Contracts - General Contractual Principles - Construction and Interpretation of Contracts - Contractual terms - Conditions and warranties - Intermediate terms serious breach of which entitles party to terminate - Whether Australian law recognises class of intermediate terms.

Contracts - General Contractual Principles - Discharge, Breach and Defences to Action for Breach - Agreement to operate Casino and Hotel - Owner alleging multitudinous breaches of contract - Some breaches established, most not - Whether breaches amount to repudiation of the contract by the operator - Turns on own facts.

Trace Practices - Interpretation - Agreement to operate Casino and Hotel - Pre-contractual negotiations and covenants in agreement - Whether false representations of existing fact - Whether representations of future matters made on reasonable grounds - Turns on own facts.

Plaintiff : Mr W S Martin QC, Ms C J McLure QC & Mr S M Davies

Defendant : Mr R H B Pringle QC & Mr A S Stavrianou

Defendant : Huston Partners (until 31 January 1996)

Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470

Akron Securities Ltd v Iliffe (1997) 143 ALR 457

Allen v Tobias [1958] HCA 13; (1958) 98 CLR 367

Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1

Anderson v Morris Wools [1965] Qd R 65

Apollo Shower Screens Pty Ltd v Building & Construction Industry Long Service Leave Payments Corporation (1985) 1 NSWLR 561

Associated Dominion Assurance Society Ltd v Andrew (1949) 49 SR (NSW) 351

Caledonian Colleries Ltd v Speirs [1957] HCA 14; (1957) 97 CLR 202

Coldman v Hill [1919] 1 KB 443

Cummings v Lewis (1993) 113 ALR 285

El Ajou v Dollar Holdings plc [1993] EWCA Civ 4; [1994] 2 All ER 685

Federal Commerce & Navigation Co Ltd v Molena Alpha Incorporated (1979) AC 757

Finance & Guarantee Co v Commissioner of Taxation (1970) 44 ALJR 368

Fraser Heinleins v Cody [1945] HCA 49; (1945) 70 CLR 100

Hampton Court Ltd v Crooks [1957] HCA 28; (1957) 97 CLR 367

Hillas & Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] All ER Rep 494

Jones v Dunkel [1959] HCA 8; (1958-59) 101 CLR 298

Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286

Maddox v Storer [1963] 1 QB 451

Mummery v Irvings Pty Ltd [1956] HCA 45; (1956) 96 CLR 99

RW Miller & Co v Krupp (Australia) (1993) 32 NSWLR 152

Ryan v Etsa (No 1) (1987) 47 SASR 220

Shepherd v Felt & Textiles of Australia Ltd [1931] HCA 21; (1931) 45 CLR 359

Suisse Atlantique Societe O'Armement Maritime SA v NV Rotterdamsche Kolen Central [1967] 1 AC 361

Sybron Corporations v Rochem Ltd [1984] Ch 112

The "Ophelia" [1916] 2 AC 206

Theilmann v The Commonwealth [1982] VicRp 71; [1982] VR 713

TPC v Allied Mills Industries [1981] FCA 103; (1981) 55 FLR 174

TPC v Collings Construction Co Pty Ltd (1997) 142 ALR 43

TPC v TNT Management (1985) 6 FCR 1

Waters Motors Pty Ltd v Cratchley (1963) 80 NSW WN 1165

Western Australia v Bond Corporation Holdings Ltd [1990] FCA 522; (1990) 99 ALR 125

Wickstead v Browne (1992) 30 NSWLR 1

This is an action for declaratory relief and damages arising from the termination of the operating agreement for a casino and hotel complex called Christmas Island Resort ("the Resort"). The complex is situated on Christmas Island ("the Island").

The Island is an Australian territory. It is situated in the Indian Ocean approximately 2600 kilometres from Perth in a north westerly direction. It is much closer to Asian destinations than it is to Perth. The distance from Jakarta to the Island is approximately 360 kilometres and from Singapore it is about 1300 kilometres.

It is a relatively small island with an area of approximately 135 square kilometres. It has a central plateau ranging from 183 metres to 357 metres above sea level. From the plateau there is a series of terraces leading to a cliff face that fronts the sea and surrounds most of the Island. The climate is tropical with a wet season occurring in December to April.

Historically, phosphate mining has been the only significant economic activity on the Island. In December 1987 the mine was closed down because it was regarded as not viable. It has since re-opened on a small scale. There is little or no arable land or pasture on the Island to support primary industries.

The population of the Island is estimated to be between 1800 and 2000. The local population consists mainly of people of Chinese (61%), Malay (25%) and European (11%) extraction. There is no indigenous population.

The Island was annexed by Great Britain in 1888. It became part of the settlement of Singapore (which was itself part of the Colony of the Straits Settlements) under the Christmas Island Ordinance (Sing) 1900. Christmas Island became a British Colony in itself from 1 January 1958 by an Order in Council made on 13 December 1957. However, by virtue of the Christmas Island (Request and Consent) Act 1957 (Cwth) and the Christmas Island Act 1958 (UK), the Australian and British Parliaments passed legislation for the Island to become a territory of Australia. The final statute proclaiming Australian jurisdiction was the Christmas Island Act 1958 (Cwth).

Under ss7(d) and 8A(1) of the Christmas Island Act 1958 (Cwth), the laws of Western Australia apply to the Island. This includes principles of common law and equity (both procedural and substantive) and the statutes and subsidiary legislation of the Western Australian Parliament [s8A(6)]. The Territories Law Reform Act 1992 (Cwth) conferred jurisdiction in and in relation to the Territory on the courts and judicial officers of Western Australia. The jurisdiction may be exercised by this Court whether it is sitting in Western Australia or in the Territory itself. In short, then, the Island is administered by the Commonwealth Government as part of the Australian territories but Western Australian law applies to it.

The plaintiff is a company incorporated under the Corporations Law. It is a wholly owned subsidiary of Casinos Austria International Ltd ("CAIL"), which is a listed Australian company. The share capital of CAIL is held as to 30.1% by institutions and investors (no one of whom has more than a 5% holding) and 60.9% by Casinos Austria International GmbH, an offshore entity. That company, in turn, is 95% owned by Casinos Austria International AG, a European entity. The Casinos Austria International group ("the CAI group") is engaged primarily in the operation and management of land and ship based casinos in Europe, Egypt, Africa and South America. The Australian holdings of the group include the Canberra Casino and the Reef Casino Cairns, each of which was operated by a wholly owned subsidiary of the Australian listed company, and (until March 1997) the Christmas Island venture. The Canberra Casino opened in temporary premises in 1993. An official opening of its permanent complex was held on 31 July 1994. The Reef Casino opened in January 1996.

I should now describe the individuals who were most closely involved in this venture on behalf of the plaintiff. Mr Alexander Tucek is the Chief Executive Officer of CAIL and a director of the plaintiff. Dr Heinrich Resmann is director of CAIL and of the plaintiff. Mr Allan Tan is the company secretary and financial controller of CAIL. These three men were stationed in Brisbane, Sydney or Canberra rather than on the Island. Mr John Farrow was the General Manager of the Resort on two occasions during the relevant period. Mr Glen Secco was the financial controller of the plaintiff during a good part of the relevant period. He was stationed on the Island.

The defendant is a company incorporated under the Corporations Law. At all times relevant to these proceedings 90% of its share capital was held by interests associated with Mr Robby Sumampow, an Indonesian businessman whose ultimate holding company is called PT Guntur Madu Tama ("GMT"). The other 10% of the share capital is held by Mr Frank Woodmore, a Perth businessman. The main participant in this litigation on behalf of the defendant was Mr Herman Gani. He is a director of GMT and of the defendant. In May 1993, when the plaintiff and the defendant first began discussions, the defendant had seven directors. They included Sumampow, Woodmore and Gani. Relevantly, they also included Mr John Moneta (who was situated in Perth and who resigned in 1994) and Koesnander, who has since resigned. The defendant still has seven directors. The only one of the new directors who played a significant part in these events is Mr Ari Sagita.

During the 1980's Woodmore and the GMT group began to plan the casino venture on Christmas Island to take advantage to its proximity to Asia, particularly Indonesia. At the time, there was seen to be a special opportunity because many casinos in Indonesia had been closed down as gambling was considered to be incompatible with religious sensitivities in the country. The idea was to attract wealthy patrons, known in the trade as "high rollers", from Indonesia and other parts of Asia. The defendant was incorporated to develop the Resort complex, including the Casino and Hotel. Construction began in the late 1980's or early 1990's.

The main residential and commercial centre on the Island is situated in the north at Flying Fish Cove. It is generally referred to as the Settlement. The Resort is situated on the eastern side of the Island. There are two principal roads that affect the Resort. One is called Gaze Road. It goes around the coast past the golf course to the Settlement. The other is called Linkwater Road. It winds south from the Resort before joining another road that turns north near the airport and then on to the Settlement. Towards the north end of the Island, between the Resort and the Settlement, there are two areas that are of relevance to this litigation. One is called Poon Saan. At this location there is an accommodation block called "Christmas Island Lodge" ("the Lodge"). This facility is owned by the defendant and provides budget style accommodation for tourists and others who do not wish to stay at the main complex. Poon Saan also has a number of blocks of flats or units. The blocks have been in existence for many years. They were owned by the government and had been used to house mine workers and others. They were acquired by the defendant and are utilised for staff accommodation for the Resort. About a kilometre from Poon Saan is another area called Taman Sweetland. This area houses a number of dongas or transportable huts or units of a style commonly seen in remote mining and construction sites on mainland Australia. The distance from Poon Saan to the Resort is about 12 kilometres if travelling along Gaze Road and about 25 kilometres via Linkwater Road.

I have included as annexure "A" to these reasons a map of the Island, which was used as an aide memoire during the trial. It shows the location of the major features that are relevant to the action.

The construction cost as originally estimated was $20,000,000. The successful tender came in at $26,000,000. Gani has qualifications in civil engineering and has had experience in building projects. He was the person from the GMT group with the day-to-day responsibility for the project and with a special brief to reduce the costs closer to the budget estimate. By early 1992 the relationship between the defendant and the building contractor had deteriorated to such an extent that the building contract was terminated. Litigation ensued between the developer and the contractor. Gani took over the task of completing the construction and used subcontractors for that purpose. The defendant operated through an arm called "CIR Constructions". The construction of the buildings was all but complete early in 1993. The remainder of that year was spent fitting out the Casino and the Hotel.

In 1988 or 1989 the defendant had entered into an agreement with the Federal Hotels group for the latter to operate the Resort. The contract had a clause that if construction was not completed within three years, the arrangement would terminate unless the parties reached a mutual agreement to extend it. During 1992 the three-year period expired. The defendant and Federal Hotels attempted to negotiate a fresh agreement but to no avail. Early in 1993 Federal Hotels broke off negotiations but continued to provide the defendant with technical assistance. The defendant sought expressions of interest from other operators and six companies came forward. Representatives of the plaintiff and the defendant first met to discuss the project on or about 7 May 1993. The plaintiff's initial proposal was to operate the Casino only. The defendant however, wanted a single operator for the Casino and the Hotel. This led the plaintiff to amend its proposal to include the Hotel. Eventually the defendant selected the plaintiff. On 3 June 1993 the parties signed a Heads of Agreement indicating that the defendant would cease negotiations with other operators and they would "progress towards a mutually beneficial arrangement" for the Resort. The target date for opening the Resort was 8 August 1993.

In the period June to October 1993 the plaintiff was engaged in preparations for the opening of the Resort. Staff began to arrive on the Island in July 1993. The defendant continued with efforts to complete the fitting out of the buildings. The Resort did not open on 8 August. There were two main reasons for this. First, the defendant had not obtained a certificate of occupancy for the building. Secondly, the plaintiff had not received from the Casino Control Authority in Canberra a licence to act as operator of the Casino. The relevant authorities issued the certificate and the licence early in November 1993.

On 29 October 1993 the parties signed a contract entitled "Agreement for Operations - Christmas Island Resort" ("the Agreement"). On 5 November 1993 there was a "soft opening" at which the Resort received its first patrons. There was an official opening on 18 December 1993.

The Resort is situated on about 37 acres of land. There is a main building which houses the reception, Casino, bars, restaurants and offices. There are 13 accommodation chalets, each of which consists of four suites and a number of single rooms. There are 156 rooms in total. During the relevant period some of these rooms were used for staff accommodation and others for storage. There were approximately 142 to 145 rooms available to accommodate guests. In 1995 a new building was added near the main building. It houses gift shops and multi-purpose areas. The new building never came under the control of the plaintiff.

The Agreement is a rather unusual document and I need to spend some time outlining its contents. In the recitals it is noted that the parties intend that the Resort should be conducted as an "international five star hotel and casino with associated facilities consistent with those currently operating within Australia". The parties submit to Australian law. It is also recited that it is a mutual desire that the plaintiff should "manage the operation, management and supervision of the Hotel and Casino".

The Agreement is expressed to be for a five-year period from the commencement date. It is not in dispute that the commencement date was early November 1993. There is provision for three separate extensions of the term, each of five years. The relationship between the parties is set out in cl 2.1 in these terms:

"The [defendant] hereby appoints the [plaintiff] to operate the Hotel and Casino on behalf of the [defendant] for the Term and grants upon the terms of this deed the [plaintiff] exclusive management in the operation management and supervision of the Hotel and Casino for the Term but not exclusive possession of the Hotel or Casino and the [plaintiff] in consideration of the fees herein set forth hereby accepts such appointment."

By cl 10 the defendant was obliged to provide the working capital for the operation and the plaintiff would not advance any of its own funds for those operations unless the defendant failed in this obligation. Under cl 11 separate bank accounts were to be opened in the name of the defendant for the Hotel and the Casino. The accounts were to be operated "for and on behalf of the [defendant]" and could be activated by one authorised signatory from each of the plaintiff and the defendant or two signatories from the defendant. Revenue was to be paid into these accounts and "gross operating expenses" paid from them.

The terms "gross operating revenue" and "gross operating expenses" are defined in cl 1. They are long definitions and I need not set them out. It is sufficient to say that gross operating revenue is all revenue and income collected or received and derived from the operation calculated in accordance with relevant published standards. Gross operating expenses include all reasonable costs and expenses incurred in maintaining, operating and supervising the operation calculated in accordance with relevant published standards. They do not include tax, capital expenditure (as defined), cost of funds employed on capital expenditure, depreciation and leasing costs. "Gross operating profit" is then defined as the excess of gross operating revenue over gross operating expenses in a "fiscal period", which is a financial year from 1 July to 30 June with provision for adjustments for part periods.

By virtue of cl 7.1 the plaintiff was to receive a "basic fee" equal to 1.5% of the gross operating revenue. The plaintiff was entitled, under cl 7.2, to an additional "incentive fee" equal to 4% of the gross operating profit. Clause 7.3 authorises the plaintiff to deduct the basic fee and the incentive fee from the Hotel account or the Casino account monthly in arrears subject to a settling up at the end of each financial year based on the audited financial statements for that year.

The decision making process in connection with the day-to-day operations is conditioned by the existence of two bodies that were set up under the Agreement. The first is the Consultative Committee provided for in cl 9.1. It was to be comprised of two representatives from each party but one of the plaintiff's representatives would always be chairman. Because the chairman had a casting vote there was a built in majority for the plaintiff on this body. Matters that had to be referred to the Consultative Committee were gross operating expenses, certain matters relating to employees, monthly profit and loss reports and details of insurances. The second body was the Advisory Committee. Under cl 9.2 it was to be comprised of two representatives from each party but this time one of the defendant's representatives would always be chairman. Because the chairman had a casting vote there was a built in majority for the defendant on this body. Matters that had to be referred to the Advisory Committee are rather more numerous and I will not set them out. It is sufficient to say that they include employment contracts for senior executives, budgets and capital expenditure not required by law.

Clause 9 contains notice provisions for the summoning of meetings. Unless the members unanimously agreed to the contrary, meetings were to be held at the Resort. There was a mechanism to by-pass the committee structures where "due to circumstances a rapid decision is required".

The position with respect to employees was somewhat unconventional. Clause 8.1 is in these terms:

"All persons employed at the Hotel and Casino shall be employed by the [defendant]."

Clause 8.2 preserves in the plaintiff "complete control and authority in respect of all persons employed at the Hotel and Casino" (including the right to hire and fire) and contains a covenant by the defendant not to interfere with the plaintiff's rights and obligations. By cl 8.3, if the defendant believes that an employee is an inappropriate person to be employed at the Resort it can report that fact to the Consultative Committee, which must investigate the claim and act in the best interests of the parties. If, within 30 days, no action has been taken, the defendant can refer the matter to the Advisory Committee. Clause 8.4 entitles the defendant to have up to six persons during a financial year employed at the Resort as "Assistant Employees". The terms of employment are to be decided by the Consultative Committee. The costs associated with the employment of Assistant Employees are regarded as part of the gross operating expenses.

A lengthy list of the plaintiff's duties and obligations is set out in cl 4. The plaintiff is obliged, among other things to:

(i) collect and recover room charges and charges for use of amenities incurred by guests and invitees [cl 4.1(d)];

(ii) institute in the name of the defendant proceedings for recovery of such charges [cl 4.1(e)];

(iii) advertise promote and publicise the Resort [cl 4.1(f)];

(iv) effect insurances and not place the policies in jeopardy [cl 4.1(g) and see also cl 15];

(v) maintain in good order and replace furniture as required [cl 4.1(i) and (j)];

(vi) maintain the highest possible occupancy rate reasonably achievable for the Resort [cl 4.1(l)];

(vii) use reasonable endeavours to cause the Resort to be cleaned and painted regularly [cl 4.1(o)];

(viii) repair and replace broken glass and plumbing and electrical fittings [cl 4.1(p)];

(ix) review the operations of the Resort on a continuing basis and to take corrective measures where necessary to improve operating results [cl 4.1(ab)];

(x) keep the Resort in good and substantial repair subject to fair wear and tear [cl 4.1(ac) and see also cl 13]; and

(xi) establish and maintain appropriate accounting, administration, financial control and budgeting systems at the Resort [cl 4.1(aj)].

Budgets are dealt with in more detail in cl 5. In relation to each financial year the plaintiff is obliged, 30 days before the commencement of the year, to submit to the Advisory Committee for approval an "operating budget" (that is, a budget of gross operating expenses and revenue) and a "replacement and refurbishment budget" (namely, a budget of expenditure for addition or replacement of furniture and equipment) which is to include proposed capital expenditure. The approval of the Advisory Committee to a budget is not to be withheld unreasonably.

Clause 6 has the heading: "Operator as Agent for the Developer". There is a general obligation in cl 6.3 by which the plaintiff is to act in good faith towards the defendant and take all reasonable actions to operate the Resort for the financial benefit of both the plaintiff and the defendant. Through various sub-clauses of cl 6 the plaintiff is entitled to enter into certain contracts in its own name and to hold itself out as agent of the defendant in the terms set out in the deed. Clause 6.1(a) lists a number of specific actions that the plaintiff is authorised to carry out on behalf of the defendant. It is provided expressly in cl 6.4 that there is no partnership or joint venture between the parties. Clause 6.6 contains some express limitations on the authority of the plaintiff in regard to specific transactions, including:

(i) the employment of any person whose salary package exceeds the amount from time to time set by the Advisory Committee; and

(ii) in respect of expenditure in excess of the operating budget, the incurring of an amount in excess of $10,000 on any one item or such higher amount as the Advisory Committee might set.

The obligation of the plaintiff in regard to keeping and presenting to the defendant books, records and periodic reports is dealt with in cl 14. By cl 14.1 the plaintiff must keep:

"---full and adequate records reflecting the results of the operation of the [Resort] and shall record all other information relevant or necessary for the purpose of this deed. Such books and records shall be audited by the auditors for each [financial year] and kept in all material respects in accordance with [published standards]"

Under cl 14.1(c) the defendant has a right to inspect the books and records at any time on giving 24 hours notice or carry out a report on the operations or the performance of the plaintiff and the plaintiff must make the books and records available for those purposes. However, in exercising this right the defendant cannot have more than three representatives carrying out the work at any one time. Clause 14.2 obliges:

(i) the plaintiff, within 21 days after the end of each month, to give to the Consultative Committee a monthly profit and loss statement showing year-to-date results and other information; and

(ii) both parties to endeavour to have the annual financial statement audited within 60 days after the end of the financial year and the plaintiff, within 15 days after receipt of the audited statements, to deliver a set to the defendant.

The default and termination provisions of the Agreement are central to the dispute but I will deal with them later. All I need say at the moment is that cl 17 provides the mechanism for a party to terminate the Agreement if the other party is in default. There are other provisions of the Agreement to which I will refer when I come to deal with individual allegations of breach or default. What I have said to date should be sufficient to describe the way in which the relationship between the parties was intended to develop. In essence it was an agency relationship. The plaintiff was to run the Resort for and on behalf of the defendant. It was not conducting the operation for its own benefit, other than in relation to the fees and, presumably, the enhancement of reputation. It earned fees but did not take the profits from the operation and nor did it have to shoulder the losses. There was a complex decision-making structure that, with hindsight, made it almost inevitable that the sorts of problems that were to afflict the parties during 1994 and 1995 would arise.

As I have already indicated the Resort opened for business on 5 November 1993 and conducted its official opening on 18 December 1993. The Resort maintained an office in Perth and most of the purchasing functions for the operation were conducted there. A representative office was established in Jakarta. This handled things such as co-ordination of flights and junket packages to the Island. Eventually it was decided that purchases should, where possible, be sourced from Jakarta. After this, the Jakarta office played a significant role in purchasing. The plaintiff had its operational offices at the Resort. Also situated at the Resort was a "Directors' Office" which housed the representatives of the defendant.

Over the period from November 1993 to July 1995 there was a gradual accretion in tensions between representatives of the plaintiff and representatives of the defendant. From time to time meetings of the Advisory Committee and the Consultative Committee were held and there were other less formal contacts between the two groups. The defendant had caused both Arthur Andersen and Price Waterhouse to provide statutory and occasional audit comments which, in the defendant's view, highlighted inadequacies in the plaintiff's efforts and structures. The plaintiff had its own criticisms of the defendant's contribution to the venture. In short, the plaintiff was concerned about things such as the quality and quantity of staff accommodation, perceived interference in the day to day operations by representatives of the defendant and the time taken to get decisions on things such as capital expenditure and remuneration packages for senior staff. For its part the defendant was concerned about the adequacy of the plaintiff's financial recording and reporting systems, losses in the Hotel (particularly in the food and beverage area), the low level of occupancy in the Hotel and certain matters concerning senior staff.

The Resort, overall, was operating profitably. The results fluctuated from month to month, with a profit in some periods and a loss in others. The audited financial statements for the year ending 30 June 1994 indicate a profit from operations (before management fees) of $18,300,000. Most of the revenue and all of the profit came from the Casino. In each of the Rooms Department and the Food and Beverage Department of the Hotel expenses exceeded revenue. The unaudited monthly reports for the period from October 1994 to December 1995 disclose that there was a profit from operations (before management fees) in eight of those months and a loss in the other seven months. The overall result in that period was a profit. I hasten to add that I am here speaking only of operating results and not commenting on the adequacy of the profit figure as a return on capital or by any other measure.

The relationship took a significant turn for the worse in July 1995. An Advisory Committee meeting was called for 21 July 1995. It was held at Sumampow's residence at Citeko, Indonesia. Messrs Resmann, Farrow and Secco attended on behalf of the plaintiff. Messrs Sumampow, Gani and Woodmore represented the defendant. In addition the defendant had legal, accounting and business advisers present as well as members of the GMT group internal audit team, the members of which had done some work on the Resort's finances. The meeting commenced at 10.00am and finished at 3.15am the following morning. I will refer to this meeting as "the Citeko meeting". The minutes (that have never been formally adopted) record that the defendant considered the plaintiff to be unprofessional and to have failed to implement necessary changes. It records a comment by the Chairman that if within 30 days proper systems had not been introduced in all areas of the administration and all matters discussed at the meeting the defendant would have no choice but to terminate the Agreement.

On 27 July 1995 the defendant sent to the plaintiff a letter ("the 27 July letter") enclosing a draft of the minutes of the Citeko meeting and detailing a number of areas of complaint. The letter concludes with the statement that the plaintiff was required to perform, remedy or otherwise rectify all of the matters of complaint within 30 days failing which the provisions of cl 17 of the Agreement would be invoked to terminate the plaintiff's services.

The plaintiff formed a task force to deal with the complaints made by the defendant. It was headed by Tan. The task force went to the Island and conducted investigations. On 18 August 1995 the task force presented a written report and forwarded a copy to the defendant under a covering letter from Tucek to Sumampow. The crux of the response was that all matters of complaint had either been fixed or were being attended to.

