were prepared in March. They dealt with profits of a period which, at that point, still had more than three months to run. Management of ABCL had been, for some nine months, in the hands of ABL alone and that position would continue for the rest of the financial year. A party in ACH's position should have addressed the possibility that things might change in the following three months - that, for example, ABL would develop new or more refined or more concrete rationalisation plans and that the identified Geelong and BIP aspects might be joined by others as sources of charges or provisions affecting current year profits and producing future year benefits for ABL alone. Indeed, Mr Blackford was probably alive to this kind of possibility when he wrote "Any more likely?" on the draft of what became paragraph 3 of schedule 3. He gave evidence about having written "Any more likely?": Q. In the left hand margin do you see that you have written, 'Any more likely'? A. Yes. Q. That refers to all of the BIP amount figures on that page? A. Yes. Q. Is that a question you directed to anybody from Adelaide Brighton? A. I don't believe so, but I'm not absolutely certain. Q. It was a significant matter to you, was it not, to try to work out if any more BIP expenses or savings were likely, is that right? A. Well this was a forecast, and it was of significance to me as to whether the forecast would change." 83 A particularly compelling point about clause 5.3 and schedule 3 should now be mentioned. If a Swan lime kiln closure provision of the order of $20 million had been in contemplation as a deduction from profits for the year to 30 June 1999, the adjustment mechanisms in those parts of the agreement would have been so much useless verbiage, since a substantial loss would have been inevitable. It is not conceivable that ACH would have agreed to clause 3.5 and schedule 3 in those circumstances.