During August 1995 the defendant formed an "Evaluation Team" consisting of auditors from SGV and internal auditors from GMT to assess the plaintiff's response to the matters raised in the 27 July letter.

On 1 September 1995 there was a further meeting of the Advisory Committee. It was held at an hotel in Jakarta. Messrs Sumampow, Gani and Woodmore represented the defendant. Messrs Resmann, Tan and (for some of the meeting) Farrow represented the plaintiff. Again, the defendant had legal, accounting and business advisers and members of the internal audit team present. In the weeks following the meeting the Evaluation Team continued to work on the financial records of the Resort, particularly the payroll records. Tan and other representatives of the plaintiff continued with matters that had been raised in the task force report. A considerable amount of correspondence flowed between the parties in the period from August to December 1995.

On about 5 October 1995 SGV forwarded to Gani a written report on the investigations of the Evaluation Team. On the basis of this report the defendant prepared a further letter to the plaintiff dated 12 October 1995. In these reasons I will call this communication "the 12 October letter". In the letter the defendant alleged that the plaintiff had refused or was unable to remedy the matters previously referred to and that this constituted a default under the Agreement. The defendant also alleged that the plaintiff was guilty of material and gross mismanagement in the operation of the Resort. It set out a number of grounds of breach and non-performance. The letter indicated that the defendant regarded the plaintiff's attempts to remedy matters previously raised as inadequate or unsatisfactory. It then said that it was giving notice, in accordance with "Clause 17(h)" of the Agreement that unless within 30 days the plaintiff remedied all of the matters stated in the letter its engagement as operator of the Resort would terminate. The defendant also reserved all rights to claim damages.

By letters dated 1 November 1995 and 9 November 1995 the plaintiff responded to the 12 October letter. In essence the response was that the plaintiff was not in breach but that in any event all matters of complaint had been remedied or action had been commenced to that end. Correspondence continued to flow between the parties in November and December 1995.

On 12 December 1995 the defendant served on the plaintiff a notice in which it purported to terminate the Agreement ("the 12 December notice"). In it the defendant refers to the 12 October letter in which it had alleged that the plaintiff was in default and had indicated that it would terminate the Agreement unless the defaults were rectified within a reasonable time. The 12 December notice goes on to say that the plaintiff has had a reasonable time, namely 60 days, and has failed to remedy the defaults to the satisfaction of the defendant. It then provides that in accordance with cl 17.2 of the Agreement the Term of the engagement of the plaintiff as operator under the Agreement is terminated effective from the date of service of the notice. It also calls in aid the transitional provisions in cl 17.4.

On 19 December 1995 the plaintiff issued a generally endorsed writ of summons out of this Court claiming a declaration that the purported termination was invalid and an injunction to restrain the defendant from implementing the purported termination. On 20 December 1995 the plaintiff obtained an injunction restraining the defendant from taking any steps to remove the plaintiff as operator of the Resort.

The plaintiff filed a statement of claim seeking declarations as to the invalidity of the purported termination, an order for specific performance of the Agreement or alternatively damages for repudiation. The defendant lodged a defence and counterclaim in which it raised issues of default and mismanagement by the plaintiff by way of answer to the plaintiff's claim.

The trial commenced on 5 August 1996 but it could not be finished in the allotted time. At the end of August it was adjourned until March 1997. Just before the 1997 sitting was due to commence, counsel for the plaintiff announced that the plaintiff now accepted the service of the 12 December notice as a repudiation of the Agreement by the defendant and that the claim for specific performance would be abandoned. He also said that the plaintiff would be issuing a separate writ seeking damages for wrongful repudiation of the Agreement. That writ was issued in due course. Some time later I made an order that all claims for damages by the plaintiff in this action be deferred for consideration in the other action.

By the end of the proceedings the fundamental issues raised in the action had changed from whether the plaintiff was entitled to specific performance to whether the plaintiff had breached the Agreement in such a way as to entitle the defendant to terminate it under cl 17 or at law and whether the defendant was entitled to damages.

The pleadings in this case are voluminous. On frequent occasions during the trial one party or the other referred to the pleading of the other in less than complimentary terms. I would prefer to enunciate the issues by reference to the Agreement and questions of law rather than by a specific use of the language of the pleadings. Nonetheless, I am satisfied that each of the issues that I am about to enunciate can be gleaned from the pleadings even if, in some instances, it requires a generous interpretation of the language employed by the author. The seemingly endless debates about the pleadings and the stop-start nature of the hearing lead me to suggest that no party has been materially prejudiced by this approach.

1. What are the express terms of the Agreement and are there any terms that are to be implied?

2. Did the plaintiff breach any, and if so which ones, of the following terms of the Agreement:

(a) cl 4.1(f), relating to promotion of the Hotel and Casino [defence para 10(h)];

(b) cls 4.1(g) and 15.1, relating to effecting and maintaining insurance policies [defence para 10(j)];

(c) cls 4.1(i), (j), (o) and (p) and cl 13.1, relating to the repair, maintenance and replacement of buildings, vehicles, appliances, furniture and equipment, [defence para 10(f)];

(1) maintaining the highest possible occupancy rate for the Resort [defence para 10(h)]; and

(2) operating the Resort in an efficient manner [defence para 10(i)];

(e) cl 4.1(ab), relating to the review and correction of Resort operations [defence para 10(i)];

(f) cl 4.1(aj), relating to the establishment and monitoring of accounting, administration, financial control and budgeting systems in the following areas:

(1) the payroll system, particularly meal break allowances, annual leave entitlements and the compilation of time sheets [defence para 10(b)(i)];

(2) stock control system [defence paras 5(d) and 10(b)(iii)];

(3) collection of accounts receivable, particularly travel agents, private jet charges and tickets from junket operators [defence para 10(b)(iv)];

(4) production of accounting and financial information [defence para 10(b)(v)];

(5) purchase order system [defence para 10(b)(vi)];

(6) appointment of senior management staff [defence paras 5(a) and 10(b)(vii)];

(7) control of excessive expenditure over budget [defence para 10(b)(viii)];

(8) night audit procedures [defence para 10(b)(ix)];

(9) double payment of accounts [defence para 10(b)(x)];

(10) failure to document and instruct staff as to proper procedures [defence para 10(b)(xi)];

(11) failure to check invoices for air freight against consignment notes for goods [defence para 10(ba)];

(g) cl 5.1(a), relating to the approval of the operating budget for the year commencing 1 July 1995 [defence paras 5(b), 10(a) and 10(b)(i)];

(h) cl 6.3, relating to the plaintiff acting in good faith towards the defendant in the following areas:

(1) by one Ashton sending unsolicited letters to Resort customers [defence para 10(g)]; and

(2) relating to the use of the defendant's money to pay insurance premiums for the benefit of the plaintiff [defence para 10(k)];

(i) cl 14.1, relating to the plaintiff making available for inspection financial records and books of account of the Resort [defence para 5(f)];

(j) cl 14.2, relating to the delivery of financial statements in the following respects:

(1) failure to provide monthly profit and loss statements [defence para 10(d)]; and

(2) failure to provide an audited profit and loss statement [defence para 10(e)];

(k) an implied term (if there be such a term) relating to the recovery of overpayments to:

(1) Perishable and General Air Cargo Pty Ltd ("PGAC") [defence paras 5(e) and 10(c)]; and

(2) employees of the Resort [defence paras 5(c) and 10(c)]?

3. What is the proper construction of the termination provisions of the Agreement, particularly cls 17.1(f), 17.1(h) and 17.2?

4. What are the rights of termination at law (in addition to the right to terminate that is conferred by the contract) that could be relevant in this case?

5. If the plaintiff breached any of the obligations in questions 2(f)(2), 2(f)(6), 2(g), 2(i), 2(k)(1) and 2(k)(2), was the plaintiff "in default":

(b) by reason of being guilty of material or gross mismanagement under cl 17.1(h),

and did the defendant serve all notices required by cl 17.2 so as to terminate the Agreement effectively?

6. If the plaintiff breached any of the obligations referred to in question 2, do those breaches amount to:

entitling the defendant to elect to bring the obligations arising under the Agreement to an end?

7. Did the plaintiff engage in misleading and deceptive conduct under ss51A and 52 of the Trade Practices Act 1974 (Cwth) and, if so, has the defendant suffered loss and damage by reason of the plaintiff's misrepresentations?

8. To what relief, if any, is the plaintiff entitled?

9. To what relief, if any, is the defendant entitled?

Normally I would have dealt with all or most of the factual issues before turning to the legal questions that have been raised. In this case I think it is necessary to spend some time on the law so as to mark out the legal framework within which the factual disputes will arise for determination. Accordingly, I propose to deal first with the issues numbered 1, 3, 4, 5, and most of 6 and 7. I will then return to the factual issues set out in item 2. The question of the relief to which the successful party is entitled will be dealt with in the concluding remarks.

There is no real dispute as to the express terms of the contractual arrangements. They are contained in a written document dated 29 October 1993 entitled "Arrangements for Operation - Christmas Island Resort". It was the document tendered at the hearing as ex 3/211 and is the one that I have previously defined (for the purposes of these reasons) as "the Agreement".

It contains, as cl 25.1, an "entire agreement" clause. This provides that the Agreement supersedes all prior agreements, whether written or oral. In particular, it provides that a Heads of Agreement dated 12 June 1993, which had been executed by the parties, would be of no further force or effect. It follows that the express terms of the contractual arrangements between the plaintiff and defendant are those contained in the Agreement.

Both parties contend that there are other terms that are to be implied into the contractual arrangements. Neither concedes that the implied term or terms contended for by the other should be incorporated.

In para 4 of the amended substituted defence, the defendant says:

"By reason that the plaintiff was required to pay all operating expenses of the hotel and casino and collect all monies spent on the amenities of the hotel and casino and the fact that all records relating to the operating expenses of the hotel were kept by the plaintiff, it was reasonable, necessary and obvious in order to give business efficacy to the Agreement that the plaintiff would take all necessary steps, including instituting legal proceedings in the name of the defendant if necessary, to recover any overpayments of operating expenses to any person, including employees and a term to that effect was implied in the Agreement." ["the defendant's implied term"]

For its part, the plaintiff denies that a term of this nature should be implied. However, in para 3(a) of its re-amended substituted reply the plaintiff contends for an implied term of more limited scope covering similar subject matter. It is in these terms:

"If and to the extent that the plaintiff was responsible for recovering any overpayments of operating expenses, the plaintiff says that it was an implied term of the Agreement that the plaintiff would take such steps as were reasonable in the circumstances to recover any overpayment of operating expenses." ["the plaintiff's first implied term"]

Clause 4.1(e) of the Agreement includes within the duties imposed on the plaintiff by the contractual arrangements, the following:

"(e) institute in the name of the [defendant] proceedings for the recovery of possession or the recovery of any amounts due in respect of any letting of the Hotel rooms or the provision of any other amenities including gaming of the Hotel and Casino."

The basis on which terms are to be implied in a commercial contract are well known. They were authoritatively pronounced in Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 and BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 . In Codelfa, at 347, Mason J set out the five criteria that must be satisfied if a term is to be implied:

"(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that `it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

Counsel for the plaintiff submitted that the defendant's implied term failed to meet any of these criteria. Counsel contended that the implied term was not reasonable and equitable because it is phrased in an absolute sense. If taken literally it could involve the plaintiff in the pursuit of all overpayments of operating expenses, no matter how small, thus creating considerable and unnecessary inconvenience and expense. Counsel further submitted that the term was not necessary to give the arrangement business efficacy, as the Agreement had continued in force for more than two years without resort to any such requirement. Counsel also challenged the assertion that a term of the nature contended for was "so obvious it goes without saying." As to the fourth criteria, counsel pointed out that the parties could not agree on the correct formulation and that there were obvious difficulties in arriving at a clear expression of the term. The fifth criteria is that the term must not contradict any express term of the contract. The plaintiff argues that the general nature of the implied term is inconsistent with the more limited obligations expressly provided for in cl 4.1(e).

I do not agree with all of these contentions. In my opinion the plaintiff has overstated the case. The fact that the Agreement was able to continue, in some fashion, for two years or so does not necessarily mean that the term was not required for "business efficacy". There are many provisions in contracts of all sorts that never see the light of day simply because the parties conduct their respective affairs in a manner that makes resort to those provisions unnecessary. The mere length of time the Agreement is on foot is not decisive of whether an implied term is necessary to give "business efficacy"- although it may provide a rough guide.

The plaintiff's submission, that the defendant's implied term was not capable of clear expression because the parties in the action could not agree on the form of the term, is likewise untenable. In the context of a protracted and acrimonious dispute it is not at all surprising that the parties would not be able to agree on the appropriate formulation of an alleged implied term.

I also have difficulty with the inconsistency argument. Clause 4.1(e) of the Agreement refers to the "recovery of any amounts due in respect of any letting of the Hotel rooms or the provision of any other amenities including gaming". This is clearly directed at the relationship between the operator and guests or "punters" using the Resort's facilities. It is concise and precise in its scope and effect and I do not think it necessarily excludes some implied obligations in relation to collection of overpayments to others who might become creditors of the Resort.

This brings me to the first and third of the criteria mentioned in Codelfa. The plaintiff argued that the proposed implied term was not "reasonable and equitable". I think the concern of the plaintiff is that the defendant's implied term is phrased in an absolute sense. There are no exceptions. Consider the hypothetical example of a wealthy gambler who consistently neglected to pay a small bill for meals. On the defendant's construction, the plaintiff would be legally obliged to issue a writ and take legal proceedings against that valued client of the Resort. I do not think that such an obligation in an implied term could be described as "reasonable and equitable". I am not sure that it is "so obvious that it goes without saying" either. The stringency of the duty to pursue repayment, even if the benefit is dwarfed by the cost and by the possibility of collateral damage would be quite uncommercial.

Accordingly, I find that at least two of the criteria enunciated by the High Court in Codelfa have not been made out. The defendant's contention that the term pleaded in para 4 of the defence should be implied into the contractual arrangements has not been made out.

I have already set out the formulation of the overpayment recovery term suggested by the plaintiff. The important distinction between the defendant's implied term and the plaintiff's first implied term is that the latter posits a standard of "reasonableness" on the steps to be taken to recover any overpayments. I think the importation of a concept of "reasonableness" would satisfy both remaining criteria. In my opinion it would be appropriate to imply into the contractual arrangements a provision of the type formulated by the plaintiff in para 3(a) of its re-amended substituted reply.

The plaintiff also claimed there were two other implied terms. In para 3(b) of the re-amended substituted reply, the plaintiff says:

"It is an implied term of the Agreement that the plaintiff and the defendant were required to co-operate to achieve the object and purpose of the Agreement and to do nothing that would prejudice the rights of the other."

"... [I]t is an implied term of the Agreement that no party is entitled to take advantage of its own breach to deprive the other party of a benefit under the Agreement."

The plaintiff in its written submissions conceded that these terms may not be critical to this action but they may be of greater relevance to other, related actions. Counsel for the plaintiff directed my attention to what was said by Mason J in Secured Income Real Estate (Australia) Ltd v St Martin's Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 607:

"But it is common ground that the contract imposed an implied obligation on each party to do all that was reasonably necessary to secure performance of the contract. As Lord Blackburn said in Mackay v Dick:

`as a general rule ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect.'

It is not to be thought that this rule of construction is confined to an obligation on one contracting party to co-operate in doing all that is necessary to be done for the performance by the other party of his obligations under the contract. As Griffith CJ said in Butt v McDonald:

`It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract.'

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself."

At first glance the plaintiff's first implied term appears to me to overstate what was said by Mason J in Secured Income. As is made clear in the above passage, a party is not necessarily obliged to make all its contractual decisions for the benefit of the other contracting party. There is a distinction between co-operating where co-operation is required for the fulfilment of the contract and making decisions under the contract that disadvantage the other contracting party.

To determine the extent of the obligations, the court must look to the intentions of the parties as evinced by the written contract. It is in this context that cl 6.3 of the Agreement becomes relevant. This clause required the plaintiff to act in good faith towards the defendant. Strangely, it does not seem to require the defendant to act in good faith towards the plaintiff. However, there is the overriding factor of obligations to a government authority to preserve a casino licence without which the whole venture simply could not operate. There is also the relationship of principal and agent that is recognised in cl 6.5 of the Agreement. I should also mention cl 9 of the Agreement. The provisions relating to the constitution and authority of the Consultative and Advisory Committees, both of which have joint representation of the plaintiff and the defendant, indicate an intention that there should be co-operation in the administration of the venture.

On balance, although not without some hesitation, I think it is appropriate to imply provisions as formulated in each of paras 3(b) and 3(c) of the plaintiff's re-amended substituted reply.

7. Rights of Termination Under the Agreement and at Law

7.1 The Termination Provisions in the Agreement

As I have already said, the Agreement provides for an initial term of five years with three separate options to extend the term each for a further period of five years. Clause 17 provides for early termination in two situations. The first is where the operator commits a default under the Agreement or mismanages the Resort. The second is where the Gross Operating Profit fails to reach a defined amount in a three-year cycle. It is the first of these possibilities with which the case is concerned. The second possibility is dealt with in cl 17.3 but I do not think that I need to make specific reference to it.

Clause 17.1 sets out several things the happening of which will constitute "events of default" under the Agreement. They include:

"(f) the failure within a reasonable time of either party after reasonable written notice (having regard to the nature of the failure) has been given by the other party to perform or observe any of the agreements or obligations contained or implied in this deed which on the part of the relevant party ought to be performed or observed[.]"

Under cl 17.1(g) it is an event of default if the plaintiff fails to maintain use and operate the Hotel and Casino at the standards in accordance with the obligations under the Agreement and such failure continues for 30 days after service of a notice detailing the alleged defects. I should also mention cl 17.1(h). This provides that the defendant may serve written notice on the plaintiff alleging that the plaintiff is guilty of material or gross mismanagement in the operation of the affairs of the Hotel and Casino. The plaintiff must advise what action it will take to remedy the alleged mismanagement and commence to do so within 30 days. If the defendant considers the action proposed to be taken has not been taken it may issue a further notice detailing the action it considers necessary and requesting the plaintiff to implement the same. If within 30 days of the service of a second notice, action has not been commenced and the details given to the defendant, then the plaintiff will be in default.

The Agreement goes on to provide what is to happen if a party is in default. The relevant provision is cl 17.2. It has the heading "Termination and Due Notice" and is in these terms:

"17.2 If any party shall be in default and the non-defaulting party desires to terminate this deed (either pursuant to this deed or at law or in equity) the non-defaulting party may give to the defaulting party Due Notice of intention to terminate the term. The non-defaulting party shall also notify the Commonwealth as soon as possible if it intends to serve the said Due Notice and shall notify the Commonwealth immediately prior of its intention to otherwise terminate this deed. `Due Notice' shall mean that upon the expiration of 30 days from service of any notice the Term shall subject as hereinafter provided, expire provided however that if upon receipt of such Due Notice the defaulting party shall promptly and with all due diligence cure the default (if such default is capable of being cured within the said 30 day period and if not, such longer period as is reasonable in the circumstances) and if so cured or all reasonable action is taken to cure it then such notice shall be of no force and effect. A party shall only be entitled to serve Due Notice or to terminate this deed in respect of a default while such default continues. ------."

Finally, cl 17.4 provides that where the deed is terminated under cl 17 the Operator shall continue in office for a period of six months. The purpose of this provision is to allow for the smooth transition to a new operator and to ensure compliance with the relevant provisions of the Casino Ordinance.

7.2 The Defendant's Case on Rights to Terminate

The defendant's pleaded case relied both on cl 17.1(f) and cl 17.1(h). The pleading does not rely on cl 17.1(g). I have mentioned it because I think it is relevant to the proper construction of the termination provisions in the Agreement. Paragraph 8A of the defence pleads that the 27 July letter was a first notice alleging material or gross mismanagement and the 12 October letter was a second notice under cl 17.1(h). However, during the course of closing submissions, counsel for the defendant indicated that the defendant would not press the argument for termination based on cl 17.1(h). In the light of that concession (which I think was well made) I can ignore cl 17.1(h), save for any effect that the reference to it in the 12 October letter might have on the remainder of the claim.

So far as concerns cl 17.1(f), the defendant's case is set out in paras 5 to 8 of the defence. It is that the 27 July letter was a notice under cl 17.1(f). The plaintiff failed to remedy the defaults specified in the letter. The 12 October letter constituted "Due Notice" under cl 17.2. By 12 December 1995 the plaintiff had still failed to remedy the defaults and, as a reasonable period had elapsed, the notice became effective and by the 12 December notice the defendant formally terminated the Agreement. An alternative position put by the defendant (in paras 10A and 11) is that certain nominated breaches of the Agreement alleged by the defendant constitute breaches of conditions or serious breaches of intermediate terms, thus entitling the defendant to terminate the Agreement at law. A further alternative (specified in paras 11A and 11B) is that the several breaches alleged by the defendant amounted to repudiatory conduct and that by the 12 December notice the defendant accepted the plaintiff's repudiation, thus bringing the Agreement to an end.

7.3 The Termination Provisions - Issues of Construction

There are several issues that are related to, or which impinge on, the proper construction of cl 17 of the Agreement. One is whether cl 17 is a complete code relating to termination, which excludes rights of termination other than strictly in accordance with its express terms. Assuming that rights of termination at law have been preserved, another issue is the extent to which the contract recognises certain terms as "conditions" breach of which would entitle the defendant to bring the contract to an end otherwise than by resort to the procedures in cl 17.2. A further issue is whether Australian law recognises intermediate terms as a separate category from conditions and warranties and, if so, what are the ramifications so far as concerns termination. Another construction issue arises under cl 17.2. It is whether the service of a "Due Notice" is mandatory before termination can be effected. I think it is necessary to deal with these questions before considering the validity and effect of the various notices which the defendant gave to the plaintiff.

7.4 Right to Terminate Other Than Under the Agreement

In the early versions of the plaintiff's reply it was not entirely clear what stance the plaintiff was taking on rights of termination outside the Agreement. However, in the end the plaintiff did not contend that the defendant was limited to termination under the provisions of the Agreement. It seems to me that this is correct. The Agreement does not purport to exclude rights of termination at law. This much is made clear by the express terms of cl 17.2. It refers to the non-defaulting party desiring to terminate "either pursuant to this deed or at law or in equity". A little later it refers to an intention to serve a Due Notice or "[otherwise] to terminate --- this deed".

Clause 17.2 is conditioned by a party being "in default" giving rise to a desire on the part of the other party to terminate the Agreement. With this in mind, the reference to termination at law or in equity is a little confusing. It is not easy to see when a right to terminate in equity, as opposed to a right emerging at law or under the Agreement, would arise from a "default". Generally speaking, equitable rights of termination could be expected to accrue in areas such as unconscionable conduct or rescission for fraudulent misrepresentation. Certainly, the proviso could operate at law, for example, by acknowledging the existence of a right to terminate by acceptance of repudiatory conduct. It is well settled that a contract cannot exclude termination by way of acceptance of repudiatory conduct because any provision of the agreement to that effect falls within the repudiation of the agreement as a whole: Holland v Wiltshire [1954] HCA 42; (1954) 90 CLR 409 at 416; Sinnatamby v Cooper Corporation Ltd [1986] WAR 36 at 40, 45-46.

7.5 The Classification of Contractual Terms - Conditions

In Australian contract law the "binarism of essential and subsidiary terms or conditions and warranties" (a description used in Cheshire and Fifoot's Law of Contract, 6th Australian Ed, para 2107) is well known. What is perhaps a little less certain is whether Australian law has adopted a "tripartite classification [under which] a term is a condition, warranty or intermediate term" (as to which see Carter and Harland, Contract Law in Australia, 3rd Ed, para 725).

The definition of a "condition" which was formulated in Associated Newspapers Ltd v Bancks [1951] HCA 24; (1951) 83 CLR 322 at 326 appears to me still to apply. The test is:

"--- whether the [obligation] is a condition or essential term of the contract going to its very root, the breach of which would immediately entitle the [innocent party] at his option to rescind the contract and sue for damages."

The fundamental question is one of essentiality. In Bancks (supra) at 337 the Court approved the following statement of Jordan CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641, 642:

"The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor---. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise however slight."

Whether a term is a condition in accordance with these concepts is a question of construction. It is a question of law to be decided by the court and the onus rests on the party alleging that the term is a condition. The onus can be satisfied by pointing to an express assertion in the contract to that effect or by implication from a rule of law (neither of which apply in this case) or because the construction of the contract indicates an implied agreement that the term is to be a condition. There is no presumption, even in commercial contracts, that a contractual term is a condition. The implication must appear clearly from terms of the arrangement. The test is objective. The question is what the parties, as reasonable persons, must have intended. Some of the factors that can be looked at in making this assessment include the motivation for inclusion of the term, the form and structure of the term and the contract, the likely effect of a breach, whether the innocent party would be compensated adequately by damages and the subject matter of the term and the contract.

In relation to motivation for entry into the contract, something must appear from the general nature of the contract or from some particular term or terms as applied to the surrounding circumstances to indicate that the injured party's entry into the contract was motivated by an assurance of strict or substantial compliance: Tramways (supra) at 641-42; DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at 431; Shevill v Builders Licensing Board [1982] HCA 47; (1982) 149 CLR 620 at 627, 636.

In considering the form and structure of the term and the contract, regard must be had to the contract as a whole. The interrelationship of terms may throw light on the proper classification of terms. For example, if there is a contractual right to terminate which has the effect of making certain terms operate in the same way as express conditions, it may be possible to infer that the other terms in the contract are not intended to operate as conditions. In L Schuler AG v Wickman Machine Tools Sales Ltd [1973] UKHL 2; [1974] AC 235 the terms of a distributorship agreement were in issue. The contract included a provision (cl 11) which entitled either party to determine the agreement if "the other shall have committed a material breach of its obligations hereunder and shall have failed to remedy the same within 60 days of being required in writing to do so". There was another provision (cl 7) which said: "It shall be a condition of the agreement that [the distributor] shall send its representatives to visit six firms --- at least once in every week for the purpose of soliciting orders". The distributor admitted that it had breached cl 7. The manufacturer purported to terminate the agreement because of those breaches but without giving the 60 day notice required by cl 11. The House of Lords held that the purported termination was ineffective and that the procedure in cl 11 should have been followed. Lord Reid said, at 249: "If the terms of cl 11 are wide enough to apply to breaches of cl 7 then I am inclined to hold that cl 7 must be read subject to the provisions of cl 11". His Lordship concluded, at 252-53:

"The word `condition' would make any breach of cl 7, however excusable, a material breach. That would entitle [the manufacturer] to give notice under cl 11 requiring the breach to be remedied. --- If [the distributor] were at fault --- they would have to amend their systems so that they could show that the breach had been remedied. If they did not do that within the period of the notice then [the manufacturer] would be entitled to rescind."

I do not suggest that Schuler directly governs the result in this case. Nor do I suggest that the mere presence of a contractual right to terminate will of itself be a bar to the implication that certain terms were intended to be conditions. However, the case highlights the importance of reading the contract as a whole.

7.6 The Classification of Contractual Terms - Intermediate Terms

An intermediate or (as it is sometimes called) innominate term is one the importance of which lies between that of a condition and a warranty. Its genesis is said to be found in Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1961] EWCA Civ 7; [1962] 2 QB 26. Diplock LJ, at 69-70, explained that there might be terms which, due to their complexity, could not be categorised as "conditions" or "warranties". However, the legal consequences of the breach of such an obligation might depend on the nature of the event to which the breach gives rise. In other words, the remedy depends not so much on the classification of the obligation as on the seriousness of the breach. This approach has been endorsed by English courts at the highest level: see, for example, Cehave NV v Bremer Handelsgesellschaft mbH (The Hasa Nord) [1976] QB 44 at 60 (Court of Appeal); Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 at 998 (House of Lords); Bunge Corporation, New York v Tradax Export SA Panama [1981] UKHL 11; [1981] 1 WLR 711 at 715-16. In Bunge (supra) at 719 Lord Lowry explained the doctrine in this way:

"It is by construing a contract (which can be done as soon as the contract is made) that one decides whether a term is, either expressly or by necessary implication, a condition, and not by considering the gravity of the breach of that term (which cannot be done until the breach is imminent or has occurred). The latter process is not an aid to construing the contract, but indicates whether rescission or merely damages is the proper remedy for a breach for which the innocent party might be recompensed in one way or the other according to its gravity."

Accordingly, the determination whether, in any particular case, an obligation in a contract is an intermediate term is not a question of construction in the same way as that issue would unfold in relation to a condition or essential term. It focuses more on the nature of the breach and the appropriateness of the remedy for the breach.

So far as I am aware, there is no decision of an Australian court in which the doctrine of the intermediate term has been applied directly. Counsel for the defendant referred to Honner v Ashton (1979) 1 BPR 9478, a decision of the New South Wales Court of Appeal. Mahoney JA, at 9490-93, adopted the Hongkong Fir doctrine and said (at 9491) that:

"There are sound reasons why the right to terminate for breach should not be limited to breach of terms which are conditions. Experience has shown that the consequences of a breach of a non-condition, though falling short of compliance with the test of frustration, may well, in a particular case, be of such significance to the injured party that to hold him to the continued performance of his obligations under the contract would be quite unjust".

However, Mahoney JA was a dissentient. Glass JA, with whom Hope JA agreed, decided the case on the basis that the injured party was entitled to terminate directly under the provisions of the contract. The majority said that the contractual provisions rendered redundant any enquiry as to whether the term breached was a condition or a warranty. Glass JA went on to say, at 9483: "Whether the clause is to be treated as raising all terms of the contract to the level of conditions or as giving a power to discharge for inessential breach is a matter of purely academic interest". Save for its exposition of the juridical nature of the intermediate term doctrine, I do not think Honner is particularly helpful.

In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd [1987] HCA 15; (1986-87) 162 CLR 549 at 561-62 Mason ACJ, Wilson, Brennan and Dawson JJ referred to the English authorities but found it difficult to apply the "innominate term" classification to the contractual provisions with which they were there concerned. It is to be noted that the discussion about the provisions in question focuses more on the language in which the clauses were expressed than on the seriousness or effect that breaches of the clauses might have : see 557. In Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1988-89) 166 CLR 623, Brennan J commented that a right to rescind could arise from repudiation of a term of the contract as well as from repudiation of the contract generally. His Honour did not refer to the Hongkong Fir doctrine in this context but once again it must be noted that the emphasis was on the importance of the term repudiated rather than on the effect of the breach: see 641-42. In Amman Aviation Pty Ltd v Commonwealth of Australia [1990] FCA 55; (1990) 22 FCR 527, the three members of the Full Court of the Federal Court seemed to assume that the intermediate term doctrine applied in Australia and that it had been acknowledged by the High Court in Ankar (supra): see 532, 542 and 553-54. However, the decision in Amman turned on whether or not the contract had been repudiated.

I have spent some time on the doctrine because it was expressly pursued by counsel for the defendant in his closing submissions. My own view is that the tripartite classification probably does apply in Australia. However, for reasons, which will appear shortly, for the purpose of disposing of this case, I do not need to decide the issue.

There are many authorities dealing with the nature and essence of repudiatory breach. They are conveniently summarised in Rigg v Ley Loy Sing [1987] WAR 333. See also Shevill (supra) at 626; Progressive Mailing House Pty Ltd v Tabali [1985] HCA 14; (1985) 157 CLR 17 at 33-34; Laurinda (supra) at 634, 657-58. For the purposes of this case it is sufficient to say that repudiation will usually involve acts or omissions by one party to a contract which:

(a) evince an intention no longer to be bound by the contract;

(b) evince an unwillingness or inability to perform the obligations imposed under the contract either at all or in a manner substantially consistent with those obligations and not in any other way;

(c) constitute a breach going to the root of the contract; and

(d) deprive the other party of a substantial part of the benefit to which it is entitled under the contract.

Whether a party has evinced an intention no longer to be bound by the contract does not depend on the subjective intention of that party. The intention may be inferred from words or conduct despite a professed willingness to go on with the contract: Universal Cargo Carriers Corporation v Citati [1957] 2 QB 410 at 436-37.

I need to say something about the juridical relationship between the doctrines of repudiation and serious breach of an intermediate term. As the author of Carter, Breach of Contract, 2nd Ed, says at para 716, the distinction between a right of termination stemming from breach of an intermediate term and one stemming from repudiatory conduct is subtle. However, there is a difference. The focus of the repudiation doctrine is on the intention and conduct of the promisor whereas under the intermediate term doctrine attention shifts to the consequences of the breach on the promisee. The issue in the latter case is whether it would be unfair or unjust to hold the promisee to continued performance of its obligations under the contract. Whether (assuming that the intermediate term doctrine applies in Australia) it is germane to the resolution of this dispute is, in my view, problematic. This is something to which I will return shortly.

Having set out what I apprehend to be the legal principles I will now return to the facts of the case so as to reach conclusions on the appropriate construction of the Agreement and the rights of the respective parties under it and at law.

7.8 The Defendant's Contentions on Conditions

The defendant contended that the implied term pleaded in para 4 of the defence was a condition. As I have rejected the implication of such a term I need say no more about it. The defendant also contended that the following obligations were all conditions:

(i) cl 4.1(aj): establish and monitor appropriate accounting, administration, financial control and budgeting systems;

(ii) cls 4.1(g) and 15.1: effect and maintain policies of insurance;

(iii) cl 5.1(a): obtain approval to an operating budget for the year commencing 1 July 1995;

(iv) cl 14: make available for inspection financial records and books of account and deliver financial statements.

This is a matter of construction in accordance with the principles that I have outlined. In my opinion there is nothing in the surrounding circumstances or in the general nature of the contract or any of its terms to indicate that the defendant would not have entered into the contract unless it received an assurance of strict or substantial compliance with all or any of the nominated terms. In this case, I think that the presence of the termination clause in the contract is of special significance. In relation to what might be called, in a general sense, the proper operation of the Resort business, cl 17 is absolutely comprehensive. Clause 17.1(f) covers non-performance or non-observance of all of the agreements or obligations contained or implied in the Agreement. Clause 17.1(g) covers a failure to maintain, use and operate the Resort in accordance with the standards laid down in the Agreement. Clause 17.1(h) provides a mechanism by which gross or material mismanagement in the operation of the affairs of the Resort can become an event of default. In each of these instances there is a requirement for notice to be served. Each of them provides the party to whom the notice is given with an opportunity to cure the alleged defect before it becomes an event of default entitling the innocent party to terminate the Agreement. But even then, the Agreement goes on, in cl 17.2, to establish the mechanism by which termination can be effected.

It is, I think, clear that each of the obligations in cls 4.1(aj), 4.1(g), 5.1(a), 14 and 15.1 are obligations encompassed within cl 17.1(f). The same thing might also (depending on the circumstances) follow in relation to cls 17.1(g) and 17.1(h). These, then, are detailed provisions specifying the particular breaches or types of breaches that may give rise to a right to terminate and stipulating the procedure to be followed in order to exercise the right of termination in the event of such breaches.

In my opinion it is inconsistent with the express provisions of cl 17 to impute to the parties an intention that there were terms of the Agreement of such a nature that any breach, no matter how insignificant, would entitle the other party to terminate the Agreement without following the procedure laid down in cl 17. I also think that cl 17 was intended to be a code dealing with the circumstances in which, and the procedure by which, the Agreement was to be brought to an end for breach in the observance of obligations governing the proper operation of the Resort business. I should add that the "code" argument would not prevent a right to terminate arising at law for repudiatory breach.

It follows that I reject the defendant's case in so far as it relies on a right to terminate at law for breach of a condition or essential term.

7.9 The Defendant's Contentions on Intermediate Terms

The defendant contends that each of the obligations relied on as conditions are, in the alternative, intermediate terms: see item (1A) of the Particulars to para 10A of the defence. In item (2A) of the Particulars several other provisions are advanced as constituting intermediate terms. They are cl 4.1(f) [promotion of the business], cls 4.1(i), (j), (o), (p) and 13.1 [repairs, maintenance and replacement of buildings and chattels], cl 4.1(l) [achieving high occupancy rates and conducting the Resort in an efficient manner], cl 4.1(ab) [review and correction of Resort operations] and cl 6.3 [the duty of good faith].

The question here is, assuming the Hongkong Fir doctrine applies and assuming a serious breach of all or any of those non-essential obligations, would there be a right to terminate at law apart from cl 17 and apart from the doctrine of repudiatory conduct?

As I have already indicated, this is not really a question of construction of the contract. It assumes that the obligations are not, or cannot be, classified as conditions or essential terms but that because of the consequences of a breach, a right to terminate arises. While acknowledging that it is not a question of construction, I think that the intention of the parties, as evidenced by the language chosen by them in the contractual document, may be relevant in deciding whether the parties intended that the consequences of the breach would govern the remedy to be applied. Once again, each of the obligations specified in items (1A) and (2A) of the particulars to para 10A of the defence are encompassed within cl 17.1(f) and possibly also within cls 17.1(g) and (h). The same arguments advanced in relation to the construction argument for conditions apply here. It is the very comprehensiveness of the termination provisions that is significant. The proper construction of the Agreement leads to the conclusion that the parties intended that any breach of an obligation governing the proper operation of the Resort business might give rise to a right to terminate provided the stipulated procedures were followed and the breach went unremedied after notice. It seems to me to be straining the language to import into these arrangements an intention to confer on the defendant an over-arching right to ignore the stipulated procedures and to terminate forthwith for breach of a non-essential term simply because of some perceived consequence or effect of the breach on the defendant.

There is a further issue that is peculiar to this case. It has been said that it is desirable to preserve the Hongkong Fir doctrine separate from repudiation to avoid injustice to the innocent party by holding it to the performance of its contractual obligations. However, it is not necessary to import the doctrine into this situation to protect the defendant from that type of hardship. I acknowledge immediately that, strictly speaking, the test should be applied at the time of termination to see whether the right had arisen when it was exercised. In December 1995 and at all times up to March 1997 the plaintiff was seeking to hold the defendant to the performance of the contract. Since March 1997 that has not been the case and the plaintiff has abandoned its claim for specific performance. To paraphrase Lord Lowry in Bunge (supra) the issue is no longer whether "[termination] or damages is the proper remedy for a breach for which the innocent party is to be recompensed". The Agreement has been brought to an end and (leaving to one side declaratory relief) the question to be decided in this and subsequent litigation is whether either party is entitled to damages.

It would, I think, be different if the issues involved in the repudiation argument in this case were not so all encompassing. I do not wish at this stage to say anything more about repudiation. That will come later. It is sufficient to say that at least some of the allegations made by the defendant would, if made out, go to the root of the Agreement so as substantially to deprive the defendant of its bargain. I cannot see anything that the breach of non-essential terms in the Hongkong Fir sense would add to the allegation of repudiatory conduct.

It follows that I reject the defendant's case insofar as it relies on a right to terminate at law for serious breach of an intermediate or innominate term.

7.10 The Proper Construction of Cls 17.1(f) and 17.2

I have already expressed the view that the drafting of cl 17.2 is less than happy. It refers to a party being "in default", giving rise in the innocent party to a desire to terminate. It then says that the innocent party "may" serve a Due Notice. If the innocent party wishes to serve a Due Notice or if it wishes "otherwise" to terminate it "shall" notify the Commonwealth. It specifies that during the 30-day period of the Due Notice the defaulting party has an opportunity to cure the default. Finally, it provides that the innocent party is only entitled to serve a Due Notice or to terminate in respect of a default while the default continues. There is within the clause an unfortunate and unclear mixture of apparently mandatory and directory steps. Of course, while "shall" will usually indicate an obligation and "may" a power, the use of those words is not definitive in answering the question whether a provision is mandatory or directory: Re Davis [1947] HCA 53; (1947) 75 CLR 409 at 418-19_._ As the author of Garner, A Dictionary of Modern Legal Usage, 2nd Ed, says at p939: "The courts in virtually every English speaking jurisdiction have held - by necessity - that `shall' means `may', and vice-versa. These holdings have been necessary primarily to give effect to slipshod drafting". Once again it is a question of construction depending on the context.

It is necessary to look at the Agreement as a whole. It seems to me that the factors that I mentioned when construing the Agreement to see whether certain terms were conditions apply again here. Those same factors have persuaded me that the mechanism for termination that the parties intended in cls 17.1(f) and 17.2 can be summarised in the points which follow.

1. It is first necessary for the innocent party ("IP") to establish an event of default by the defaulting party ("DP").

2. In terms of cl 17.1(f) the event of default is established once IP has served on DP a reasonable written notice calling on DP to perform the obligations about which complaint is made and DP fails to do so within a "reasonable time".

3. The reference in cl 17.2 to a party being "in default" is a reference to an "event of default" that has been established under cl 17.1(f).

4. Clause 17.2 preserves a right to terminate at law or in equity (as well as under the Agreement) and this may give meaning to the apparently directory aspects of the early part of the clause. However, it seems to me that where IP desires to terminate because of an event of default established under cl 17.1(f) it must do so strictly in accord with cl 17.2. In other words the service of a Due Notice is, in these circumstances, mandatory.

5. It follows that for a termination to be effective under the combination of cls 17.1(f) and 17.2, these steps must be taken or omissions must occur:

(a) service by IP on DP of a notice complying with cl 17.1(f);

(b) failure of DP to comply with the notice within a reasonable time;

(c) service by IP on DP of a Due Notice under cl 17.2; and

(d) failure of DP to cure the default the subject of the Due Notice within 30 days.

6. If the default is not cured within the 30-day period of the Due Notice or (if the default is not capable of being cured within 30 days) within such longer period as is reasonable in the circumstances, the term of the Agreement expires. To give practical effect to this provision, it seems to me that the Due Notice must specify the period within which the default is to be cured. It might be 30 days or it might be some longer nominated period. If the period is specified and the default is not cured within it then the term would, without more, expire at the end of the period. If, however, the Due Notice does no more than specify that the default must be cured within a "reasonable" period IP would have to allow a period in excess of 30 days to go by and then (if the default remains extant) would have to do something objectively to demonstrate termination. This might be service of a third notice or it might be some other act, for example, taking possession, which unequivocally indicates termination.

7. At the time when it serves the Due Notice and again when termination becomes effective IP must advise the Commonwealth accordingly. It is a moot point whether failure to comply with this obligation would render the termination notices (as between the plaintiff and the defendant) ineffective or whether such failure would sound in some other sanction as between the Commonwealth and one or both of the parties. It is not necessary for me to decide that point.

It seems to me that this construction is in accord with the way that the defendant has pleaded its case on termination under cl 17.1(f) in paras 5 to 8 of the defence, to which I have already referred.

7.11 The Purported Termination Under Cls 17.1(f) and 17.2

The defendant relies on the 27 July letter as the notice under cl 17.1(f). The letter was written after the Advisory Committee meeting in Citeko on 21 July 1995. The letter included draft minutes of the Citeko meeting. It says that at the Citeko meeting the defendant had made known its "complete dissatisfaction in [the plaintiff's] performance and conduct of the Casino and Hotel Operations". It then set out in numbered paragraphs, 21 "matters of complaint or concern". The letter concluded in this fashion:

"At the conclusion of the meeting on 21 July 1995 notice was given to you that we, as Developer and Owner, require you to perform, remedy, or otherwise rectify all of the matters of complaint strictly within thirty (30) days from that date.

You are further advised that the provision of Clause 17 of [the Agreement] will be invoked to terminate your services should you fail to perform, remedy or otherwise rectify all of the matters referred to above within the time specified."

There are several things that have caused me to have misgivings about the efficacy of the 27 July letter. Counsel for the plaintiff submitted that the document did not purport to be a notice pursuant to any part of cl 17 of the Agreement, let alone cl 17.1(f), and nor is the general language of the document consistent with a conclusion that it was intended or construed by the parties as a notice under cl 17.1(f). I do not think that the failure to include in the document an express reference to cl 17.1(f) is necessarily fatal. However, it is not without significance. This is a commercial contract of considerable value and of real importance to both parties. They have gone to some lengths to set out what is effectively a code for bringing the contract to an end before the expiration of the term when a party fails to comply with obligations that go to the proper operation of the Resort business. Part of this code involves the giving of notices. It seems to me that the parties must have intended that there be some precision in the notices. Precision is necessary so that the party to whom the notices were delivered would have reasonable notice of what was being alleged against it, what was required of it to cure the alleged defaults and the period within which it had to act. So long as the requisite degree of precision is present I do not think it matters what form of words are used. On the other hand, the failure to mention the clause being invoked is not without significance. I say this because this very failure might lead to confusion or misunderstanding that is inimical to the concept of precision.

I think it is important to set the 27 July letter in context. It followed the Citeko meeting (of the Advisory Committee) held on 21 July 1995. The draft minutes of the meeting (which were prepared by the defendant and sent together with the 27 July letter but which have never been approved or adopted in their entirety by or on behalf of the plaintiff) conclude with these statements that are attributed to Gani:

"---we have no other choice than to demand that if within 30 days there are still not the proper systems introduced in all areas of the administration and all matters discussed here at our meeting, we will have no other choice than to terminate the Agreement.

[Resmann] sought clarification. [Gani] confirmed the [plaintiff] had 30 days, and that the notice will be issued in writing and filed with the CAI Ltd office on Monday together with the Minutes."

In his oral evidence Gani said that although he could not remember the exact words used at the meeting he told the plaintiff that they had to rectify all of the problems discussed within 30 days or otherwise the defendant would use cl 17 for termination. The express reference to cl 17 is not reflected in the Minutes. In any event, it is a general reference to cl 17 rather than to a particular portion of it.

The Citeko meeting was held on 21 July 1995, a Friday. The Minutes suggest that a written notice would be filed on the Monday, presumably a reference to 24 July. Approximately a week after the meeting the 27 July letter was sent. It is clearly a follow up from the meeting. It contains the reference to cl 17 but again not to any particular portion of it. The 21 numbered paragraphs are a mixture of allegations of defaults or breaches under the Agreement and requests for information. For example, items 7 (redundancy of food and beverage manager), 11 (accountability in staff accommodation), 15 (discrepancy in debtor's account), 17 (discrepancy in Christmas Island Lodge Revenue) and 18 (payroll) all suggest areas of enquiry that might or might not be matters of default. The third last paragraph on p17/112 is an assertion about conduct alleged against Mr Craig Ashton but there is no indication of the remedial action (if any) which the defendant requires. The six obligations set out in para 5 of the defence (which the defendant says were not complied with and on which it relies in this area) fall into the category of allegations of breaches or defaults. Once again, the inclusion of defaults and requests for information would not of itself be fatal to the validity of the notice but it is a matter which reflects on its clarity.

Having set out the areas of complaint or investigation the defendant then calls on the plaintiff "to perform, remedy or otherwise rectify all of the matters of complaint strictly within 30 days". The wording perform, remedy or otherwise rectify" does not mirror any of the particular provisions of cl 17. The parties are by cl 17.1(f) to "perform or observe" obligations, by cl 17.1(g) "to properly maintain, use and operate the Hotel and Casino, by cl 17.1(h) "to remedy the alleged mismanagement" and by cl 17.2 to "cure the default". I repeat that I am not saying any particular form of words is necessary. However, the wording of the 27 July letter does not assist in construing the general reference to cl 17 as being intended to incorporate one or other of the subclauses within cl 17. This is more than something of merely academic interest. For example, if the party delivering the notice is relying on cl 17.1(h) a second notice may be required before the requirements of the subclause have been fulfilled. It is interesting to note that on 11 January 1994 the defendant wrote to the plaintiff indicating concern at "the overall operation of the Resort" and specifying that the notice was being issued pursuant to cl 17.1(h).

It is not as if the plaintiff stood idly by on receipt of the 27 July letter. On 1 August 1995 Tan wrote to Gani saying that the plaintiff had taken legal advice and disagreed that there were grounds to invoke cl 17 or that the period specified in cl 17.2 had been triggered. He indicated that the plaintiff would give a detailed response to the allegations and wanted to resolve the matter "to our mutual satisfaction". He then said: "I would therefore ask you to clarify which clauses of [the Agreement] you allege have been breached". On 3 August 1995 Gani responded. However, he did not clarify which of the provisions of the Agreement were alleged to have been breached and said nothing about the application of all or any of the aspects of cl 17.

I accept Tan's evidence (T 4940-42) that the plaintiff was unsure as to which of the particular provisions of cl 17 the defendant was relying on or, perhaps more correctly, at the time the plaintiff did not give consideration to cl 17.1(f). On 1 December 1995 Tan wrote to the Casino Surveillance Authority "with an update of the situation". Tan made a general reference to cl 17 and I accept his evidence that he had in mind cl 17.1(h) rather than cl 17.1(f). As I have already said, there are important procedural differences in the two subclauses.