Reliance and causation 84 It is against this background concerning the genesis of clause 3.5 and schedule 3 that I must address the question posed by s.82 of the Trade Practices Act, namely, whether ACH suffered loss or damage "by" the contravening conduct of ABL. 85 There can be no doubt that ACH could have taken steps in relation to the draft clause 3.5 and schedule 5 to protect itself more effectively against the eventualities which saw those provisions, as incorporated into the agreement, produce for it no positive price adjustment at all. That, however, is beside the point in a case such as this. I should, in that connection, quote the following passage from the judgment of Hill J in Argy v Blunts and Lane Cove Real Estate Agency Pty Ltd (1990) 26 FCR 112: "For the respondents, however, it was argued that the necessary causal connection required was not present where as in the present case the applicants had acted unreasonably. The argument was put in a variety of ways. For example, it was said that s.52 or s.82 was not designed to assist those who failed to take reasonable care of their interests; that the class of persons protected by the sections excluded those who were extraordinarily stupid or foolish, the implication being that Mr Argy, by failing to notice the incomplete nature of the certificate or failing (not being a conveyancer) when making a financial investment of the magnitude involved to instruct a solicitor competent in conveyancing, was extraordinarily stupid or foolish. This itself was said to negate entirely any misleading conduct on the part of the respondents." 86 The arguments thus outlined by Hill J were advanced by reference to statements by Gibbs CJ and Gummow J in, respectively, Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 and Elders Trustee & Executor Co Ltd v E.G. Reeves Pty Ltd (1987) 78 ALR 193 that s.52 is not designed for the benefit of persons who fail to take reasonable care of their own interests. The answer to that was provided by Hill J in the following terms: "The Full Court of this court in Sutton v AJ Thompson Pty Ltd (1987) 73 ALR 233 in response to a submission that the applicants in that case had failed to take reasonable care in their own interests by not investigating more closely the affairs of the business which they had purchased described as a 'bold submission' the proposition, 'You should not have believed me when I misled you' and, after referring to the four propositions enunciated by Wilson J in Gould v Vaggelas set out earlier, continued at 240: '… the possibility that a foolish person might be misled by some misrepresentation which no normal person would take seriously, is covered by the exclusion of representations which are no "calculated to induce" entry into the contract - the test is objective, but must take into account the respective positions of the parties including such matters as their knowledge of each other through previous dealings and their respective familiarity with the subject matter of the contract. Similarly, if a person is so determined to enter into a contract that he is not in truth influenced by some false representation made to him, he clearly has no case. But there is nothing in the principles cited, or in any other authority which has been brought to our attention, to suggest that a person who has been misled into entering a contract, by false representations of a type which were likely to produce that result, and in fact did so, can be deprived of his remedy because of his failure to check the accuracy of those representations: see, to the contrary, Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 at 309; and Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601.' " 87 His Honour also referred to a statement by Lockhart J in Henjo on appeal (1988) 79 ALR 83, referring to Gould and Neilsen: "These decisions support the view that recovery under s.52 is founded by the applicant's actual reliance upon the misleading or deceptive conduct of the respondent, although that conduct was not the only factor in the applicant's decision to enter a particular agreement, and although the applicant did not seek to verify the representations or did so inadequately and so failed to discover their falsity." 88 Turning then to the matter before him, Hill J said: "It is true that, with the benefit of hindsight, a close perusal by Mr Argy of the contract would have been at the very least prudent. Given his lack of familiarity with conveyancing the amount of the purchase price to which he and his wife were to be committed, he would have been wise to employ one of his partners to act for him. That old adage that a solicitor who acts for himself has a fool for a client is not inappropriate. But Mr Argy had been led to believe that the property was zoned in such a way that unlimited development of it, consistent with its residential zoning, was possible, including development of the waterfront land. The mere fact that there was a part of the property zoned reservation 9(c), inadequately described because of the missing page in the s.149 certificate, did not, as I find, disabuse him of this. Accordingly I find that the applicants were induced by the misrepresentations of Blunts to enter the contract and that the effect of these misrepresentations was not lost by Mr Argy's cursory perusal of the contract. The misrepresentations of Blunts were a, albeit not the sole, cause of the damage he suffered. Some part of the cause undoubtedly lay in Mr Argy's own failure to consider carefully the terms of the s.149 certificate. But, as the cases indicate, it is sufficient for the purposes of s.82(1) if the representation is but a cause of the loss." 89 In the present case, ACH was induced by ABL's letter of 15 March 1999 to think that the Geelong closure and the BIP were the only likely sources of large charges and provisions relevant to the calculation of normal operating profit in accordance with the present burden/future benefit consensus. The fact that there were contrary indications in the drafts of the explanatory statement, the KPMG reports and drafts and the ACCC drafts did not disabuse ACH of this. It is therefore open to me to find, and I do find, that ACH was induced by the representations in ABL's 15 March 1999 letter (upon which it relied) to enter into the agreement of 30 March 1999 in the form in which it was executed - specifically, with clause 3.5 and schedule 3 included in the form in which they eventually appeared. 90 The appropriateness of such a finding of inducement and reliance in this case is, I think, borne out by what was said by the Full Federal Court in Como Investments Pty Ltd v Yenald Nominees Pty Ltd (1997) 19 ATPR 41-550: "The law does not consider cause and effect in mathematical or in philosophical terms. The law looks at what influences the actions of the parties. Acknowledging that people are often swayed by several considerations, influencing them to varying extents, the law attributes causality to a single one of those considerations, provided it had some substantial rather than negligible effect. As Brennan J said in San Sebastian Proprietary Limited v the Minister administering the Environmental Planning and Assessment Act 1979 (1986) 162 CLR 340 at 366: 'The representations must be a real inducement or one of the real inducements to engage in the conduct which occasions the loss.' " 91 The content of ABL's letter of 15 March 1999 was certainly a substantial consideration, or a real inducement, influencing ACH to accept a form of clause 3.5 and schedule 3 which made no reference to charges and provisions other than those for the Geelong closure and BIP.