There are other areas in which the 27 July letter lacks precision. It contains differing time periods for compliance with different demands. There is the overall specification of 30 days. Some examples are: item 6 (candidate for marketing manager by 1 August), item 10 (fully revised budget by 31 July), item 16 (stock control report by 28 July) and item 21(d) (missing records to be provided by 24 July). The overall 30-day period is expressed to have commenced on 21 July, reducing the effective time for compliance by almost a week. If, as the defendant contends, the 27 July letter is to be taken as a notice under cl 17.1(f), the ultimate issue (in this area) is whether it allowed a "reasonable period" for compliance. Counsel for the defendant submitted that the specification in a notice of a period that was shorter than a "reasonable period" would not be fatal so long as no action was taken on the notice until after a "reasonable period" had actually expired. Counsel relied on the comments to that effect in Brooking and Chernov, Tenancy Law and Practice in Victoria, 2nd Ed para 242. The proposition advanced is not without practical difficulty because matters such as election and waiver can so easily intrude. When a contract specifies a reasonable period for compliance it is a matter for the court, depending on the circumstances of the case, to decide whether the period allowed was "reasonable". In this case my conclusion does not depend on whether or not the time or times specified in the 27 July letter were "reasonable". Nor do I regard the specification of differing time periods as being of itself fatal but it adds to the concern about the presence of the degree of certainty which I believe was required.

For all of these reasons I do not believe that the 27 July letter was a valid notice under cl 17.1(f). I think that the plaintiff would have been left in a fair degree of doubt as to whether this was effectively a last warning before formal action under cl 17 would be implemented or, if it was the first step in the cl 17 process, exactly where it fitted into the formal requirements of the process. Counsel for the plaintiff submitted that there were two other factors which would prevent the defendant succeeding on this issue. The first is that none of the six defaults alleged in para 5 of the defence remained unremedied at the time when the next step in the cl 17 procedure was taken. I do not need to deal with this point now. It is more conveniently canvassed in the area of repudiation. The second point is that the actions of the defendant constitute an election not to terminate the Agreement on the grounds set out in the 27 July letter or a waiver of the right to pursue that remedy, relying on Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 at 655. Once again, I do not think this is the appropriate time to deal with the point. That, it seems to me, is an issue which is relevant to the estoppel argument raised in para 7 of the plaintiff's reply. If it becomes necessary to canvass the estoppel point I will do so in that context.

Even if I am wrong in my conclusion about the validity of the 27 July letter there are other obstacles which I do not think the defendant has overcome. I refer specifically to the 12 October letter.

After the Citeko meeting and the receipt of the 27 July letter the plaintiff formed a task force under Tan to review the operations of the Resort and to respond to the allegations. Correspondence flew thick and fast between the parties.

On 12 October 1995 the defendant wrote to the plaintiff referring to the 27 July letter and saying:

"A further meeting of the Advisory Committee was held on 1 September 1995 in Jakarta whereat you were required to report on all of the matters\issues that were dealt with at the previous meeting on 21 July 1995. It has become apparent to us that you have failed to or refused to or are otherwise incapable of attending to or remedying the several matters\issues raised previously. This constitutes a default on your part which continues to the present day. You have been given every opportunity to attend to the matters\issues properly in accordance with the obligations under the terms of the Agreement. Furthermore it has now become clear to us on the grounds set out hereinafter that as an Operator, you, your servants or agents are guilty of material or otherwise of gross mismanagement in the operation of the affairs of the Hotel and Casino and have been in default of your obligations under the terms of the Agreement and continue to be in default to the present day. The grounds of the breach and\or non-performance are set out hereinafter."

The letter then specifies a variety of alleged breaches of the Agreement. In each case, the conduct complained of is specified and attention is drawn to the particular clause of the Agreement which is said to have been breached. Although the wording is somewhat different I think it is fair to say that each of the six alleged defaults referred to in para 5 of the defence is included (along with many others) in the list of complaints in the 12 October letter. The letter then concludes:

"As mentioned above you have been given every opportunity by our letter dated 27 July 1995 to attend to or otherwise remedy the various matters\issues set out therein which, according to investigations undertaken appear not to have been done or otherwise have been attended to inadequately or unsatisfactorily. Accordingly, we have no alternative but now to give you notice in accordance with cl 17(h) of the said Agreement that within thirty (30) days from the date of the service of this notice on you, as Operator, to remedy each and all of the matters\issues stated above failing which your engagement as Operator of the Hotel and Casino will terminate. We also hereby give you further notice that we reserve all rights to claim damages against you."

Counsel for the defendant submitted that the reference to cl 17(h) was a typographical or drafting error and that it should have been cl 17.2. There is no cl 17(h) in the Agreement and it could only mean cl 17.1(h) or cl 17.2. Counsel submitted that it was necessary to look at the substance of the sentence in order to determine exactly the ground of the notice. Having done that it was apparent that it does not fit at all with the language in cl 17.1(h) in the Agreement. In other words, the defendant was contending that the 12 October letter was a "Due Notice" under cl 17.2. I have difficulty with the submission for a number of reasons. While I agree that the words in the notice do not fit with the language of cl 17.1(h), they are no more compatible with the language of cl 17.2. It would be a significant typographical or drafting error for the inclusion of the numbers and letter "17(h)" [given the existence in the document of a cl 17.1(h)] when what was intended was a reference to cl "17.2".

In addition, the last paragraph of the letter cannot be read on its own. It must be construed in the context of the letter as a whole. This brings into play the earlier paragraph that I have set out. Clearly, the defendant has taken the view that the plaintiff has failed to remedy the matters which were the subject of the 27 July letter. The implication from the earlier paragraph is that this failure amounts to a breach of the Agreement by the plaintiff and that these breaches and other matters that have come to light amount to "material or otherwise gross mismanagement". This is (ignoring the word "otherwise") exactly the wording of cl 17.1(h). What would be the point, it might be asked, in making express reference to material and gross mismanagement if it were not the intention of the defendant to rely on it as a ground to insist on performance by the plaintiff of its obligations under the Agreement, failing which the plaintiff's services would be dispensed with? There could not be reliance on cl 17.1(h) unless the procedure specified in the sub-clause was adhered to.

On 1 November 1995 Tucek wrote to Sumampow denying that the defendant was entitled to utilise cl 17 but stating: "We presume Mr Gani intends his letter of 12 October 1995 to constitute the first notice required by clause 17.1(h)". On 9 November 1995 Tan wrote to Sumampow to similar effect. In re-examination Gani said that he had not answered those letters because there were subsequent discussions between Sumampow and representatives of the plaintiff and there was some "without prejudice" correspondence emanating from the plaintiff. In the circumstances, not much can be made of the defendant's failure to respond to the letters. However, it does support the evidence of Tan that the plaintiff assumed that cl 17.1(h) was being invoked and that the defendant was aware that this was the plaintiff's position.

There is a further point. If the innocent party wishes to give a Due Notice under cl 17.2 it is required to notify the Commonwealth "as soon as possible" and also to notify the Commonwealth "immediately prior of its intention to otherwise terminate" the Agreement. I have already said that I do not need to decide whether failure to comply with this obligation renders the Due Notice invalid. However, I think the actions taken by the defendant in relation to the obligation are a significant pointer to the defendant's intention and attitude in this regard. It would not have been required to give notice to the Commonwealth at the time if the 12 October letter were a notice under cl 17.1(h). It would have been required to do so if it were a notice under cl 17.2. There is no evidence that the defendant complied with the obligation to advise the Commonwealth at or around 12 October 1995. So far as the evidence discloses, the first formal notification which the defendant gave to the Commonwealth was its letter of 11 December 1995 in which it advised that it intended "serving notice on the [plaintiff] under the provisions of clause 17.2 of the [Agreement] that the term of the engagement of the [plaintiff] has been terminated due to the default by [the plaintiff] in complying with the terms of the [Agreement]". The letter of 11 December refers to an earlier letter from the defendant to the Authority dated 27 November 1995 but so far as I am aware that letter was not put in evidence. In any event it would not have been sufficiently proximate to 12 October to constitute compliance with the obligation to which I have referred. On 12 December 1995 the defendant served on the plaintiff a formal notice terminating the Agreement under cl 17.2. The giving of notice to the Commonwealth on 11 December 1995 is consistent with an intention formally to bring the Agreement to an end on 12 December 1995 but it lends no weight to the contention that the 12 October letter was a Due Notice under cl 17.2. Indeed, to the extent that it is relevant it seems to me that the contrary is the case.

I therefore find that the 27 July letter was not a valid notice under cl 17.1(f) and the 12 October letter was not a valid Due Notice under cl 17.2. It follows that I find that the purported termination of the Agreement by the defendant under cl 17.1(f), as alleged in paras 5 to 8 of the defence, was ineffective. As the defendant did not pursue the purported termination under cl 17.1(h), it follows that the defendant has failed to persuade me that it properly brought the Agreement to an end relying on the contractual termination provisions. I have also rejected the defendant's case based on termination at law for breach of a condition or serious breach of an intermediate term. It follows that the defendant is confined to the argument that it properly brought the Agreement to an end by acceptance of repudiatory conduct on the part of the plaintiff.

7.12 Plaintiff's Case on Election, Waiver and Estoppel

In para 6(a) of the reply the plaintiff contends that if the 27 July letter were a notice for the purposes of cl 17.1(f), if it were in breach and if it failed to remedy the defaults within the time specified in the letter the defendant by its conduct elected not to terminate by reason of those matters. Paragraph 6(b) contains a plea of waiver in similar circumstances. In para 7(c) the plaintiff says that the defendant is estopped from asserting that the 12 October letter was a notice under cl 17.2.

Because of the conclusions to which I have come concerning the notices and the proper construction of the Agreement it is unnecessary to deal with the issues.

The defendant claims that it is entitled to relief because certain actions of the plaintiff constituted misleading and deceptive conduct under ss51A and 52 of the Trade Practices Act 1974 (Cwth) ("TPA"). These allegations arise partly from the pre-contractual negotiations and correspondence and partly from the terms of the Agreement.

There was a meeting between representatives of the parties on 7 May 1993. At that stage the focus of attention was the Casino. The defendant's representative said that it needed to give further thought to the operation of the Hotel. On 12 May 1993 the plaintiff submitted a proposal to manage the Casino only. The following day the defendant's representative asked the plaintiff to submit a proposal covering the operation of the Hotel as the defendant was interested in having only one operator for the complex. On 13 May the plaintiff wrote to the defendant referring to that request and saying that it had contacted a hotel management group and would submit an amended proposal. On 19 May the plaintiff submitted an amended proposal giving alternatives for the Hotel, under all of which the plaintiff would assume operational responsibility. On 27 May the plaintiff submitted a detailed proposal for the operation of the Hotel using its own staff. On 3 June 1993 the parties executed a heads of agreement for the management of the complex. The Agreement was signed on 29 October 1993. It contained recitals and covenants relating to the management of the Hotel.

In para 20 of the counterclaim the defendant pleads that by the letters of 13, 19 and 27 May 1993 the plaintiff impliedly represented to the defendant that from the time the plaintiff commenced to operate the Hotel it would operate and manage it in a proper and efficient manner and would obtain whatever assistance it needed to do so. In para 21(a) the defendant pleads certain provisions of the Agreement, namely, recital C (that the plaintiff was "qualified in the supervision operation and management of hotel and casino resorts"), cl 4.1(l) (that the plaintiff would maintain high occupancy rates to maximise financial return and operate the Hotel in a proper and efficient manner) and cl 4.1(ab) (review the operations on a continuing basis and make corrective measures when necessary). The defendant says that by reason of these provisions the plaintiff represented, before the Agreement was made, that it was capable of operating and managing the Hotel in a proper and efficient manner. In para 21(c) the defendant says that the same provisions constitute implied representations (made before the Agreement was entered into) that the plaintiff was an appropriate operator to engage, that it would operate the Hotel in a proper and efficient manner and that it would continuously review operations and take corrective measures.

The defendant also pleads that it entered into the Agreement in reliance on the representations. It says that it entered into the Agreement in reliance on the representations, that the representations in para 21(a) were false and that the representations in paras 20 and 21(c) were representations about future matters and were made without reasonable grounds for making them. The defendant goes on to plead that the representations were made in the course of trade or commerce, that they were misleading and deceptive under ss51A and 52 of the TPA and that it has suffered loss and damage as a result.

In summary, what the defendant seems to be saying is that the pre-contractual letters constitute representations that by the time the Hotel operations were due to commence the plaintiff would ensure that all was in place to ensure the proper and efficient operation of the Hotel. The provisions in the Agreement constitute representations that (by October 1993) the plaintiff had in fact done so. Those same provisions are then said also to constitute representations as to future matters, namely, that actions would be taken to ensure a continuation of the proper and efficient operation of the Hotel. The defendant says that the representations of fact were false and that the plaintiff had no reasonable grounds for making the representations as to future matters.

In the defence to counterclaim the plaintiff denies that the correspondence of 13, 19 and 27 May 1993 constitute representations as alleged. If they do constitute representations the plaintiff says that there were reasonable grounds for making them. As to the allegations of representations of fact the plaintiff says that the provisions of the Agreement constitute contractual promises, not representations, and that they could not as a matter of law amount to misleading and deceptive conduct for the purposes of the TPA. If they are representations, the plaintiff denies the falsity of them. It also says that in any event the defendant did not enter into the Agreement in reliance on any of the alleged representations.

I need to repeat some of the background. The Christmas Island Resort project had endured a rather long period of gestation. From 1988 or 1989 an arrangement had been in place for the Federal Hotels Group to operate the Resort on behalf of the defendant once it was completed. The agreement with Federal Hotels had a clause that if the construction of the Resort was not completed within 36 months it would terminate automatically unless both parties agreed to extend. Federal Hotels refused to extend and attempts to renegotiate the terms were unsuccessful. The position at the beginning of May 1993 was that construction of the Resort was well advanced, commencement of trading was imminent but the defendant did not have an operator. However, Federal was still providing technical assistance. The defendant called for expressions of interest in order to attract an operator. Six organisations (including the plaintiff and the operator of the Burswood Casino in Perth) expressed interest. Eventually it came down to a choice between the plaintiff and the Burswood Group. The defendant rejected the Burswood Group's application largely because of the potential for a conflict between the interests of the casino in Perth and that on Christmas Island. The contract was therefore awarded to the plaintiff.

The first contact between the plaintiff and the defendant was on 5 May 1993 when Mortelman, on behalf of the plaintiff, sent to Woodmore, on behalf of the defendant, some preliminary information in relation to its capabilities. The facsimile was confined to information about the plaintiff's casino operations.

On 7 May 1993 there was a meeting in Perth between Resmann and Mortelman, on behalf of the plaintiff, and Woodmore and Moneta or Koesnendar on behalf of the defendant. Resmann thought that Koesnendar had been present at the meeting. Koesnendar's evidence was that he had first met representatives of the plaintiff on or about 16 May 1993. I have accepted Resmann's evidence as to what transpired at the meeting. In any event I do not think that Koesnendar gave any evidence indicating that the plaintiff had professed hotel management experience during the negotiation period. Resmann introduced the plaintiff generally and in particular in relation to its Australian operations, including the Canberra Casino. Woodmore described the history of the project and indicated that construction would be completed within three to four months. Woodmore also said that the market for players would focus in the main in Indonesia because of the short distance to Jakarta. He said that he expected there to be regular airline flights from Jakarta (one or two per day) to give easy access to Indonesian players and that the then existing charter arrangement between the Government and Ansett for flights to the Island would convert to a commercial arrangement with that airline. However, the market for players from Australia was not expected to be significant because of the distances involved. Woodmore also explained the Federal Hotels' arrangement and how it had not been renewed because of the degree of control over the operation that the defendant required. There was discussion about the influence that Sumampow could bring to bear in attracting players, the likely impact of competition from casinos in Indonesia and the level of gaming taxes that were being negotiated with the Government.

Resmann indicated that the plaintiff had been approved as a casino operator by the Australian authorities in relation to the Canberra venture and spoke generally about his company's integrity. In relation to the operation of the Hotel, this exchange occurred in Resmann's examination -in-chief:

"During the course of the meeting was there any discussion about the hotel operation on the island?---Yes, there was insofar as we asked what the infrastructure was. We were told, well, there's a hotel with 130 rooms, I think, and we said - there was a discussion about who would - sorry, I should go one step back. We were discussing the operation of the casino, but it was obvious that somebody had to operate the hotel and we asked the owners what they thought and they said, "Well, not too much thought had gone into this" and they still had to think about this, but we probably wanted to make a proposal and I think I can remember my first thought was, "If this is the case then - if we have a chance to give advice, we probably want to have somebody who we know," and I think I thought immediately of Country Comfort with whom we ran for The [Reef] Casino.

In the course of the meeting in South Perth that you are telling us about, was anything said by you or Mr Mortelman about the experience of Casinos Austria in hotel operation? .....The emphasis was on our experience as casino operators. We certainly did not hold ourselves out to be hotel operators."

At the conclusion of the meeting Woodmore asked that a proposal be put together swiftly because time was running out. There was mention of the Resort opening on 8 August 1993 because Sumampow felt that it would be a lucky day for Asian visitors.

On 12 May 1993 Mortelman sent by facsimile to Woodmore a document entitled "Casino Operating Offer and Commissioning Proposal". It relates only to the operation of the Casino. It says that the plaintiff would be appointed as Casino Operator with responsibilities for all services provided in the Casino gaming areas and that the defendant would manage or appoint a manager for all facilities and operations external to the designated Casino gaming areas of the Resort. The proposal envisages that food and beverage and hotel room complimentaries would be charged to the Casino at cost. In an accompanying document concerning the experience of the CAI Group it is said that gaming is the core activity although diversification into other leisure related fields had begun with the ownership of the company's first hotel. Thus far, there is no evidence that could be construed as a representation that the plaintiff wished to operate or had experience in the operation of hotels.

On or about 13 May 1993 Woodmore telephoned Resmann thanking him for the proposal but enquiring where the Hotel proposal was. Resmann testified that Woodmore was adamant that it is important that the plaintiff also include the Hotel in the proposal. It was not a major thing but it was important that there was an offer on the table to be evaluated. Resmann said he did not object because it was early in the negotiations. Resmann then contacted an hotel management group called Country Comfort, with whom the plaintiff was associated in another venture, enquiring whether it would be interested. In due course Country Comfort declined to be involved. At some stage Resmann also contacted the Southern Pacific Group but they too expressed disinterest.

On 19 May 1993 Mortelman and Resmann sent to Woodmore a revised Casino operation proposal and a proposal entitled "Pre-opening and Hotel Operations". The latter says: "[The plaintiff] to be responsible for operation of the total complex ie., Casino, Hotel, food & beverage, maintenance etc.". Under the heading "Hotel Operations" the following appears:

"[The plaintiff] will take operational responsibility for the total resort, with the hotel to be operated under the structures of either:

(ii) own staff with hotel chain support through management services contract

Our first preference is option (i) above, and we are currently assembling the senior management team for your consideration. The option provides for the lowest management fee structure whilst ensuring dedicated staff.

We are holding confidential discussions with two suitable parties in respect of option (ii), and see option (iii) as being of interest only in the event that you require immediate start-up ie. within two weeks of signing heads of agreement for the operating contract."

By this time Woodmore had made it clear to Resmann that the defendant wanted to have one overall agreement covering the operations of the entire Resort, that is, the Casino and the Hotel. Although Resmann could not remember exactly when Country Comfort and Southern Pacific had declined to be involved it seems that by 19 May 1993 he would have been aware that their participation was unlikely. Hence the reference to "own staff" as the preferred option.

Koesnendar's evidence was that when he read the correspondence of 19 May he understood the plaintiff to be saying that it would operate the Casino and at the request of the defendant would assume responsibility for the Hotel under one of three stated options but that there had been no assertion to the effect that the plaintiff had prior hotel management experience. In his evidence Gani did not allege that there had been any assertion on behalf of the plaintiff of hotel management experience.

Resmann then contacted Mr Dean Minett. He was then engaged as a consultant on food and beverage matters for the plaintiff's casino in Canberra. He had been General Manager of a number of hotels. On 26 May 1993 Minett wrote to the plaintiff saying he was willing to assist with the initial investigation into, and set up of, the Hotel division of the Resort. On 26 May Mortelman and Resmann wrote to Woodmore indicating that Minett had been selected as Hotel Manager and that he (Minett) and other senior managers would like to visit the Island with representatives of the defendant. Woodmore then arranged for the three senior managers (including Minett) to come to Perth on 28 May and to go on to the Island (accompanied by Koesnendar) the following day.

On 27 May 1993 the plaintiff submitted to the defendant a "preliminary proposal for hotel and food and beverage services" for the Resort. The proposal indicated that the Hotel operations would be undertaken by staff engaged by the plaintiff rather than by a management services contract or a concession to an hotel operator. In other words, option (i) in the 19 May letter had been selected. The letter contained brief details of pre-opening functions, staff lists and a wages budget. Koesnendar read this correspondence and made comparisons between the wages budget submitted and similar materials that had been obtained from Federal Hotels and the Burswood Group. On 28 May Woodmore wrote to Mortelman saying that the wages budget seemed high and asking that it be reviewed. The letter also enclosed a draft heads of agreement. On 23 June 1993 Minett wrote to Woodmore saying he had made a complete review of the salaries and had "adjusted expectations in a number of areas". On the same day Moneta wrote direct to Minett requesting further information about computer software requirements.

On 28 May 1993 Minett travelled to Perth. He had a discussion of about three hours' duration with Gani during which he explained his involvement in the venture and his experience in hotels. From 29 May to 2 June 1993 Koesnendar and Minett and others were on the Island. Koesnendar testified that he did not have many discussions with Minett at this time. Koesnendar said that while he was on the Island the other directors had been gathering information and having discussions with Canberra. The defendant did not make the final decision that the plaintiff would operate the Hotel until shortly before 3 June 1993, when the Heads of Agreement was signed.

By that time there were only two serious candidates, Burswood and the plaintiff. The issue was discussed between Woodmore, Gani, Moneta and Koesnendar. A consensus was reached that the plaintiff should be preferred and this consensus was reported to Sumampow. The most important factor that weighed with Koesnendar was the marketing segment and the possibility of a conflict of interest with Burswood. He testified that he had confidence that the plaintiff could set up the operation in the time frame that the defendant wanted. The fee structure suggested by the plaintiff was also in its favour. He also noted that the plaintiff had expertise in operating small scale casinos with limited local markets. He thought the plaintiff was the best choice to operate the Resort, the Hotel and Casino, and that it was capable of doing so. He said he had no doubts at any time during 1993 about the ability of the plaintiff to operate the Hotel efficiently. Mr Gani also testified that he had no doubts about the ability of the plaintiff to operate the Hotel and no objection to the plaintiff doing so.

Resmann's position is summarised in the following exchanges that took place during his cross-examination:

"At that time [around 13 May 1993] were you keen to get the job of both operator of the casino and operator of the hotel?....We were keen to operate the casino and with it came obviously the hotel, so it was something which had to be accepted as well.

But you remained keen to get the whole job as opposed to previously being keen to get the job of running the casino alone?....No.

Is that right?......No, that's not correct. We were keen to run the casino and it was made clear to us that we could only run the casino if we also operated the hotel, so we had to operate the whole resort.

You had to make a decision then, didn't you, whether to back out?......Yes; yes, that's correct.

Or to press forward on the basis that you had to run both?...That's correct.

And you made a decision to press forward?...That is correct.

And that was because you were terribly keen to become manager of the casino. Is that right?....Correct.

Were you keen enough to take a chance on whether you could run the hotel properly?.....It was clear to us that we were not hotel operators nor hotel experts, so we would have to get expertise one way or the other and this was certainly a challenge which we had to master in order to become operator of the resort.

Did you ever think that it would be unnecessary to operate the hotel to anything but a proper standard for a resort hotel of that kind?...Not at all. Not at all.

And is it right that when on 29 October 1993 your company entered into the operating agreement it did so on the basis that it would have to perform properly in all respects? ...Yes."

On 8 June 1993 Resmann wrote to Woodmore enclosing pre-opening schedules for each week from the week ending 20 June to the week ending 8 August on the understanding that the Casino would open on that date. The letter also contained a pre-opening budget and some information on working capital. On 9 June Resmann sent to Woodmore information on pre-opening costs, key staff costs and names (including a notation that the two special project managers, Minett and Farrow, would be phased out and replaced two months after opening) and details of a stand-by facility. Woodmore asked Resmann to provide further information about the substance of the plaintiff because the defendant's investigations had revealed that it had a paid up capital of $2 and consideration was being given to the amount of professional indemnity cover that would be requested. Resmann complied with this request on 10 June 1993.

In the period from June to October 1993 preparations for the commencement of operations continued. I will return to the evidence in this period a little later. As early as October 1993 tensions between the parties began to surface. On 5 October Farrow wrote to Moneta saying that the plaintiff had been appointed as operator of the entire Resort and should be left to complete pre-opening operations as it saw fit. The alternative was to transfer responsibility for the entire Hotel operation to the defendant's Perth office. On 7 October 1993 Moneta replied, although it was sent to Resmann. Moneta complained of an arrogant approach adopted by Farrow and others and questioned Minett's competence to be Hotel Manager. He said there was a fundamental question whether the plaintiff had the capacity and capability properly to operate the Resort. In his evidence Resmann said that he had no doubts about Minett's competence but for some time there had been difficulties with the degree of interference being practised by Moneta.

The Agreement was executed on 29 October 1993. The defendant puts its case on the basis that it was this Agreement (not the Heads of Agreement in June 1993) that was executed in reliance on the alleged representations. The relevant temporal focus for this aspect of the claim must be 29 October 1993.

I have set out in sufficient detail the several provisions in the Agreement which the defendant says constitute representations. There would be little point in repeating them.

8.4 Were the Representations Made and Relied On?

I think it is clear (and I find) that at no stage did the plaintiff profess prior hotel management experience. Its expertise was in the operation of casinos and this was known to the defendant. I think it is also clear that the plaintiff was not particularly keen to operate the Hotel. The passage that I have set out above from the cross-examination of Resmann indicates that the plaintiff was anxious to secure the contract to run the Casino. The defendant communicated a position that it wanted one operator to run both the Hotel and the Casino. The only way for the plaintiff to achieve its aim of running the Casino was to take responsibility for the Hotel as well. This it did and, not being a hotel operator or hotel expert, it "would have to get expertise one way or the other".

I accept Resmann's evidence as having been given frankly. His oral testimony accords with the letters of 19 May and 27 May. The plaintiff started off with three options. It eventually selected the one which would best accord with the overall proposal, largely because it provided the lowest management fee structure while allowing for a dedicated staff compliment. Prior to the signing of the Heads of Agreement the plaintiff had introduced to the defendant the person who it had appointed as its Hotel consultant.

I have no doubt that the defendant was anxious to appoint an operator at the earliest possible time because of delays in the project that had already occurred and because of the desire to open the Resort, perhaps as early as 8 August 1993. I also have no doubt that the defendant was somewhat concerned that the field of candidates had been narrowed to two. It might well be that the range of investigations carried out by the defendant was accordingly limited. There is no doubt that the potential conflict between the Christmas Island Casino and that of Burswood was a significant, perhaps the most significant, factor in the decision to appoint the plaintiff. At least one or some of the directors of the defendant clearly had misgivings engendered by experience with the plaintiff between June and October 1993. It might have taken some other steps before committing itself finally on 29 October 1993. Apparently it did not.

It seems to me that none of these factors are determinative. In Gould v Vagellis [1984] HCA 68; (1985) 157 CLR 215 Wilson J made it clear, at 236, that a representation will not be actionable unless it is relied on. If a material representation is made which is calculated to induce the representee to enter into the contract and that party in fact enters into the contract there arises a fair inference that it was induced to do so by the representation. The inference can be rebutted if it is shown that the representee knew the true facts or if the representee made it plain that it did not rely on the representation. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract.

I think the only reasonable way that the evidence can be approached is that in May 1993 the plaintiff was telling the defendant that while it did not then have the necessary hotel management expertise it would get it before the time at which the Resort would commence to operate. That is the clear import of Resmann's evidence and it is, in my view, the proper way to read the correspondence. The relative materiality of the Hotel operation vis-à-vis the Casino functions is, and always has been, a live and substantial issue in the case. Nonetheless, I think it would defy logic to conclude that the owner of a multimillion dollar Resort development would have paid no regard to the competence or otherwise of a candidate to manage a particular section or division of the proposed venture. This is particularly so as it was envisaged by the parties (as will appear from my findings generally) that the Hotel was to be a support facility for the Casino. It seems to me, therefore, that:

(a) the May 1993 correspondence does amount to an implied representation that from the time the plaintiff commenced to operate the Hotel it would do so in a proper and efficient manner and would obtain whatever expert assistance it needed to do so;

(b) in the context of this arrangement the representation was material;

(c) even though the stipulation that there be one operator for the entire Resort emanated from the defendant, the representation was made so as to induce the defendant to accept the plaintiff's offer to manage the venture;

(d) neither the plaintiff's known lack of prior experience nor its initial reluctance to undertake management of the Hotel overcome these findings; and

(e) while the Burswood conflict problem was the single most significant factor in the defendant's decision, and subject to what I am about to say concerning reliance, the issue of the plaintiff's capacity to operate the entire Resort (as opposed to the Casino only) played some part in the formation of the contract.

The next question is whether the defendant relied on and was actually induced by the representation to enter into the contract. The relative materiality of the representation can itself assist in drawing an inference of inducement: Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 578. However, I am not sure that the question of materiality impacts significantly in this case. The Burswood issue and the relative positions of the Hotel and the Casino tend to suggest to me that I should look more directly to the formation of the contract to determine the point.

Counsel for the plaintiff submitted that there was simply no evidence that any person who could speak for the defendant relied on the representations at the time of entry into the contract in October 1993. It is true that neither Koesnendar nor Gani (the only persons who were called and who could have testified directly on the point) said that the representation was relied on. However, both said that they had no reason to doubt the competence of the plaintiff to operate the Hotel efficiently. I have little doubt that the plaintiff's reputation and experience in operating casinos played a larger part in the thought processes of the defendant's representatives. But I do not think that the Hotel management aspect was either irrelevant to, or of such little weight as to be immaterial to, the defendant's decision to engage the plaintiff for the entire Resort. I accept the proposition put by counsel for the defendant that direct evidence of reliance is not necessary and it can be obtained by way of inference: Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd [1992] FCA 550; (1992) 38 FCR 471 at 482-83; Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242 at 263, 266.

I think there is sufficient in Koesnendar's evidence and that of Gani to justify the drawing of the inference that the defendant relied on the representation (in the form that I have outlined it) in entering into the Agreement. Counsel for the plaintiff placed reliance on Moneta's letter of 7 October 1993 as an indication that by then the defendant had a fundamental concern about the competence of the plaintiff to manage the Hotel and thus could not have relied on any prior representations. There are several things to be said about it. Gani testified that he had seen the letter but did not agree with it and protested to Moneta about it being issued. Koesnendar said that he saw the letter after it had been sent. He regarded it as Moneta's personal opinion and he himself did not have that view of Minett's competence. It must also be remembered that the 7 October letter is a response to the letter of 5 October 1993 from Farrow to Moneta. The clear implication from Farrow's letter is that the plaintiff could do the job provided the defendant stopped interfering and let it get on with its responsibilities. I do not suggest that this is a representation. It is not pleaded as such. However, it indicates the context in which the 7 October letter was written. It should also be noted that as between representatives of the plaintiff and the defendant (other than Farrow and Moneta) nothing was done about the letter or its contents.

I therefore find that the plaintiff made the representations set out in para 20 of the counterclaim and that the defendant relied on them in entering into the Agreement.

The next question is whether the provisions of recital C and cls 4.1(l) and 4.1(ab) themselves constitute representations, either expressly as statements of existing fact or as implied representations as to future matters. In this instance the evidence is entirely silent. There was no evidence as to the circumstances in which the drafting of the Agreement was negotiated. It was executed by Woodmore and Moneta on behalf of the defendant. No director or representative of the defendant gave evidence to the effect that they saw any term of the Agreement before it was executed. Gani said that he did not see the Agreement until some time in November 1993, after it had been executed. Koesnendar did not see the Agreement before it was signed. He had seen drafts but he was not questioned as to whether any of the provisions in question were in the drafts that he saw. Accordingly, there is no evidence that any person on behalf of the defendant saw, read or acted on the provisions of the Agreement that are said to found the representations relied on in this part. In my view this does not impact on the finding that the May correspondence constituted representations that were still current and active as at 29 October 1993. However, I do not think that the provisions of the Agreement add anything to the representations made at the earlier time. In any event there is an absence of any evidence from which an inference of reliance, separate and apart from the other communications, could properly be made.

In reaching this conclusion I have not relied on the failure of the defendant to call Messrs Woodmore, Moneta or Sumampow to give evidence as I was invited to do by counsel for the plaintiff. So far as this issue is concerned, the fact is that there was no evidence that anyone on behalf of the defendant read or relied on recital C, cl 4.1(l) or cl 4.1(ab) at the time when the Agreement was entered into. That is the simple point. It does not require resort to Jones v Dunkel.

The further point is that the provisions relied on are contractual promises. They are to be found in an agreement that contains an "entire contract" clause. Mere non-performance of a contractual obligation does not of itself found a claim for misleading and deceptive conduct: Wright v TNT Management Australia Pty Ltd (1989) 15 NSWLR 679 at 688; Futuretronics International Pty Ltd v Gadzhis [1990] ATPR 51,635 at 51,651; Serrata Investments Pty Ltd v Rajane Pty Ltd (1991) 6 WAR 419 at 432-34.

It follows that the Trade Practices aspect of the claim is alive, but it is limited to the representations pleaded in para 20 of the counterclaim.

8.5 Were There Reasonable Grounds for the Representations?

I have found that the plaintiff impliedly represented to the defendant that from the time the plaintiff commenced to operate the Hotel it would operate and manage it in a proper and efficient manner and would obtain whatever assistance it needed to do so. This was a representation as to future matters within the meaning of s51A of the TPA. By virtue of that section the representation is taken to be misleading unless the representor had reasonable grounds for making it. The representor is deemed not to have had reasonable grounds for making the representation unless it adduces evidence to the contrary. It follows that the burden of establishing the existence of reasonable grounds lies on the representor: State of Western Australia v Bond Corporation Holdings Ltd [1990] FCA 522; (1990) 99 ALR 125 at 129.

In May 1993, when the representations were made, the plaintiff had already engaged the services of Hotel, Leisure and Property Enterprises (Vic) Pty Ltd, which was the company through whom Minett operated, to provide expert assistance. His company offered hotel consultancy services to the industry in all areas of management, marketing and operations. In his letter of offer to the plaintiff Minett agreed to undertake the set-up and initial operations of the Hotel. He would act as General Manager of the Hotel for the first three months of operation with responsibility for staff recruitment, operational procedures and casino liaison. He also agreed to "source a replacement general manager" at the end of the period. Resmann had a copy of Minett's curriculum vitae and was aware of some other information about him. Minett had been general manager of a number of hotels including the Southern Cross in Melbourne and in Sydney. Some of that management experience was at the pre-opening stage. Resmann testified that he thought Minett would be well suited to the task where the plaintiff would have overall jurisdiction for the Resort and that he would be an employee of the plaintiff.

There were other directors or employees of the plaintiff whose experience and availability is relevant. Tucek had over 20 years' experience in the gaming industry. For some time he had been general manager of operations in the International Department of Casinos Austria AG based in Vienna. In that position he was overseeing approximately 60 casino operations. He said that he had not himself been involved in running an hotel but he had been engaged in casinos that had hotel operations associated with them and knew how it worked.

Resmann was a director of the plaintiff and of CAIL. He had been with the group since 1986. During this period he had been involved in the establishment of new casino operations in hotels in Cairo and Warsaw. He had been operations manager for the cruise ships division of the group supervising approximately 30 ships. In March 1992 he came to Australia to work on the development of the Canberra Casino and to develop new business in Australasia. The Canberra Casino opened in temporary facilities in November 1992. It was not associated with an hotel. However, it had two restaurants (a coffee house facility and a fine dining establishment) and three bars. In 1992 CAIL was also putting together a tender to operate the Reef Casino Cairns, in association with the Country Comfort Group. The tender was successful and the Reef Casino opened in 1996. Resmann had not himself been involved in hotel management.

Mr Warren Richards was in charge of CAIL marketing office in Sydney and was marketing the Canberra operation to premium players and was a specialist in that field. Resmann testified that he felt that Richards did the job well. He had been involved in the pre-opening phase of Jupiters, Breakwater and the Canberra casinos. Resmann felt he was ideally suited to address the specific needs of the Christmas Island project.

Ms Dee McGrath was the marketing manager of the Canberra Casino. She had been recruited to the position by Resmann and had guided the Canberra operation to an award for tourism in the Australian Capital Territory. Resmann felt that she was very well qualified and her services were available to the Christmas Island operation.

Ms Gillian Archer was the director of Human Resources for the CAIL Group. She had enjoyed 15 years' experience in human resources, including 11 years as personnel manager of the Southern Cross Hotel in Melbourne. This is a large five Star hotel with approximately 650 employees. Archer was responsible for recruitment, termination, industrial relations, training and the organisation of apprenticeships. She had also been involved, for two years, in the pre-opening phase of a large resort run by the Interwest Group in Queensland. She had been responsible for the recruitment of 350 staff and had negotiated awards and industrial agreements. She had also been engaged as human resources manager at the Raddison Hotel, Port Douglas with 300 staff and similar responsibilities. She had some qualifications in occupational health and safety and industrial relations. Archer was the human resources manager at Casino Canberra and had been involved at the pre-opening stage with responsibility for staff recruitment. In May or June 1993 Resmann told her that the plaintiff was involved in the Christmas Island Casino. She then became director of human resources for a company called Casinos Austria International Management Pty Ltd. Her role with the organisation changed and she then shifted to Christmas Island and initially the Perth offices to oversee pre-operations for the property.

Farrow had enjoyed 20 years' experience in a variety of positions in the gaming industry. Included in this experience were periods in the pre-operation stage of a Caribbean casino in association with the Ramada Hotel group, bringing into operation two casinos in Denmark and casino manager for Canberra Casino from June 1992. He had experience in operating casinos in association with hotels in Darwin, Mauritius and Sun City but was not responsible for hotel operations. In June 1993 Resmann asked him to become involved in the Christmas Island project.

Mr Paresh Patel was the Financial Controller of the CAIL Group situated in Canberra. He was available to give advice and assistance.

Some evidence was led to suggest that the casinos operated by the plaintiff in Canberra and Cairns had failed or, at very least, had suffered losses and had encountered severe difficulties. It seemed to me to be inappropriate to allow more than passing reference to those matters. I made that small concession because the defendant felt compromised because of the evidence that the plaintiff had led concerning the experience and success of the CAI Group internationally. To have allowed a more detailed analysis of the other operations would have opened up a large and potentially false issue as I would have been required to permit the plaintiff to explain the present position and the factors influencing it. I have not decided the case on whether the plaintiff was or was not a successful casino operator generally. I have considered the issue in relation to what actually happened in relation to the Christmas Island Resort in the period May 1993 to December 1995. The real issue in this part of the case was what the plaintiff did and what expertise it had available to it in 1993. Financial setbacks in other operations in 1996 and 1997 would have been of limited relevance in assessing the plaintiff's state of mind in 1993.

The upshot of all this is that the plaintiff had available to it a number of persons with vast experience in areas of casino operation and control, including the setting up of new casino operations. I refer in particular to Resmann, Tucek and Farrow. Player development (high rollers) and marketing generally were catered for by Richards and McGrath. Both of these persons were known to Resmann and had enjoyed his respect as successful proponents of their relative disciplines. Industrial relations and staff matters were in the hands of Archer, again someone who was known to and respected by Resmann. In financial matters, Patel was available. So far as concerns the Hotel, the services of Minett (who was known to Resmann and whose curriculum vitae appeared comprehensive) had been engaged. Most of these people had been involved in the pre-opening stage of the Canberra Casino and Resmann would have had an opportunity to assess the contribution that they had made. I have already said that I accept Resmann as a frank witness and am prepared to rely on his testimony. So far as concerns Minett, I note that neither Gani nor Koesnendar, both of whom met him in late May 1993, expressed any concern about his hotel management qualifications and experience. Of course, in October 1993 Moneta expressed an adverse view on that question but it does not seem to have been a view shared by either of those gentlemen. I should also mention Mortelman. He did not give evidence and so far as I can see, no person testified as to his exact area of expertise. However, he was responsible, jointly with Resmann, for the early negotiations of the arrangement and was one of the plaintiff's nominees on the Advisory Committee in the first instance. Given all of this, I believe that Resmann was justified in thinking, as at the end of May 1993, that he had in place the senior management personnel to set up the Casino and to "get [the hotel] expertise one way or the other [as] a challenge which [the plaintiff] had to master in order to become operator of the resort".

I think it is important to look at the steps that the plaintiff took between May and October 1993 to prepare for the operation of the Hotel. On 27 May 1993 it submitted to the defendant a preliminary proposal for the Hotel and food and beverage services. It seems to have been prepared by Mortelman. It covered the appointment of executive staff, the level of fixtures, fittings and equipment, preparation of pre-opening budget, commencement of staff recruitment, establishment of working budgets for the first year of operation, identification of Hotel computer systems, opening staff and a wages budget. On 8 June 1993 the plaintiff submitted a pre-opening schedule dealing with the establishment of junket operations, recruiting, preparation of gaming rules, union negotiations, gaming licences, staff training, preparation of manuals and a manning schedule. It also included a start-up budget and some details on cash reserves and stand by facilities. The pre-opening schedule, which covers the period from 13 June to 8 August, was prepared by Farrow. The manning schedule was prepared by Archer. On 9 June Resmann sent further information on pre-opening costs, key staff costs and names and details of the standby facility.

Because the plaintiff was aware that Minett would not remain as general manager of the Hotel for long after the opening it was important that steps be taken towards securing a replacement. Mr Gareth Thomas was approached. He was then engaged as manager of the Rottnest Lodge for the All Seasons Hotel group. His curriculum vitae discloses some training qualifications in aspects of the hospitality industry and experience for several employers in a variety of hotel positions covering a period from January 1982. Archer discussed his application with Minett and with Resmann. Archer testified that she regarded Thomas as potentially a suitable replacement for Minett. She conducted reference checks to satisfy herself as to his suitability. In June 1993 Thomas was engaged as executive assistant Hotel manager with particular responsibility for food and beverage matters.

Archer was involved in staffing matters for the Resort from a very early time. She liaised with others who were involved in pre-operational activities, including Farrow, McGrath, Minett, Mr Ian Napier, who was the head of the security division, and Resmann. Archer had previously worked with Minett at the Southern Cross Hotel in Melbourne and said she regarded Minett as a competent and capable operator who knew his job. Resmann had discussed Minett's possible appointment with her before it was made. Her view was that given Minett's prior experience he was a suitable person to be appointed to the Resort. In June 1993 Archer came to Perth and was based at the defendant's office. So to were Minett and Mr John Smith (the gaming manager). Archer had meetings with Koesnendar and Woodmore in relation to staff accommodation, industrial agreements, and recruitment. Woodmore told Archer that recruitment should be from Perth and that salary levels should be no greater than those applying under the Burswood award. Archer felt this was unrealistic given the difference between a capital city operation and one in a remote island location.

Archer was extensively involved in recruitment and personally reviewed hundreds of applications. In mid-1993 she came to Perth on five occasions and travelled to the Island several times in connection with pre-operational matters. Early in July 1993 Ms Lisa Callaghan (Ward) was engaged as personnel manager. All staff appointments continued to be approved by the defendant. Archer proceeded to negotiate an award for the Resort. In the latter half of 1993 she went to the Island three times and was in regular contact with the Resort.

In July 1993 staff began to arrive on the Island. At this time, the parties still had not given up on the aim of opening the Resort in August. On 24 July senior staff held a "pre-opening meeting" to air difficulties and achievements. On 26 July 1993 Minett wrote to Koesnendar detailing the senior personnel who had been appointed. They included the personnel manager, executive housekeeper, purchasing manager, duty manager, executive chef, Chinese chef and chief engineer. Staff recruitment continued and there was adduced in evidence lists of staff members prepared by Archer as at 24 September 1993 and 4 November 1993.

Farrow also gave evidence as to his role in the pre-opening period. He first travelled to the Island in July 1993 after spending a couple of weeks in Perth with Woodmore, Moneta and Koesnendar. Pre-opening meetings were held each week and weekly updates were prepared by Farrow and sent to Resmann, Patel and the directors of the defendant. I mention ex 1/243, 1/249, 1/272, 2/15, 2/49, 2/87, 2/133 and 3/92 as examples. Farrow was meeting with Gani on a regular basis. Matters were raised with Gani about the inadequacy of storage space necessitating the use of Hotel rooms for that purpose, and problems with staff accommodation. By the end of August, Farrow had been working with Minett for a month and regarded him as conscientious and competent. One of the activities in which Minett was engaged was the preparation of hotel operation manuals. On 25 August 1993 Farrow sent to the defendant a status report covering all facets of the Casino and Hotel operations. It covered the preparation of operating procedures and manuals, training manuals, stock inventories, stock control procedures, standards and requirements for Telecom and computer systems. It also included a draft Chinese menu. On 29 August Farrow reported that the installation of two of the Resort's computer systems had been finalised and checked for operational problems and that menus had been finalised.

On 3 September Minett sent Moneta a food and beverage menu for areas including the fine dining restaurant. There had been discussions about estimated occupancy levels and planning had proceeded on a figure of 45%. This was then changed to 80% necessitating additional staff recruitment. Arrangements were put in place for the establishment of an office in Jakarta under the control of the defendant and for the appointment of owners representatives to the staff complement at the Resort. Purchasing was creating problems and it was the genesis of the exchange of correspondence between Farrow and Moneta on 5 and 7 October to which I have already referred. This was the subject of further meetings between representatives of the parties in October. Financial and computer systems, purchasing and ordering systems and stock control systems were put in place.

It seems to me that this evidence entitles me to find that the plaintiff had reasonable grounds for making the representations that it did. It assembled the senior management staff who were responsible for the Resort operations. I am satisfied that Resmann believed that those people were equal to the task and I have explained why. Those staff members went about their tasks. By 29 October 1993, in addition to the staff to which the plaintiff had access in May 1993, approximately 350 employees had been engaged for the Resort. A vast amount of work had been done during the pre-operation phase of the project preparing the Resort for opening. In the early stages it was envisaged that the defendant would be responsible for the marketing of the Resort. This was reflected in Resmann's letter of 20 May 1993 to Woodmore and in the Heads of Agreement signed in June 1993. So far as the evidence discloses, in the period between May and October (at least until Moneta's letter of 7 October) the two matters of major concern to the defendant were the amount the defendant could charge to the operation for marketing and the desire to keep salary levels as low as possible. From the plaintiff's perspective problems, particularly in the areas of staff accommodation, stock storage and purchasing systems, arose. However, the resolution of many of those problems were within the province of the defendant. I do not think that these problems ought to have caused the plaintiff to conclude that it would not be able to carry out what was required of it. The impression that I gained from reading the various weekly updates and minutes of pre-opening meetings and the tenor of Farrow's evidence (which I accept) have confirmed that view. I have not seen any evidence that would justify me in finding that either in May or October 1993 the plaintiff should reasonably have been of the view that when the time came to open the Resort it could not or would not be able to operate and manage the Hotel efficiently and it would not or could not obtain expert assistance in order for it to do so.

I therefore find that both at the time when the representations were made (May 1993) and the time when they were relevantly relied on (29 October 1993) the plaintiff had reasonable grounds for making them.

I have concluded that the provisions of recital C, cl 4.1(l) and cl 4.1(ab) are not actionable representations as statements of existing fact. If I am wrong in that finding the representations would be actionable if they were false, as alleged in para 23 of the counterclaim. Briefly, the allegations are:

(b) there were no proper accounting procedures and no plans for the preparation of monthly budgets;

(c) there were no plans to provide food for Asian guests; and

(d) the initial inability to operate the Hotel was not cured at any time before 12 December 1995.

The question of a marketing plan was a constant theme throughout the trial. It is covered in the issue numbered 2(a) in the statement of issues and there is nothing that I would wish to add. The alleged absence of accounting procedures was another issue that recurred throughout the proceedings. It is covered in issue 2(f). That there were no plans to provide food for Asian guests is simply not made out on the evidence. As early as July 1993 the plaintiff had engaged the services of a Chinese chef in addition to the executive chef. On 25 August 1993 Farrow sent to Moneta a draft Chinese menu. On 3 September 1993 Minett sent to Moneta a series of draft menus. Unless my gastronomic knowledge is even more deficient than I had thought, the drafts look very much like Asian fare. As to the general allegation that the food and beverage facilities were disorganised, the matter falls within the general complaints made by the defendant about those areas. The fourth area of complaint also covers pretty well the entire gamut of the litigation.

I reject the defendant's case so far as it relies on misleading and deceptive conduct under s52 of TPA.

9. Breaches of the Agreement - Introductory Comments

I now turn to consider whether, at the time when the defendant purported to terminate the Agreement, the plaintiff was in breach of any, and if so which, of its obligations under the Agreement. It will be clear from what I have already said that I regard the issue here as whether there are breaches of the Agreement which, either individually or in combination, amount to repudiatory conduct by the plaintiff. Before examining the particular allegations it will be convenient to look at the respective cases of the parties in broad perspective.