ACH's loss 92 Once the point is reached where representations within s.52 are found to have been the cause of a particular act or course of action by the party to whom the representations were made and who has relied on them, it becomes necessary to consider whether and, if so, how the party misled has been left worse off than it was before the contravention occurred. This is the inquiry dictated by the joint judgment of McHugh, Hayne and Callinan JJ Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494. As their Honours also observed, this requires a comparison between the position in fact of the party which alleges loss and the position which would have obtained had there been no contravention. The relevant concept of prejudice or disadvantage was explained thus: "A party that is misled suffers no prejudice or disadvantage unless it is shown that that party could have acted in some other way (or refrained from acting in some way) which would have been of greater benefit or less detriment to it than the course in fact adopted." 93 What position would ACH have come to occupy if ABL's letter of 15 March 1999 had contained a full and frank account by reference to the additional material matters known to ABL as likely to have a bearing in computation of the normal operating profits of ABCL for the year? I refer, here, of course, to the provision for the closure of the Swan lime kiln and the Exmouth write-down, these being material items of which both Mr Hammond and Mr Moody were, on the evidence, aware when ABL's 15 March 1999 letter was written. It is, to my mind, clear that, in that event, ACH would have asked that those additional items be neutralised through clause 3.5 and schedule 3 in the same way as the Geelong closure provisions was neutralised. Furthermore, I am satisfied that, if ACH had made such a request, ABL would have acceded to it. This is because of my finding that the present burden/future benefit consensus existed between the parties. Items conceptually indistinguishable from the Geelong closure provision actually dealt with by clause 3.5 and schedule 3 would, in accordance with that consensus, have been subjected to the same treatment. The present burden/future benefit consensus was a fair and reasonable commercial compact between two companies (or three companies, if ACH is seen as no more than an embodiment of CSR and Pioneer) which one might expect were accustomed, as joint venture partners, to dealing with one another in an honourable way. There is no rational basis on which ABL could have seen only some of the items with which the present burden/future benefit consensus was concerned as actually covered by it. 94 The appropriate measure of ACH's loss is therefore the amount, if any, by which the sum in fact calculated under clause 3.5 and schedule 3 was less than the sum which would have been calculated under those parts of the agreement had they dealt with charges and provisions for the Swan lime kiln closure and the Exmouth write-down in the same way as they dealt with provisions for the closure of Geelong.

The "entire agreement" clause 95 I have not so far mentioned that the agreement of 30 March 1999 contained, as clause 20, the following: "This agreement (a) constitutes the entire agreement between the parties as to its subject matter; and (b) in relation to that subject matter, supersedes any prior understanding or agreement between the parties and any prior condition, warranty, indemnity or representation imposed, given or made by a party." 96 Any suggestion that this clause operates to counteract or neutralise the pre-contractual conduct caught by s.52 may be dealt with shortly. In Petera Pty Ltd v EAJ Pty Ltd (1985) 7 FCR 375, Wilcox J considered the effect, in the context of such pre-contractual conduct, of a provision by which the affected purchasers acknowledged in the purchase contract that, in entering into that contract, they had not relied on any representation or warranty not contained therein. His Honour held that, whatever might be the effect of such a provision in relation to an action brought in contract, it could not defeat a claim based on s.52. The rationale is, of course, that the statutory proscription and the statutory right arise independently of contract and are created in a way which allows no scope for contractual modification. Once reliance upon a misleading or deceptive pre-contractual representation is shown, the statutory right accrues regardless of the content of the contract (see also Oraka Pty Ltd v Leda Holdings Pty Ltd (1997) ATPR 41-558; Tantipech v IOOF Australia Trustees (NSW) Ltd (1998) ATPR 41-614). The existence of clause 20 of the agreement of 30 March is therefore irrelevant in the present context.

Conclusion 97 ACH is entitled to damages against ABL under s.82 of the Trade Practices Act in the amount I have already outlined, that is, the amount by which the sum in fact calculated under clause 3.5 of and schedule 3 to the agreement of 30 March 1999 and paid to ACH by ABCL was less than the sum which would have been calculated and paid pursuant to clause 3.5 and schedule 3 had the provisions and write-down reflected in the profit and loss account of ABCL for the financial year to 30 June 1999 for anticipated expenses and losses in respect of closure of ABCL's Swan lime kiln and diminution of ABCL's investment in Exmouth Limestone Pty Limited been dealt with in and pursuant to clause 3.5 and schedule 3 in the same way as provisions for the closure of the Geelong works were dealt with therein and pursuant thereto. ACH is also entitled to interest on that amount at the rate prescribed by Schedule J to the Supreme Court Rules from the date of payment under the agreement of 30 March 1999 to the date of judgment. The defendants must pay the plaintiff's costs. 98 I direct that the parties file, by delivery to my Associate within 21 days from today, short minutes of orders giving effect to this decision. I shall then arrange for the proceedings to be listed again for such further argument as may be necessary. 99 The findings and decision in relation to the s.52 claim make it unnecessary to consider further ACH's alternative claim in contract.

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