When this broad exercise is undertaken the case looks disarmingly and beguilingly simple. However, by the time the trial started and throughout the hearing the relationship between the parties had deteriorated to such an extent that there was little co-operation to limit individual issues. The areas of dispute simply proliferated leaving me with the task of making findings in many areas which I think, with more goodwill, could have been avoided.

The plaintiff contends that the Christmas Island Resort was primarily and essentially a casino venture. The Agreement was for the management of a venture that included both a hotel and a casino. However, the Hotel was never intended and could never be anything other than a support facility for the Casino. The overwhelming source of the revenue and the anticipated profit from the venture was to come from the Casino, not the Hotel. The plaintiff denies that it was in breach of the Agreement at all. It says that if there were breaches, they have to be looked at in the context of the Agreement as a whole. That context, the plaintiff says, is the management of a Resort which is primarily oriented to the Casino and for which the Hotel is an adjunct or support facility.

The plaintiff also contends that this is not a situation in which a test of strict liability can be applied. The general nature of the Agreement is such that the plaintiff was called upon to manage the Resort utilising a large staff complement. The Agreement does not require the manager to indemnify the owner for any losses that might be incurred from time to time. Nor would it follow that the manager would be liable in damages simply because, after curial inquiry and with the benefit of hindsight, there might have been a better way of carrying out a particular task. The plaintiff says that on the proper construction of the Agreement the obligation of the manager is to exercise reasonable care in the performance of the management functions. If the manager fails to exercise the care that might reasonably be expected from a competent and prudent manager in similar factual circumstances, it will be liable in damages. However, it does not follow that any action by an employee that might have caused loss to the Resort will, of itself render the manager liable in damages. The Agreement does not require the manager to manage the Resort perfectly in all the circumstances or to indemnify against all losses occasioned by departure from perfection. Management judgment is required in making decisions involving competing considerations. Human error may intervene. Hindsight may show that the judgment was wrong. But to establish breach it is necessary to show that the acts or omissions complained of fell outside the range of reasonable conduct in all the circumstances.

The general approach of the defendant was that the Agreement means what it says: the plaintiff is required to operate the entire Resort, Hotel and Casino, in a proper and efficient manner. Not to put too fine a point on it, the defendant's general approach is that the plaintiff failed to run the Hotel properly and efficiently and was, in fact, utterly hopeless and incompetent in that regard. Counsel for the defendant submitted that it would be wrong to approach the conduct of the plaintiff from a standpoint akin to negligence. The proper course was to construe the individual provision of the Agreement that was then under consideration. In some instances the provision, as construed, would then be applied according to its tenor. In other instances, the provision, properly construed, might require the exercise of a value judgment. Whichever construction applied, the manager could not escape liability on the basis that it had acted reasonably even though it had failed to comply with an obligation.

In Ranieri v Miles [1981] AC 1050 at 1086 Lord Edmund-Davies said:

"It is axiomatic that, in relation to claims for damages for breach of contract, it is, in general, immaterial why the defendant failed to fulfil his obligation, and certainly no defence to plead he had done his best."

It seems to me that a defaulting party cannot be excused from what would otherwise be a breach of contract because it had acted reasonably. However, the critical question is the ambit of the contractual provision that is said to have been breached. This is a question of construction and one that has to be applied to the individual provision. Issues of reasonableness might properly intrude in determining the ambit of the obligation imposed by the contract. In this sense, I think the proper approach lies somewhere between the positions put respectively by the parties.

The next general comment relates to the context in which the individual provisions imposing obligations on the manager fall to be determined. In general terms I have accepted the submissions put to me by counsel for the plaintiff on this aspect. I have taken into account the matters that I am about to relate in construing the individual provisions and in assessing the factual material presented in relation to the alleged breaches.

The plaintiff was engaged late in the physical development of the Resort and was required to bring the venture into operation in a short period of time. The initial aim was to open in August. It opened in November. This involved significant constraints on what was done and on what was required. The Resort was a start-up operation on a "green-fields" site. No feasibility study had been done, leading to the inference that the profitability of the Resort depended significantly on what happened in the Casino, particularly in relation to "high rollers". The Resort was situated in a remote location with infrequent and inadequate airline services. There was limited infrastructure available on the Island. There was a lack of any significant antecedent marketing effort. It was a little known destination and not one where the new casino operation would get some benefit from marketing of other attractions in the area. The availability of local personnel was limited, leading to a need to recruit most staff from the mainland or other overseas places. Recruitment was occurring in an environment where there was competition from new casinos in Australia with respect to staff. There were problems with accommodation for senior staff and employees generally. The resident population did not provide a source of trade to smooth out fluctuations in custom from visitors to the Island. Difficulties were experienced in the sourcing of supplies from Indonesia and Australia. Supplies had to be brought great distances and climatic conditions made delivery difficult at certain times of the year. Finally, the Agreement provided for a complex decision making structure that permitted the owner a significant level of control.

Another general issue that attracted considerable sensitivity was the identity of the employer of the various staff members of the Resort. Some of the senior management personnel were clearly employees of the plaintiff. There were "owners representatives" on the staff complement of the Resort who were clearly employees of the defendant. But what about the great bulk of the staff?

I have already referred to the rather curious provisions of cl 8 of the Agreement in relation to employees. The Industrial Award entered into in September 1993 nominates the defendant as the employer and binds the Union and the defendant. The Enterprise Bargain Agreement, which became effective in October 1994 to replace the Award, again nominates the defendant as the employer but says that it binds the Union, the owner and the operator of the Resort. I confess to being little wiser now than I was when I first read it as to exactly what cl 8 means or was intended to mean. It is symptomatic of the poor drafting that, with respect to those who crafted it, besets this document. Counsel for the plaintiff submitted that the plaintiff can only be held liable for breaches of contract for which it, as a corporate entity, is responsible. This means that the relevant breach must be established to derive from an act or omission by some person for whom the corporate persona of the plaintiff is responsible. Counsel for the defendant submitted that the plaintiff was responsible for the acts and omissions of all those through whom it discharged its obligations under cl 4.1 of the Agreement. This is because the Agreement gave to the plaintiff complete control and authority over employees. Counsel referred to cases such as Kondis v State Transport Authority [1984] HCA 61; (1984) 154 CLR 672 and Spalding v The Tarmac and Civil Engineering Ltd [1987] 1 WLR 1508 which emphasise the importance of the powers of direction and control in deciding issues of vicarious liability.

In the end, I do not think that I need to go to any great lengths to solve the dilemma. The fact is that some of the senior personnel were employees of the plaintiff. The "assistant employees" or owners representatives were, for all practical purposes, employees of the defendant. The case is largely about systemic deficiencies. The plaintiff was responsible to ensure the establishment and monitoring of appropriate accounting, administration, financial control and budgeting systems. If there were deficiencies in the systems, responsibility for them must be sheeted home to someone for whom the plaintiff bears corporate responsibility. If there are defects in other management and administration areas, such as promotion or collection of accounts or overpayments, it must likewise be sheeted home to someone for whom the plaintiff bears corporate responsibility. Whatever may be the technical position with persons employed at the Resort, I have no doubt that Tucek, Farrow, Thomas, Minett, Tan, Archer, Ms Catherine Ryan, Ms Diana Radford, Secco and Resmann are all persons for whom the plaintiff bore corporate responsibility. I would be a little diffident about placing people such as Mr Melvin Bartholomeusz, Mr Shane Tatnell and Mr Trevor Harris into the same category. I think I can skirt around this area of controversy in reaching the necessary conclusions.

So far as concerns systemic error, the defendant would have to establish either that there was no system at all or that there was no proper system or that there was a system but it was inefficiently administered. In relation to the last of those possibilities the defendant's case relies largely on particular instances of error as a basis on which to draw the necessary inferences of systemic deficiency.

I accept the proposition put by counsel for the plaintiff that, generally speaking, no direct evidence was called by the defendant to show that the systems employed by the plaintiff in marketing, accounting, staff recruitment or management generally, were below that which would be expected of a prudent and competent manager. The defendant's case rests largely on the contention that systemic error is to be inferred from specific instances of human or other error.

A significant part of the plaintiff's case revolved around the "cost-benefit" analysis of the remedial steps that the defendant was alleging should have been taken. This is allied to the other general point that the Casino, rather than the Hotel was the primary revenue and profit centre.

I accept the submissions of the plaintiff that in making management decisions a prudent and competent manager would be required to take account of the costs of various alternative courses of action. For example, increasing accounting controls would increase management costs. The mere fact that controls could have been improved does not of itself establish that failure to improve controls is a breach of an obligation imposed by the Agreement. Such a conclusion could only be drawn after a comparison of the likely benefits to be derived with the likely costs to be incurred and the flow on effect to other areas of the operation. For example, a change that might be to the benefit of one cost centre might have an adverse impact on another, and arguably more important, division of the operation.

The issue of revenue and profit centres is, and remains, one of central significance. The plaintiff points to the disparity between revenue and profit earnings in the Hotel and Casino and says that losses (and expenditure savings) in the former were insignificant when compared with the latter. The defendant suggested that the figures told a different tale.

I can illustrate the different approaches to the figures by reference to the operating results for June 1995 (ex 15/1) which contain the figures for the 12 months to 30 June 1995. They do not purport to be audited results but they are sufficient for present purposes. I will use rounded figures. The total revenue for the year was $156,500,000. Casino revenue for the year was $145,400,000 and departmental profit was $29,400,000. The combined results for rooms, food and beverage disclose revenue of $7,500,000 and a departmental loss of $2,000,000. After allowing for all overhead expenses, management fees and the transfer to the refurbishment reserve, the profit on operations for the year was $6,200,000. There are other income and expense items but for the purpose of this exercise I will regard the combined rooms, food and beverage as the Hotel operation. The plaintiff says that the Casino accounted for 93% of the revenue (compared with 5% contributed by the Hotel) and all of the profit. On the other hand the defendant says that if the Hotel operation could be made to break even it would add $2,000,000 to the bottom line, increasing the net profit from operations by some 33%. Counsel also referred to the unaudited figures for the 6 months to 31 December 1995 (ex 28/111). Concentrating solely on food, the loss in the two restaurants was $870,000. The profit on operations for that period, again after management fees and reserves, was $1,400,000. Had the food division broken even the bottom line would have improved by about 62%. Counsel for the plaintiff countered by pointing to the larger profit figures for the financial year ending 30 June 1994 ($18,300,000) and to the fact that the refurbishment reserve had not been spent and nor had an account been established for the fund. In other words, the amount notionally set aside for refurbishment was money under the control of, and available to, the defendant.

I think this exercise shows how difficult it is to rely on figures. Both parties have a point. It is not possible to say that the food and beverage operations were a mere bagatelle and largely irrelevant to the financial wellbeing of the venture. On the other hand, simple statistics mask as much as they disclose and the exercise that I have set out begs many questions. It is not clear whether break even on food and beverage was ever a realistic possibility and it ignores the type of cost-benefit analysis that is needed in all such decision making. These are issues to which I will return in due course.

As I have said, a plethora of issues was raised during the hearing. Most of them are relatively minor but there are some with which I felt I had to deal. In the end I think it is the allegation of a failure to address continuing losses in the Hotel area and the extent to which systemic deficiencies, which the plaintiff should have identified and corrected, contributed to those losses, which is at the heart of the dispute.

I have done what I can to limit the length of these reasons but there are so many issues that go directly to the Hotel losses and systemic deficiencies that I have found economy of scale difficult to achieve. I regret my part in the destruction of the south-west forests.

The defendant was anxious to canvass events occurring after 12 December 1995 as going directly to the right to terminate as at that date. In procedural rulings made during the trial I indicated that I was reluctant to enter into those matters.

On 19 December 1995 the writ was issued and an injunction was obtained just before the Christmas break. The parties were reasonably frequent visitors to the Court from January 1996 onwards, as directions hearings in the Expedited Lists and appearances in relation to the injunction were called on. I was told during the hearing that there had been attempts to settle the dispute (although no detail was given) but those attempts were unsuccessful. It was patently obvious that the relationship between the parties continued to deteriorate. I formed the view that if I allowed the defendant to go into matters occurring after December 1995 to establish further or other breaches sufficient to justify termination I would be opening up the whole history of the conduct of the Resort from January 1996 on. It would have been necessary to permit the plaintiff to explain the relationship between the parties at each stage and to say why certain steps were taken or not taken as the case may be. Counsel for the plaintiff told me, and I accepted the statement as being genuinely made rather than as in terrorem, that to do so would have made the hearing much longer and virtually unmanageable. It would not have been in the interests of the fair and efficient administration of justice for this case to have taken any longer than it did.

For these reasons I limited the scope of evidence largely to the period up to the end of December 1995. I regarded post-December events as relevant for two purposes only. The first was the extent to which they explained matters occurring before termination. The second was the extent to which they could bear on discretionary relief. At the time when I made this ruling, specific performance was a live issue. That went away but the formulation of the declarations for which each party contended remained an issue of some significance.

During closing submissions references to the Jones v Dunkel principle came thick and fast from both counsel. The plaintiff suggested that Woodmore, Moneta, Sumampow and Mr Ari Sagita should have been called, particularly in relation to the Trade Practices claim and to the internal processes which the defendant used in deciding to award the management contract to the plaintiff and then to terminate it. Counsel for the defendant suggested that Minett and Mr Darryl Rowe (a food and beverage consultant engaged by the plaintiff as part of the task force) should have been called in relation to the alleged deficiencies in the Hotel operations.

After hearing evidence for more than 70 days from about 30 witnesses, plus written statements from other witnesses, I was not inclined to treat Jones v Dunkel points with favour unless there was some real, patent and compelling force to the argument. I can think of another dozen or so persons about whom I heard and who might have been called. The evidence had to stop somewhere. In the end I was not persuaded that the failure to call any witness by either party was sufficiently curious to require me to draw the inferences that might have been available. Neither party has benefited from Jones v Dunkel inferences.

Throughout the hearing I was waiting for one party or the other to deliver what in common parlance is called "the knockout blow". It never came. On the whole, I think that all of the witnesses did their best to relate to me their version of events in an honest and forthright manner. Memory lapses, language difficulties and shows of ignorance surfaced from time to time but not in a manner that caused me to have doubts about the overall integrity of the witnesses. There are some aspects of the evidence that I found unsatisfactory. In the main, however, they can be seen as characterisation of events or documents rather than as attempts to obfuscate. I have rejected individual parts of the evidence but I have not formed an adverse view of the credit of any witness.

During closing submissions some emphasis was placed on credibility so I should deal generally with the points made. The plaintiff made only minor forays into the area of credit. It was put that the Citeko meeting was a deliberate, planned ambush of the plaintiff. Despite the denials of that proposition made by Gani, I have no doubt that it is true. The defendant had formed an unfavourable view of the plaintiff's performance and had decided that serious action had to be taken. It was not going to give much leeway to the plaintiff. I accept the evidence of Resmann, Farrow and Secco that they had no idea that the meeting would proceed as it did. Nonetheless it might be described as part of the rough and tumble of international commerce and I am not prepared to say that the defendant did other than act as if the plaintiff were entitled to no, or little, quarter.

It was also suggested by the plaintiff that from early in 1995 the defendant decided to embark upon a course, the result of which would be the termination of the operating agreement, so that the management fees that were being passed to the operator would be diverted to another entity associated with the defendant's directors. Gani acknowledged that as early as August 1995 the alternatives open to the defendant in the event of termination were discussed. One of the possibilities that he discussed with Woodmore and later with a Mr Hand (a former politician) was the formation of a company in which the three of them would have a shareholding interest and which would contract with the defendant. The mere fact that this possibility was explored does not place Gani's credit in jeopardy. The exploration of alternatives was a commercially prudent step to take.

There is a related point that I will make at this stage. Although there was no direct evidence I am quite satisfied by way of inference that by early October 1995 (at the very latest) the resolve of the defendant to rid itself of the plaintiff as operator had firmed. This may explain why, for example, some of the budget versions and, in particular, the restaurant restructuring proposals which the plaintiff had submitted in September and October both within the budgets and separately, received tardy, perfunctory or no response from the defendant. I will go into these matters in more detail later in these reasons. This aspect does not have an impact on Gani's credibility but it is important for other reasons. For one thing, it goes to the adequacy of the plaintiff's response to the matters of complaint raised by the defendant.

The whole approach of the defendant to the payroll question (both before and during trial) was quite unsatisfactory. I will give more detail of that statement later. One of the credibility issues raised by the plaintiff concerns alleged fabrication of the internal auditors' time sheets. The internal auditors investigating the financial records of the operator were adduced largely in support of one element of the defendant's claim for damages. Some of the time sheets had been altered. I will give one example to illustrate the point. The witness Albertus Djinta was one of the internal auditors. His time sheets are included in exhibit 38/109. The time sheet has a space within which is to be inserted the date of the end of the work period which it covers. It also contains a space for the insertion of the aspect of the operator's records which was the subject of investigation at the time. The original of the document that is p38/109 shows that the time period was initially noted as "1996" but was changed to "1995". The investigation subject was initially noted as "F & B" (food and beverage) but it was changed to "Junket and lap kew" (the term lap kew meaning "financial report"). There are similar changes on pp38/110, 112, 113, 114 and 117. The witness was unable to give an explanation as to how the errors and changes were made. The suggestion put to this (and other) witnesses was that the time sheets were fabricated. They had not been created at the time when the work was said to have been done but were made up in the GMT office later in 1996. A similar proposition was put to other internal auditors, Mr Mardjohan Tamin and Mr Franz Kusuma. Each of the witnesses to whom that proposition was put denied it. I formed such a poor impression of the entire payroll exercise and the lack of understanding of it at the time when the work was done that I would prefer to put any discrepancies down to lack of performance by the internal auditors rather than to a deliberate attempt to manufacture evidence. The time sheets in ex 38/17, 38/49, 38/109 38/141 and 38/173 contain numerous other errors or discrepancies that were the subject of cross-examination. Examples of these problems are to be found in the cross-examination of Sidodo at transcript pp2175-76, 2180 and 2187 and of Kusuma at pp1999 and 2028. All of this confirms me in the view that the auditors' time sheets are so unreliable that I can give little weight to them.

In November 1995 Tucek met Sumampow in Jakarta. They discussed (unsuccessfully) a resolution of their differences. Tucek was then going overseas. He testified (and there was no evidence to the contrary) that he and Sumampow agreed that there would be further communications when he returned from overseas and that no action would be taken in the meantime. The 12 December notice was served before Tucek returned to Australia. Nothing turns specifically on it. However, it is symptomatic of the nature of the relationship.

The defendant's case placed a rather more substantial reliance on credibility issues. Counsel for the defendant made much of individual aspects of Secco and Tan in relation to payroll, particularly the late disclosure of ex CCC, as matters going to credibility. The whole payroll exercise bordered on being a fiasco. In the circumstances I think it is understandable that the witnesses were unsure as to what was required. I am not prepared to hold the matters referred to by counsel against the credit of the plaintiff's witnesses.

Counsel also suggested that Archer was so obviously prejudiced against the defendant that she was left with little credit. I think this probably goes more to weight than to credit. Secco and Tan came in for pretty serious criticism. I do not wish to go through all of the individual issues raised by counsel. They are to be found at transcript pp6777-6796. I can say that I have considered all of the matters raised. Some of them appear in the discussion of allegations of individual breach. None of them have caused me to take an adverse view of the credibility of the witnesses. There are, however, a couple of them that I should mention specifically.

During the trial junior counsel for the defendant travelled to Cairns to interview Mr W D McClusky, an accountant with Price Waterhouse. It was known at the time that McClusky was likely to be called by the defendant. Because Price Waterhouse had, from time to time, acted for both the plaintiff and the defendant the plaintiff insisted that one of its representatives be present at the interview. Senior counsel for the plaintiff told me that he had been asked about it and had given advice that the plaintiff should be so represented. It meant that junior counsel's trip to Cairns was a waste of time and money. I believe that the stance taken by the plaintiff on this issue, while technically correct and open to it, was unfortunate and not in the best interests of the proper and efficient running of the litigation. However, it was symptomatic of the relationship that had developed between the parties. Because of this fact and the fact that it was done on legal advice I do not think I should hold it against the plaintiff. I would hope, however, that it does not become a feature of the litigation process.

Much was made of the time at which the document at p19/110 (which is part of the task force report ex 19/1) was prepared. It is dated 27 July 1995. Counsel for the defendant submitted that the combination of ex 17/199.1 (a letter from the union dated 28 July 1995), p19/109 (a memorandum from Farrow dated 16 August 1995) and ex 23/23 (a memorandum from Secco dated 28 September 1995) lead to the irresistible inference that p19/110 was sent at some time after 27 July 1995 and was back-dated. I can see the argument but it is not sufficiently clear for me to conclude that the document was back-dated. Secco said it may have been revised about 29 July and the date not corrected by the system.

Another significant credibility attack on Tan concerned a report that Tan commissioned from Rowe on the Hotel operations. Tan's evidence was that on or about 18 August 1995 he received the document of three pages entitled "Report Overview", which is exhibit 18/225. Some time later he received a second document of nine pages plus schedules entitled "Report - Christmas Island Casino" which is exhibit 18/97. Some time shortly before 6 September 1995 Tan received a third document, also of nine pages plus schedules, entitled "Report - Christmas Island Casino", which is exhibit 22/69. The second document starts with these words: "As a result of the incorrect operational procedures being put in place at the start-up time and the lack of direction from management a number of short falls have been experienced by the Hotel operation". Counsel for the defendant suggested that the first document to arrive was exhibit 18/97 and because of the potentially damaging introductory sentence Tan had approached Rowe, or had someone else approach him, to change it. Tan denied the suggestion. He said that he had never asked Rowe to change the report and that the chronology that he had outlined had been correct. I accept Tan's evidence.

I do not think it would be profitable to spend much more time on specific credibility issues. I reiterate that while there were some aspects of the evidence that I found surprising and difficult to accept, findings on credibility have not been a significant factor in my overall conclusions.

Appellate courts sometimes criticise Judges at first instance for reciting evidence without clearly enunciating which parts of the evidence were accepted and which were rejected. In an early draft of these reasons I slavishly adopted that course in relation to every piece of evidence to which I referred. I found it irritating and cumbersome. I thought it would make these reasons even more difficult to read than will be the case in any event. Where I have thought it necessary, or where there might be confusion, I have made an express comment as to how I have dealt with a particular item of evidence. In the main, though, I hope that my reasoning in relation to documents or testimony will be apparent from the context and from the conclusions that I have enunciated.

The was a considerable overlap between many of the issues raised in the action. Inevitably, the same factual and evidentiary material arose in similar, or sometimes different, guises in relation to individual issues. I have tried, so far as is possible, to limit repetition. I have not been entirely successful in that endeavour.

The "paper war" heated up significantly after the Citeko meeting. Counsel for the defendant put it to Tan that the amount of correspondence flowing from the plaintiff after Citeko was a deliberate attempt to "snow" the defendant, to obfuscate and to put the plaintiff in the best possible light in case litigation should ensue. Tan, of course, denied the proposition. I do not think that Tan or the other officers of the plaintiff let many opportunities pass without committing their thoughts and actions to paper in the latter half of 1995. I am sure that there was an element of self preservation and self interest in those activities. On the other hand it has often been remarked in litigation of this type that commercial people who disagree with an assertion that is put to them tend to respond. To remain silent invites criticism. It must also be borne in mind that the plaintiff was dealing with what purported to be a formal notice under a contract that required the plaintiff to take steps to remedy the alleged defaults and, if cl 17.1(h) was under consideration, to advise the defendant of the action being taken to remedy the alleged mismanagement. Some of the correspondence is self serving and less than frank. To that extent it does not enhance the general reputation of the plaintiff and its relevant officers. But it has to be seen in the context that I have mentioned.

In my view the decision making structure embodied in the Agreement was one that would only work if the parties treated each other with the utmost goodwill and co-operation. This is particularly so where there was a lack of experience in some aspects of the venture on both sides. The impression that I gained from listening to the evidence and reading the correspondence is that goodwill disappeared at an early stage and was replaced by suspicion, mistrust and interference. The degree of control which the defendant sought to exercise was, in my view, unusual. While the presence of internal auditors at the Resort was perhaps not quite as excessive as the plaintiff sought to establish I have no doubt that their activities were intrusive and did not assist the cause. Whether the defendant really needed all of the information it sought is problematic. Whether it could have achieved the same or a similar result in a less confrontational way is open to debate. By the time of the Citeko meeting the relationship between the parties was at a low ebb. It continued to deteriorate. The situation called for co-operation. This was a commodity in very short supply.

To my mind neither party has come out of this dispute with its reputation for management style and interpersonal skills enhanced.

I will now turn to the allegations about individual breaches of the Agreement. I will discuss each of the several allegations that I have listed in para 2 of the summary of issues contained under the heading "The Issues for Determination". I will first discuss some issues that are, in my view, of less significance to the outcome and with which I can deal in a relatively succinct manner. I will then move to those issues that relate in a more direct way to the financial performance of the Resort. It is on these latter issues that the decision has turned. This explains why I am not dealing with the issues in the order in which they are listed in para 2 of the summary.

This is the issue numbered 2(b) in the summary of issues. In para 10(j) of the defence the defendant alleges that the plaintiff failed to make payments of premiums which ought to have been paid in 1994 and 1995, which premiums remained unpaid until March 1996, so that as at 12 December 1995 such insurances had not been effected or, alternatively, were in jeopardy. Further or alternatively, the defendant says that the plaintiff failed to renew insurances for the period 15 September 1995 to 31 December 1995.

The preamble to the specific paragraphs of para 10 of the defence says that the plaintiff committed breaches in respects particularised in those subparagraphs before 12 October 1995 and at all times between 12 October and 12 December 1995, and that the plaintiff was in breach of the Agreement in those respects. It can be taken that references in these reasons to subparagraphs of para 10 of the defence are to be read in the context of that preamble, even though it is not repeated on each occasion.

Under cl 4.1(g) of the Agreement the plaintiff is obliged to:

"Effect such policies of insurance with a reputable insurance company as may be required pursuant to the provisions of this deed and to make all reasonable efforts not to commit or allow to be committed any act which may place any policies of insurance in jeopardy or to be likely to increase the premiums thereon."

Clause 15 specifies the types of insurances and the risks that are required to be effected or covered under the Agreement. As the types of insurances are not the subject of dispute there is no need for me to expand on the provisions of cl 15. It is common ground that the insurances that were relevant are:

There is no dispute that all relevant insurances were in place up to 15 September 1995. All of the insurances, except Business Travel, fell due on 15 September 1995. Business Travel fell due on 30 September 1995. Insurances were effected using the services of a broking house called Alexander & Alexander ("A & A"). In July, August and September 1995, Tan had discussions with Mr Nick Solly and Mr Jonathan Seth of A & A. It was decided to align the insurances that the plaintiff had effected for the Resort with those it had taken out for other properties. The reason was that this would increase the plaintiff's buying power in the market, thus making it likely that the premiums for Resort insurances would be reduced. The plan was to extend cover on the four policies that were due to expire on 15 September until 30 September to bring them into line with the Business Travel insurance. The five insurances would then be extended to 31 December 1996 to align them with the insurances on other properties for which the plaintiff had responsibility. It was intended that the premiums for the period from 30 September 1995 to 31 December 1995 would be invoiced separately.

On 26 September 1995 Tan wrote to Gani advising him of the alignment of the policies to a common date and the consequent savings on premiums. On 29 September 1995 A & A wrote to Secco confirming renewal of all insurances. The letter commences: "I refer to our previous correspondence and discussions and have pleasure in confirming the outcome of our 1995/96 renewal negotiations ---". The letter also says that the broker has obtained "leverage for the group, to a common due date of 31 December 1996". It says that pro rata premiums are being processed for the 15 days from 15 to 30 September 1995, for the three months from 30 September 1995 to 31 December 1995 and for the 12 months from 31 December 1995 to 31 December 1996. The letter concludes: "---invoices etc will follow shortly". A further letter sent by A & A to the plaintiff on 9 November reiterated that insurances had been arranged to cover contractual obligations with the Resort and that they had been consolidated through to a common due date of 31 December 1996.

By a letter dated 18 December 1995 A & A sent renewal invoices for the four insurances for the periods 15 September to 30 September 1995 and for the five insurances for the period 30 September to 31 December 1995. Each invoice had attached to it a "coverage summary" showing details of the relevant cover. In each case the "period of insurance" is in accord with these dates. On 8 January 1996 A & A sent to the plaintiff invoices and coverage summaries for the period 31 December 1995 to 31 December 1996.

Secco's evidence, which I accept, was that when he received the invoices in December 1995 he reviewed them, drew a cheque for the amount and sent them to the defendant for authorisation. He followed a similar procedure when the full year renewal invoices arrived in January 1996. There was a delay in having the cheques signed because the directors came back seeking further information. I could not locate any direct evidence on point but the inference that is available from exhibits 31/34 and 40/162.2 is that the premiums were paid on 26 March 1996.

I think it is clear on the evidence that the insurances were renewed and that, ultimately, confirmation of cover was provided by the underwriters. The evidence that supports this proposition is extensive. It is summarised at paras 11 to 24 of part 4 of the plaintiff's written submissions. Without going into detail I can say that I accept all of that evidence and find that it does establish the proposition that cover was effected.

10.4 What is the Effect of Delay in Payment of the Premiums?

There is no evidence to support the proposition in para 10(j) of the defence that premiums were not paid in 1994. The question now is whether the fact that the premiums for the extension or renewals for the period ending 31 December 1995 had not been paid by 12 December 1995 meant that, as at 12 December 1995, either there was no cover in existence or the cover was in jeopardy.

We are here dealing with the situation as at 12 December 1995. In cross-examination of Seth the question of credit terms and the consequences of not paying according to those terms was canvassed. He said that with the insurers with which we had been dealing on behalf of the Resort credit terms, which normally were 90 days, were available to his clients. In the case of the Resort the terms for credit were the usual 90 days. He had not personally arranged those terms. Nor did he personally arrange any other terms about when premiums had to be paid with the insurers. He had never received a notice from any insurers requesting premium payments in relation to these insurances. He knew of the terms arranged between his company and the insurers in a general way. The premium has to be paid within 90 days in accordance with the normal credit terms. It was put to him that if the credit term ran out, that was the end of the policy. He denied that suggestion. He said it was often the case that they may run over for various reasons This did not necessarily mean the cover was cancelled. It was summarised in this way:

"But where is the agreement on the part of the insurers who have given credit for 90 days that they are still bound after 90 days?---I don't know how that agreement is struck. It's not something I would be personally involved in.

But your general terms, you confirm, applying in this case was 90 days?---Yes."

Mr Nigel Blair, another employee of A & A, also gave relevant evidence. He was asked about the effect of non-payment of premium on the existence of cover. He said that in his experience in the insurance industry, if an insurer was giving consideration to lapsing the cover that had previously been agreed it would typically give 14 days' notice. The communication was in writing and it advised the intention of the insurer to give notice of cancellation. In relation to the cover that he had arranged in late September he had not received any notice from an insurer concerning that cover. There was no change to what had been bound. For the period prior to 30 September 1995 two insurers had sent through notice of cancellation on the insurance contract. Substitute cover had been arranged. In respect of the period from 30 September onwards no insurer signified in any way to him an intention to lapse cover

Counsel for the defendant submitted that the question was whether the insurances were at risk as at 12 December 1995 because nothing had been put in place by then for payment of the moneys. It would, I think, be an extraordinarily harsh result to hold against a party that it had not, by a particular date, started to arrange the procedures for payment of an account that it had not then received. So far as I can see, the plaintiff was not aware of the amount of the premium that it was required to pay until it received the communication of 18 December 1995. That covered the period from 30 September to 31 December 1995. Nor was it aware of the amount due for the full year renewal until it received the communication of 8 January 1996.

Counsel for the defendant pointed out that the common law, rather than the Insurance Contracts Act 1984 (Cwth), applied to these insurances because there has been no proclamation under s6 extending the operation of the legislation to the Island. With this in mind, counsel suggested that whatever Seth and Blair understood about credit terms, the underwriter may have been at liberty, in the event of a claim on 1 January 1996 (and presumably on 11 December 1995), to decline cover because of non-payment of the premium. But I must act on the evidence. The officers from A & A testified that normal credit terms were 90 days and that they were the terms applying in relation to the plaintiff's insurances. They also testified that it is the practice for an underwriter to give 14 days' written notice (and often a courtesy telephone call as well) of intention to cancel cover. None of the underwriters had given such notice as at 12 December 1995 or, indeed as at 26 March 1996 when the premium was paid and, apparently, accepted. The 90-day credit period had not expired in relation to the renewal of cover to 31 December 1995 at the time when the termination notice was issued. I am not sure whether the delay in paying the premium for the renewal to 31 December 1996 is relevant. In any event, it was paid before the expiry of the 90-day credit period from commencement of cover. On Secco's evidence the plaintiff had done everything required of it to effect payment before the end of December 1995.

It is true that the premium for 31 December 1995 had not been paid by 12 December 1995. But the invoice had not been received. Cover was in place at that date and, on the evidence, I must conclude that cover was not then in jeopardy. The defendant's claim under para 10(j) of the defence cannot succeed.

For the sake of completeness I should add that the failure to renew insurance cover for the period September to December 1995 before 13 December 1995 is also relied on as a breach of the obligation of good faith: see para 10(k) of the defence and cl 6.3 of the Agreement. As I have rejected the contention that the insurances were not renewed, I need say no more about that allegation.

11. Breach - Failure to Effect Repairs and Maintenance

The issue numbered 2(c) arose from para 10(f) of the defence. It alleged that the plaintiff had failed to carry out repairs and maintenance necessary to keep the Resort in good operating condition, contrary to various clauses of the Agreement. So far as I could see the defendant led no evidence in relation to these allegations. Counsel for the defendant told me that the issue would not be pursued with enthusiasm or vigour. I will apply a similar lack of enthusiasm for it in these reasons.

The defendant's claim, in so far as it relies on breaches of cls 4.1(i), (j), (o) and (p) and 13.1 concerning repairs and maintenance, fails.

This is the issue numbered 2(h)(1) in the summary. In para 10(g) of the defence the defendant alleges that the plaintiff used information obtained in the management of the Resort to solicit patrons of the Casino to visit Casino Canberra, a managed and owned by an associate company of the plaintiff. The allegation is particularised. It is said that in May 1995 Mr Craig Ashton, on behalf of the plaintiff, wrote unsolicited letters to patrons of the Casino who were not personally known to him advising them of the junket programme at Casino Canberra, where the commission rates were more attractive than those on offer at the Resort.

The defendant says that this is a breach of cl 6.4 of the Agreement. The reference to cl 6.4 is a typographical error as it should be cl 6.3. The clause is in these terms:

"Without limiting its specific obligations hereunder the [plaintiff] will throughout the Term operate the [Resort] to a standard in keeping with the Five star facilities provided by the [defendant] and in so doing shall at all times act in good faith towards the defendant] and take all reasonable actions to operate the [Resort] for the financial benefit of both the [defendant] and the [plaintiff]."

One of the central planks of the plaintiff's opposition to this claim was the assertion that the plaintiff was not responsible for anything Ashton did. Counsel for the plaintiff submitted that Ashton was not part of the Christmas Island operation. There was no evidence that Ashton was a director or an employee of the plaintiff. He was engaged as an international marketing manager by other companies in the CAIL group.

Ashton's evidence was that he had been employed by the Adelaide Casino for about nine years until the end of 1994. During this time he had spoken to various people and obtained some information about the Christmas Island operation. In February 1995 he had joined the CAIL group as international marketing manager for the Canberra Casino. This was the position he held in May 1995. In September 1995 he became based in Singapore. He was employed by a company called K L Resorts Pty Ltd, which was a wholly owned subsidiary of CAIL. He described his duties in this way:

"You worked for Casinos Austria promoting Canberra Casino until, I think, September of 1995 when you relocated to Singapore. Is that right?---That's right.

And what duties did you take on in Singapore in September 1995?---I took on the active marketing role for Canberra and Cairns and, I guess, more of a consultancy when required by Casinos Austria for Christmas Island whenever it was necessary.

----between September and December 1995 you talked about a consultancy role for Christmas Island. What duties were you performing in relation to ?--- Consultancy as in Casinos Austria - if they needed any information, anything, assistance with regard to programs, in regard to the marketing people wanting to meet certain individuals in the market, I was more than willing to introduce them to them at parties, dinners, lunches, whatever was required. I would give information to them quite freely, anything.

Did you visit Christmas Island at any time?---Yes, I did on two occasions.

You say that you took on a consultancy for Christmas Island Resort?---A consultancy - very loosely the consultancy was whenever there was a query. There was never any additional payment made or any formal contract. It was a very open thing where Casinos Austria would just invite me or ask me to lend some advice where they required it and also to pass information.

Who asked for the advice?---On occasions, it was John Farrow; it was the casino manager. Sometimes it may be, what is his name, John Smith from the island. Also the marketing directors at the time; sometimes it may be from head office.

In the light of this evidence I do not think it is appropriate for the plaintiff to say that it had no responsibility for the actions of Ashton. He was (as is pleaded) an employee of an associate company of the plaintiff. He did some, although not extensive, consultancy work for the Resort. He did so at the request of Farrow and sometimes at the direction of "head office". I notice that there is no indication in the minutes of the Citeko meeting or in any of the correspondence that emanated from the plaintiff after it that the plaintiff was denying responsibility for Ashton's conduct. Rather, it was saying that he had done nothing wrong. The more important question is what Ashton did and whether it is in some way a breach of the plaintiff's obligation of good faith.

Ashton's evidence was to the common practice among international marketing managers. Their main duties were to source players and junket operators and to do so they built and extended databases. Marketing personnel discuss identities of premium casino patrons regularly, although their discussions are regarded as confidential. He said that he had been involved in numerous conversations of that type. He said:

"Upon what sources of information did you rely for the increasing of the database?---A lot of industry people, people in the same capacity as myself but working for other companies, other casino operators. Also through a rapport - I guess, it is also advertising. Basically a rapport with travel agents, with the customers themselves, with operators. It's all a networking process.

Was part of your job to speak to the well-known junket operators out of the various Asian centres?---Of course, of course.

And what sort of things would you talk to them about?---We would talk about their players, the incentives that we are offering, the competitive nature of the business - I guess what the competitors are doing in the market, what their incentives are - trying to gauge, I guess, their player base, the level of play they have and also to find out - because in a lot of cases the operators are pursuing credit for their players as well. We need to know more about their players. I am also trying to gain information in the way of addresses - names, addresses, phone numbers - any way of being able to keep contact and create awareness."

Ashton gave evidence as to his position with CAIL and his use of previous information gained by him in former positions. He said when he joined the CAIL group he took all his business cards that he had in folders, country by country, to put into his own database to do mail outs. When he started with CAIL he had his own database with around 1800 to 2000 names and addresses on it. The database was increasing as he was going along and as the job progressed.

Ashton gave evidence that on commencing with CAIL he did a mail out to many of his customers, those on his database and also names and addresses he had obtained from industry people throughout Asia and had followed these letters up with telephone calls, faxes and visits. He said that for the mail-out the information he used was basically names and addresses that he had sourced from industry people, from people he had met in all countries throughout Asia. He said that of the letters sent, around 14 went to Indonesia and about four of these were Christmas Island patrons.

12.4 Did Ashton Gain Information from the Resort?

Ashton first heard of the allegations made against him by the defendant when he received a telephone call from Resmann to say that there was an allegation that he had procured names and addresses from Christmas Island Resort. In his examination-in-chief he denied having procured names and addresses from the Resort. He went on to name a number of prominent players who were patrons of the Resort and to give an explanation of how he came to obtain their names and addresses on his mailing list. He said that a number of these had come from junket operators in particular Arafan Wijaya and Ellyana Ng. He confirmed that four of the players to whom he wrote were patrons of the Casino: Loe Boon Sui, Herman Lie, Anton Agus and Yuddy Limanto.

In cross-examination he said that he had obtained some information from the Island concerning players:

"Did you get any information from talking to people in player development on the island as to the names of the prominent players who had visited the island up to the time you first visited it?---Yes, I did, in verbal discussion as to names but there was never any passing of addresses or phone numbers.

Is it possible that you got his address from the island? ---No, it's not. Everything with the island was always very much just names. There was never - the management team there would never disclose because they were trying to, you know, also protect themselves.

---but when you made inquiries on the island about who the prominent customers were, didn't they tell you?---When I asked, no. It was more - I would put names there and it was up to them whether they wanted to react to it and most of the time it was either a yes or a no.

So they told you yes or no when you put names to them? ---Yes, but it was very irregular that that was happening.

But you found out who the prominent players were. Is that right?---That's right, but at the same time I already knew of these people. I already knew of them.

But you knew something more, having spoken to them, and that is that they were - whatever else they were - customers of the resort?---Yes.

Did you telephone any of them?---I made contact with them on a regular basis, yes.

The people disclosed to you by the player development department of the island, you contacted-----?---It was more me putting words into their mouth, with the comments I made.

Yes, but having put the words into their mouths, they said yes or no. Is that right?---On occasions there was a yes or a no, yes, that's right.

Now, did you at any time see any conflict of interest between Christmas Island Resort, Casino Canberra and Reef Casino?---I would say no,

He testified that he had not discussed the mail-out letter with Tucek or Resmann before sending it out.

In relation to Loe, Ashton said that he knew, at the time of the mail-out that he was (in terms of Australian casinos) exclusively a Resort patron but did not feel that there was any conflict in approaching him. Tucek had testified that it was the practice of the Casinos Austria group to promote their other casinos. Ashton said it was the practice of marketing directors to cross promote:

"Did you not consider that you were acting against the interests of Christmas Island at the time?---No, I didn't. The way the marketing directors in their capacities in Asia work is that it's very friendly, we are all trying to source the business. We were offering alternatives for the players, for the operators, to visit numerous properties. Really as Casinos Austria being a management company for the island as well as Canberra and The Reef, I would have thought it was a fair assumption that we would pass information between each other, to be honest, but that never actually occurred."

The difficulty, I think, is that the letter was offering commissions of 1.75% at the Canberra Casino. At the time, the commission rate being offered at the Resort was 1.65%, making the Canberra deal more attractive to junket operators. It should also be borne in mind that the CAIL group had an equity interest in the Canberra Casino (and later in the Cairns property), which it did not have in relation to the Resort.

12.5 The Plaintiff's Reaction to the Allegation

It is clear that while Ashton may have "known of" some of the people to whom he wrote, there were many that he had not personally met at the time of the mail-out and Loe is one of those. At the Citeko meeting the defendant raised the Ashton issue with the plaintiff's representatives. Resmann is recorded as saying (and he confirmed in cross-examination that it was an accurate record) that he felt sure Ashton knew the people to whom he was writing, otherwise how could he have obtained their addresses? After the meeting Resmann spoke to Ashton but could not remember exactly what he had asked him about his state of knowledge of the addressees. In letters of 1 November 1995 (from Tucek) and 9 November 1995 (from Tan) to Sumampow the same point is made: that Ashton "knows" the people to whom he wrote. It seems that neither Tan nor Tucek made independent enquiries of Ashton on this issue. They relied on what they had been told by Resmann. In cross-examination, Resmann explained his stance this way:

"So are you saying that he said that he did not know all the people he had written to?---Well, I probably - when I said this I interpreted having people on a d-base means knowing them. How much he knows them I have no idea. He was a specialist for this. I would not know.

You mean that all the people on his database are personally known to him because they are there. Is that what you are saying?---I would - probably know is not the right expression in the terms of knowing personally from a meeting. It is people - I don't know his methods to get people on his d-base. he met him, as I said I do not know how people get onto his database.

Well, I would still like a straight answer if you would kindly provide one. Did Mr Ashton tell you that he had known personally the people he had written to or whether there were any whom he had not met?---I cannot really recall this because what I put to him was essentially did he use sources from the island to get the addresses of players and he said, "No." Now, which words were used I cannot recall. I think this was the main allegation that was levelled."

While I found this evidence a little precarious I do not think it is sufficiently incredible to justify me in taking an adverse view of Resmann's veracity (as counsel for the defendant invited me to do) or of the plaintiff's case generally. Ashton testified that after the Citeko meeting he was given a directive (with which he complied) to cease aggressive marketing in the Indonesian region. The commission rates for the two properties were brought into line. In the letter of 9 November 1995 Tan told the defendant that Ashton had been reminded of the delicacy of the situation. There is no evidence that the conduct was repeated after the Citeko meeting.

Based on all of this evidence I make the following findings:

1. Ashton sent unsolicited letters to premium players of the Resort in May 1995. These letters contained information regarding discount commission rates at Canberra Casino. The purpose of these letters was to promote business to the Canberra Casino in relation to existing and new clients.

2. Prior to being employed by CAIL in February 1995 Ashton had no contact with Mr Loe Boon Sui and Mr Herman Lie, two prominent players at Christmas Island. In May 1995, Ashton sent letters relating to the Canberra Casino commission rates, to a number of patrons of Christmas Island Casino including the two named players.

3. Prior to sending out the letters, Ashton had discussions with player development personnel at the Resort and during these discussions he gained selective information in relation to the identity of prominent players at the Resort.

4. There was no evidence to establish that Resort personnel gave Ashton the addresses of these players.

5. The purpose of sending these letters containing information relating to discount commission rates, to certain patrons of the Resort was to try to attract their business to Canberra Casino.

6. The plaintiff, through Ashton, engaged in conduct which was designed to, or which would be likely to, divert financial business away from the Resort. In my opinion this was a breach of the duty of good faith.

7. Once the allegation was made the plaintiff took steps to prevent further marketing of the Indonesian market and correct the discrepancies in the commission rates. There is no evidence that the impugned conduct was repeated. There is no evidence of any loss occasioned by the attempted solicitation. In my view, this minimises the impact and effect of the breach.

Counsel for the defendant referred to a passage in Halsbury's Laws of England, 4th Ed Vol 1(2) para 188 and to L S Harris Trustees Ltd v Power Packing Sevices (Hermit Road) Ltd [1970] 2 Lloyd's Rep 65 as authority for the proposition that a breach of confidence can be a ground for terminating a fixed term agency. I have no doubt that this is correct. However, each case must depend on its own facts and on the terms of the contract. In this case the result will depend on whether the breach that I have identified (either alone or in combination with other breaches) amounts to repudiatory conduct.

13. Breach - Lack of Good Faith - Insurance Premiums

This is the issue numbered 2(h)(2) in the summary. In para 10(k) of the defence the defendant alleges that the plaintiff used the defendant's funds to pay insurance premiums in respect of cover for the plaintiff's management fees which premium, as between the parties, should have been borne by the plaintiff. This is said to be a breach of the obligation of good faith contained in cl 6.3 of the Agreement. The premiums to which the allegation relates are two amounts each of $15,487.50 paid to A & A on 29 September 1993 and 29 September 1994.

The plaintiff admits that the Industrial Special Risks policy for the Resort included business interruption insurance for the plaintiff's management fees. The plaintiff acknowledges that this cover was solely for the benefit of the plaintiff and that the plaintiff should have borne responsibility for the premium. The plaintiff also acknowledges that the two premiums were paid from the defendant's funds. However, that is where the measure of consensus ends and what flows from the payments is a matter of dispute.

The plaintiff says that A & A invoiced the plaintiff for the entire premium payable for the Industrial and Special Risks insurance and did not isolate out that portion of the premium that related to the business interruption cover. Tan testified that he was the person responsible within the CAIL group for insurance matters. He said that he was not aware that these premiums had been invoiced to and paid by the defendant until July 1996.

On 5 July 1996 Gani wrote to Resmann asking him to check whether the premiums for the business interruption cover within the Industrial and Special Risks cover had been charged as part of the gross operating expenses of the Resort. Resmann passed the letter on to Tan. Tan's evidence was that as soon as he received the letter he communicated with A & A to get them to investigate. There was ongoing communication, both orally and in writing. Tan said he was told by A & A that they had made an error and that part of the premium ought to have been charged to the plaintiff. A & A also sent calculations justifying the numbers. The assertion of an admission of error by A & A is hearsay and no documents were produced. However, I did not understand the assertion to be contentious. Tan also explained why the insurances were constructed in that way. He said that it was not possible to buy a stand alone business interruption policy. It was always attached to, and was an extension of, an industrial special risks policy. On 26 July 1996 Resmann (in a letter which Tan requested him to send and which Tan might have drafted) wrote to Gani in response to the 5 July letter saying:

"We have made enquiries into this matter and discovered that inadvertently the Industrial Special Risk insurance premiums paid by Christmas Island Resort, did include cover for Casinos Austria management fee.

We, therefore, wish to reimburse Christmas Island Resort for the amount of $49,159.14 representing the amount of premiums paid to date, together with interest compounded daily at 6.35% per annum. The calculation is set out in the attachment to this letter.

We'll forward a cheque shortly, and if you have any queries, please let us know."

The attachment showed the payment of five premiums (including the covers for September to December 1996 and for 1996 as well as those for 1993 and 1994) amounting to $43,936.38 and interest of $5,222.76 to make up the total figure of $49,159.14. In August 1996 Tan then gave instructions to Ms Alison Galligan, an employee in the accounts department of the CAIL group. This part of Tan's evidence explains what happened:

"Would you have a look at this facsimile dated 8 August 1996 from Alison Galligan to Glenn Secco?---Yes.

This is an instruction to Mr Secco concerning the amount referred to in Mr Resmann's letter, being the sum of $49,159.14 and recording it as a journal entry. Do you have any information concerning this matter?---I had instructed Alison Galligan to write to Glenn along the lines contained in this memorandum.

For those of us who are ignorant in these matters, such as me, what is the effect of recording the journal entry? What actually was intended by the instruction?---There was an account or there is an account maintained in the books of Christmas Island Resort which records amounts owing by Christmas Island to Casinos Austria and from Casinos Austria to Christmas Island and the effect of the journal entry was to put an entry in that account - in the books of Christmas Island Resort - to record that Casinos Austria owes an amount of $49,159 to Christmas Island Resort.

And are you aware whether that entry was made?---Yes."

It seems that the journal entry was made. Tan was asked whether the defendant was advised that the repayment would be made by book entry rather than by cheque as communicated in the 26 July letter. He said that at some time in 1996 he instructed his lawyers to communicate with the defendant on this matter. I did not, in these proceedings, hear evidence as to the communication between lawyers or as to the state of the account. Tan said that there had been occasions when the account had been in favour of the plaintiff. He did not, at or around 8 August 1996, check whether the account was running in favour of the plaintiff or the defendant.

This is one area in which I think the actions of the plaintiff and the evidence given in relation to it were less than frank. Just why the instruction of 8 August 1996 to make the repayment by journal entry when the defendant had been advised that a cheque would be sent and then not to communicate that change to the defendant immediately is, I think, rather curious. However, I do not think it is something I can hold against the plaintiff.

The defendant did not challenge the assertion that the charging of the premiums to the defendant resulted from a mistake that was made in the first instance by A & A. I accept the plaintiff's evidence that it was unaware of the error until July 1996. There is no evidence on which I could find that the plaintiff's state of ignorance was due to wilful blindness or some similar or otherwise blameworthy cause. I accept the plaintiff's evidence that it thought it had a set-off for the amount of the premium and could transfer the amount which it admittedly owed to the defendant to the running account. I am not in a position, in these proceedings, to ascertain whether or not the set-off was validly asserted. I cannot ignore the fact that this matter came to light on the eve of the commencement of the hearing of this action.

Given that there was no evidence that the plaintiff took the benefit of the premium knowingly and that the mistake did not come to light until July 1996 I think it would be very difficult to sustain the argument that as at 12 December 1995 the plaintiff had breached its obligation of good faith in this respect. I have some reservations about the way the plaintiff went about the reconciliation in August 1996 but, once again, I do not think it can reflect on the obligation of good faith as at December 1995.

The defendant's allegations in para 10(k) of the defence have not been made out.

14. Breach - Failure to Make Available Financial Records

This is the issue numbered 2(i) in the summary of issues. In para 5(f) of the defence the defendant alleges that one of the obligations that the plaintiff had not performed and which was the subject of the 27 July letter was the failure to provide copies of records requested in a memorandum from Gani to Taylor dated 7 June 1995.

"The [plaintiff] shall keep full and adequate records reflecting the results of the operation of the [Resort] and shall record all such information relevant or necessary for the purposes of this deed.

(c) the [defendant] or such persons authorised by the [defendant] (but no more that three in number at any time) may at the[defendant's] expense be entitled at any time by not less that 24 hours prior notice to the [plaintiff] to inspect the financial records and books of account of the [Resort] and its operation or carry out such report on the operation of the [Resort] or the performance of the [plaintiff] of its obligations under this deed as the [defendant] may determine. On such occasions the [plaintiff] will permit such books of account records and other financial statements to be made available for inspection and audit by the [defendant] or by any person authorised by the [defendant] and shall allow the [defendant] or such persons to take any copies and extracts therefrom at the [defendant's] expense as the [defendant] or its authorised person or persons may require."

In its reply and defence to counterclaim the plaintiff denies that it was in breach of the Agreement as alleged because it had been unable to locate the documents. The plaintiff says that this inability was brought about by the fact that between January and July 1995 the defendant had an excess number of internal auditors inspecting the books and, as a result, the documents were misplaced.

On 16 May 1995 Gani wrote to Taylor in relation to a visit to the Island by auditors. The first paragraph of the copy of the letter that is in evidence (ex 18/52) is indecipherable. On 7 June 1995 Gani sent a memorandum to Taylor. It referred to the May letter and said that the auditors had experienced difficulty in collecting the following information:

"-Original requisition form (stock requisition/requisition out) from November 1993 to December 1994, which should be filed with Stock Controller.

-Monthly Analysis Issues Report from November 1993 to December 1994.

-Monthly Delivery Docket Report (Incoming goods) from November 1993 to December 1994.

-Variance Report for the month of January, April, May and June 1994."

In the final paragraph Gani asks that the "complete information" be provided within five working days.

On 13 July 1995 Gani sent a memorandum to Farrow saying that he had been advised by the auditors that the information had not been provided and asking for a response by 24 July 1995. There is a reference to the missing records in the summary of internal audit findings that accompanied the draft minutes of the Citeko meeting. The 27 July letter says that the missing records are to be provided by 24 July, notwithstanding that this date had already passed. On 2 August 1995 Gani sent a memorandum to Secco expressing disappointment that the information still had not been provided. Secco responded on the same day saying:

"I have been undertaking a thorough examination of our files and records, to determine that all areas and records have been checked. This is still being undertaken, and I will report my findings as soon as possible."

After the Citeko meeting the plaintiff assembled the task force. The members of the task force were working at the Resort during August 1995. The task force report indicates that some of the documents "are now available". It also says: "Many of these and other documents, books and records have been used by various auditors, both internal and external and we have found that there have been occasions where they have not been properly returned. We have also issued a reminder to all staff of their record keeping responsibilities". A copy of the memorandum to staff was forwarded to the defendant with the task force report.

The litigation which has ensued from the Christmas Island Resort has made a not insignificant contribution to the financial well-being of the legal profession in this State. Even more so has the accounting profession reason to be grateful to the parties. From time to time, Arthur Andersen Perth, Arthur Andersen Jakarta, Price Waterhouse Brisbane, Price Waterhouse Cairns and KPMG Jakarta were involved in the audit process and in giving management reports on the venture. In addition, the internal auditors from the GMT group were active throughout the period. Members of the accounting staff at the Resort have also to be added. The correct name for Arthur Andersen Jakarta is Prasetio, Utomo & Co, a member of the SGV Group. In these reasons I will refer to Arthur Andersen Jakarta as "SGV".

The numbers and activities of audit staff, both external and internal (that is, from GMT), was an issue in the case. It was raised in at least two contexts. It is relevant to the issue which is under consideration here, namely, that the activities of the auditors contributed directly to the misplacing of documents. Another area in which it was raised was the general proposition that if, contrary to the plaintiff's case, the plaintiff was in breach of any of its obligations the defendant interfered with or prevented the plaintiff from taking remedial action because of, among other things, the number of persons it had inspecting the financial records: see reply para 6(c). It would be useful, therefore, to spend a little time considering the evidence on this point.

During cross-examination of the defendant's witnesses I gained the impression that the plaintiff's case would be that there were auditors swarming all over the Resort in similar numbers to the famous Christmas Island crabs which migrate across the terrain at particular times of the year. I do not think the plaintiff's case reached any such heights.

Secco's evidence is to be found at transcript pp5465-72, 5596-97 and 5988-89. In October to December 1994 GMT internal auditors were present on the Island. Secco and his staff had discussions with them about the operation of the Casino, basically tutoring them, and describing the paper flow. The education process was made more difficult by language problems, by the fact that the teams changed and because the auditors seemed not to grasp the matters that were being explained. Secco said that from January 1995, basically right through 1995, there was a constant flow of auditors. For a majority of the time there were internal auditors going through the books. Originally there were two teams but a third was added. The teams had between seven and ten members. The SGV auditors arrived with an internal audit team. So too did a group from KPMG. This group was reviewing the reporting systems. The review lasted a couple of weeks and took up quite a bit of regular staff members' time.

The internal audit teams were initially involved in discussions with Secco. There were as many as six in his office at any one time. There was constant demand for information. They came in to his office every day asking about how things were done, how reporting was done, who was responsible in different areas and with whom they should discuss various matters. They requested an enormous amount of documentation. Once identified it had to be retrieved by a staff member and handed over. It took a considerable amount of time to assemble the documents. Then there were supplementary discussions and further questions. Directors and their representatives, such as Gani and Hadi, were also requesting documents such as spreadsheets and analyses. These requests took up a considerable amount of time for Trevor Harris, the MIS manager. The search for information had an impact on operational departments as well as the finance department. For example, internal auditors wanted to review stocktakes and to interview managers.

The documentation, once provided, did not remain in the finance office. It went either to the Directors Office at the Resort, or to one of the chalets in which the auditors were working or to Jakarta.

In January or February 1995 Secco prepared what became known during the hearing as "the 25 point plan". It was an itemised list of tasks that Secco felt needed to be attended to in accounting related functions for the Resort. It included an estimate of the number of hours needed to complete each of the tasks. Secco testified that the demands made by the auditors and the absence of documentation when it had been provided to auditors had a substantial impact on the ability of the Resort staff to implement the improvements in the plan.

On 9 March 1995 Secco sent a memorandum to Alvin Oei, a person in business development with the defendant, asking for greater consultation about internal audit visits to minimise disruption to operations.

On 1 August 1995 Tan wrote to McClusky asking him to contact the defendant about internal auditors because "the sending of so many internal auditors in the past has seriously impacted on the management and staff of the resort". He also asked Price Waterhouse to refrain from sending auditors "in the immediate future" so that staff could attend to daily responsibilities including the preparation of statutory reports. On the same day Tan wrote to Gani pointing out the numerical limits in cl 14.1 and referring to the "substantial workload on the finance department".

Towards the end of August 1995, soon after the task force left the Island, the internal auditors returned. Around 8 September 1995 Secco complained to Hadi about disruption being caused by the auditors. On 8 September 1995 Secco sent a memorandum to Hadi complaining that there had been up to five auditors in the accounts department that morning and asking for assistance to ensure that the number of auditors or evaluators be restricted to two at any one time. Hadi responded on the same day. He pointed out that two of the five were from Price Waterhouse and they were fulfilling evaluation functions under the Corporations Law. On 18 September 1995 Secco sent a memorandum to Tan saying: "We are battling. We still have around 14 auditors in house and a defeated accounts department. --- It is difficult to see an end in sight". In cross-examination Secco acknowledged that the figure of 14 might have included external auditors from SGV and from Price Waterhouse as well as the internal auditors. It seems that, whatever disruption may have been occurring in the first half of 1995 and in September 1995, the level of audit involvement in October, November and December 1995 was at a reduced scale. This exchange during Secco's examination-in-chief summarises the position:

"And in the period between August and December 1995 can you tell the court the frequency of visits from auditors?---It is difficult to recall when they came and went. It is actually more difficult to recall when they weren't there than when they were there. I think they were there for most of the time through the latter half of 95 as well in some element. I remember they withdrew at one stage and it all went back to Jakarta to undertake some audits there so that was in relation to the documentation that went to Jakarta for the payroll. I think quite a few of the auditors went back to Jakarta at that time to assist in the continuation of the payroll investigation over in Jakarta. So I would say for October - I can't recall them being in October. I can't recall internal auditors being in-house in October 95.

You gave evidence yesterday, in general terms anyway, about the effect of the auditors in the accounts department and the sort of information and documentation they were requesting. Is there anything that you said in relation to the first 6 months of 1995 that doesn't apply to the period from August 95 through to December? Were they less intrusive, for example, on the operation?---They were still intrusive on the operation. They probably didn't demand as much time with me as they had in the first 6 months that they weren't taking up as much of my time in the second 6 months as they had in the first 6 months. Initially in the first 6 months there was a bit of a teaching process, a bit of communication going on there, and in the second 6 months they didn't ask as many questions as the way the system worked. So they were less obtrusive with me. They still required documents, still asked questions of my staff that was mainly just the handing over of documents to them and the auditors looking at those documents. So that was the main impact it had on the finance department."

Farrow also testified on this issue. He said that at one stage (and he was talking about August 1995) they had 21 auditors at the Resort. They disrupted the operation almost bringing the accounts department to a halt. He observed auditors asking for information and documents. In cross-examination he acknowledged that he had not counted the auditors and that the figure had been relayed to him by Secco or Bartholemeusz. It might have included external auditors. On 11 August Gani advised Farrow that a team of three internal auditors would be visiting the Island from 14 August. Farrow responded pledging co-operation but saying it would slow down operational work and make it more difficult for the task force to meet its deadlines.

It seems that the storage of documents at the Resort was a problem. There was no archive room. Financial records were kept in boxes around the walls of the accounts department or in one of the chalets. This made it more difficult and time consuming for staff to find requested information. So far as return of documents is concerned, Secco gave this evidence:

"When the auditors requested documents and they were provided to them, I understand your evidence yesterday to be they took them to the chalet or wherever they were working. Is that correct?---Yes. Two things could occur: (1) we could be requested to deliver them to the directors' office, which we would do; we would box them up and deliver them; (2) they would request that we collate them and they would come up and pick them up; or we could deliver them down to the chalet. In very few instances we actually delivered them to the chalet. The directors' office was mainly used as the place for the taking of documents or the finance department was used as a collection point.

Were the documents returned by the auditors in any systematic manner, do you know?---No, they weren't.

How were they returned?---Often in a fairly chaotic state - not in the same state or the same order as we presented them to them. They were obviously taking a lot of the reports apart and comparing them in different ways and then putting them back together again and they weren't coming back in the same format, in the same chronological order that we had. I also had some instances where reports were not given back and

And do you now recall what reports weren't given back? ---Yes, there was one very important file that I gave to Gina Masindo of the SGV audit group and that was all the work papers on the 1994 accounts. --- I never received those back. I pursued those for quite some time after that. --- I never received those back. --- Also I believe the termination payments that we gave to the owners in regard to the payroll - --- They were provided but I don't believe they have ever been returned. So they are the only two instances that I can clearly recall but initially for the first - up till I suppose June 95, around that mid-95 time when we started the loans book, it would be difficult to say what we gave them or we received back. It is only that I have a clear recollection of the 94 audit papers and also I have a fair recollection that the termination payments weren't returned either. So until after that - before that loans book, I can't say if anything else went missing or not."

It is interesting to note the evidence of Mr Murray Compton, an expert witness called by the plaintiff. He is a Chartered Accountant with Ernst & Young in New Zealand. He has had 25 years' experience in management consulting and provides specialist consulting advice to the tourist and hospitality industry. He commented on para 5(f) of the defence: see ex EEE p24. He said that the fact that a document goes missing is not indicative of mismanagement. I am not sure that expert evidence is necessary to establish that proposition. However, he did say that in his experience it was unusual for an owner to be requesting information of the type set out in the 7 June 1995 memorandum.

In the main I accept Secco's evidence on this issue. I accept that the time demands made on the accounts department staff in complying with audit team requests was significant and that it did have an impact on the working of the organisation. However, I do not think that the impact survived beyond the end of September 1995. In my view the plaintiff cannot rely on excessive interference by internal auditors as an explanation for the failure (if it be a failure) to remedy defaults in October, November and December 1995.

So far as concerns the missing records, I find that the degree of involvement by the internal auditors was excessive in the first half of 1995. It seems to me that just as the defendant was pointed to the lack of hotel management experience of the plaintiff before this venture, those responsible for the defendant's interest in the Casino were likewise inexperienced. The GMT group owned a hotel which opened in 1995 or 1996 and a restaurant. It had not previously operated a casino. Whether the increasing degree of involvement by internal and external auditors arose from a growing sense of misgiving about the plaintiff's performance or from a desire to establish a position from which it could move against the plaintiff is something on which I cannot comment. However, the mislaying of documents may well be explained by the number of hands through which those documents passed, the way that they were handled while in the custody of the internal auditors and the way in which they were returned. I do not believe that the failure of the plaintiff to provide, before 12 December 1995, all of the documents specified in the 7 June 1995 memorandum constitutes a default by the plaintiff of its obligations under cl 14.1 of the Agreement.

This is the issue numbered 2(j) in the summary. Paragraph 10 of the defence contains two relevant subparagraphs:

"(d) the plaintiff failed to provide in each calendar month a profit and loss statement adequately showing the results of the operation of the casino and hotel for the month and the year to date and containing information determined by the consultative committee with the result that the defendant was unable properly to monitor the performance of the plaintiff or calculate the fees payable to the plaintiff under the terms of the Agreement.

(e) the plaintiff failed to deliver to the defendant an audited profit and loss statement as required by cl 14.2 of the Agreement with the result that the defendant was unable properly to monitor the performance of the plaintiff or calculate the fees payable to the plaintiff under the terms of the Agreement."

Paragraph 10(d) was particularised. The defendant alleges that at a Consultative Committee meeting on 21 July 1995 it was agreed that each month the plaintiff would provide a balance sheet, cash flow statement, analysis of variances between budget and actual cost incurred and a report on Hotel occupancy statistics. A second particular incorporates the allegations made in support of one of the complaints of systemic defect in accounting systems made in para 10(b)(v) of the defence. They are too numerous to repeat here.

Clause 14.2 of the Agreement is, relevantly, in these terms:

"(a) the [plaintiff] shall deliver to the consultative committee not later than 21 days after the end of each [month] a profit and loss statement in such reasonable form and together with such reasonable information as determined by the consultative committee adequately showing the result of the operation of the [Resort] for the [month] and the year to date and containing a computation of the Gross Operating Profit.

(b) Each of the [plaintiff] and the [defendant] shall use all reasonable endeavours to have such accounts audited within 60 days of the end of the preceding [financial year] and within 15 days after the audited accounts are available shall deliver to the developer a duly audited profit and loss statement showing the results of the operation of the [Resort] during the preceding [financial year] containing a computation of the Gross Operating Profit the Basic Fee and the Incentive Fee and such other information as the Auditors shall consider reasonable or necessary."

There was adduced in evidence operating results for each month from November 1993 to December 1995 with the exception of August and September 1994. I do not understand the defendant to contend that anything turns on the absence of the documents for August and September 1994.

The documents that constitute the evidence for each month from November 1993 to May 1994 and July 1994 consist of four pages of summary financial information in table form entitled "Profit and Loss Statement". For each month it includes, for the month and the year-to-date, the operating profit, basic and incentive management fees, income before fixed charges, refurbishment reserve and net Resort profit. The format for the months of June and October 1994 is quite different, with a larger number of pages and additional information. The format for each month after October 1994 is different again. These documents, too, include a larger number of pages and additional information. Management fees, refurbishment fees and profit from operations are set out for each month.

The first particular to para 10(j) relies on what was said at the Citeko meeting. I think the short answer to this contention is that cl 14.2 requires a resolution of the Consultative Committee to stipulate the content of monthly reports. The Citeko meeting was a meeting of the Advisory Committee rather than the Consultative Committee. There is a difference, as I have already explained. Strictly speaking, any stipulation made at the Citeko meeting was not binding.

The minutes of the Citeko meeting record Secco agreeing to the proposition that future management reports should include a balance sheet, cash flow and analyses of variances. In his oral evidence Secco said that he had so agreed but had pointed out that variances had been the subject of comment since January 1995 and that the format was already being revised following discussions he had previously had with Hadi. The monthly reports for the month of July to December 1995 seem to me to comply with those requirements: see ex 17/232, 20/130, 23/76, 25/195, 27/112 and 28/111.

For the technical reason that there was no Consultative Committee meeting that stipulated the information to be included in monthly reports after 21 July 1995 and for the further reason that the requests made by the defendant at the meeting seem to have been complied with, the allegation in the first particular to para 10(j) has not been made out.

The defendant incorporates, in its complaint under para 10(j), the particulars to para 10(b)(v). The import of para 10(b) is that the plaintiff failed to establish and monitor appropriate accounting and other systems. The precise complaint in para 10(b)(v) is that the plaintiff failed to produce usual accounting and financial information for use in the management of the Hotel with the result that the plaintiff was unable properly to manage the Hotel. Further discussion of these allegations will have to occur in relation to issue 2(f). I will mention some of the aspects that have particular relevance to the monthly accounts.

In the first particular to para 10(b)(v) the defendant asserts that from November 1993 to August 1995 the plaintiff failed to produce monthly accounts which contained certain nominated categories of information. The categories bear a striking resemblance to those that were the subject of discussion at the Citeko meeting.

I think the same technical answer is available to the plaintiff as was available under the first particular to para 10(d). The question of what information was to be provided to the defendant in the monthly reports was governed by cl 14.2(a) of the Agreement. It was a profit and loss statement with such information as was determined by the Consultative Committee as would show the result of operations and would contain a computation of the gross operating profit. There was no resolution of the Consultative Committee and there was no evidence that the information provided did not otherwise correspond with the description in para 14.2(a).

The closest that the evidence comes to supporting the defendant's claim is a minute of a joint meeting of the Consultative and Advisory Committees held on 16 February 1994, which contains the following:

"Level of Financial Information Being Provided to Owner

No dates were discussed. D Radford [financial controller] advised that the level of financial information would be provided to an acceptable standard. D Radford is working towards this and the results would be produced as soon as possible.

H Gani asked when this would be. D Radford predicted from 1 July 1994."

There is no evidence concerning the areas in which it was said the information was not at an acceptable standard. There is no evidence as to whether all or any of the categories mentioned in particular (1) to para 10(b)(v) were under contemplation. It falls well short of evidence of particular stipulations by the Consultative Committee. Gani was asked about this passage. He said that he had no objection to the suggested revision date of July 1994. He agreed that no further complaints were made until the Citeko meeting, although this seems to overlook the discussions between Hadi and Secco and the advancement by the defendant of a reporting format based on the Citraland Hotel. It should also be noted that from June 1994 on (with the possible exception of July 1994) the format of the monthly report did change with significant additional information being included.

The second particular says that the reports did not contain an analysis of and commentary on variances between budget and actual. The fact is that the reports always contained the comparative figures. Each report from July 1995 included, among other things, a balance sheet, cash flow statement, analysis of and commentary on variances between budget and actual revenue and costs, occupancy statistics, food and beverage reports and information on staffing.

From the outset the monthly reports identified variances between budget and actual income and expenditure. Secco testified (and I accept) that from January 1995 the defendant was provided with a commentary on variances, occupancy and other matters. This information was provided under separate cover from the operating results. By way of example, the monthly report on operating results for January 1995 was tendered as ex 8/202 with approximately 50 pages of information. The additional document incorporating the narrative is ex 9/87 dated 27 February 1995. It consists of five pages. Other information was available to the defendant from the accounting system. However, as this complaint is about the monthly reports per se I do not think I need to go into those other sources of information at this stage. They will be relevant to a consideration of issue 2(f).

The defendant has not satisfied me, on the evidence, that there is substance in the matter raised in the second particular.

The third particular complains that "a number of the balance sheets and profit and loss statements produced between June and December 1995" contain errors or inadequate information. In further and better particulars the defendant limited the complaint to the monthly reports for October and November 1995.

In relation to this matter I can indicate that I have read, and accept, the material contained in paras 14 to 37 of Part 11 of the plaintiff's written submissions. I accept the evidence of Secco and Compton which is referred to in those paragraphs. In my opinion that evidence provides a satisfactory explanation for the discrepancies in the reports. I do not think that the discrepancies constitute a breach of cl 14.2 of the Agreement as alleged. This aspect of the defendant's claim also fails.

Paragraph 14.2(b) is another example of the poor drafting in the Agreement. It refers to "such accounts", which could be construed as applying to the accounts mentioned in 14.2(a), that is, the monthly profit and loss statements. However, it seems to me that the context (which relates to a "fiscal period" or financial year) demands the construction that it was intended to apply to the annual financial statements rather than to monthly profit and loss statements. I will construe it in this fashion.

It is to be noted immediately that the time limits specified in cl 14.2(b) for the preparation and presentation of audited accounts are not mandatory. Each party is required to use all reasonable endeavours to comply with the time limits. In a further and better particular to para 10(e) the defendant says that it did not receive the 1994 accounts until July 1995 and had not then (March 1996) received the 1995 accounts. In amended particulars delivered in July 1996 the defendant simply repeated the provisions of cl 14.2 of the Agreement.

In relation to the year ending 30 June 1994 Secco said that the accounts were finalised in August 1994. The accounts were audited by Arthur Andersen Perth. The work was commenced in September 1994. It was necessary for the accounts to be submitted to the Casino Surveillance Authority before finalisation to ensure that the format was acceptable. A copy of the audited accounts of the operations of the Resort was tendered as ex 6/92. The audit certificate is dated 29 December 1994. A copy was forwarded to the plaintiff on 9 January 1995. Secco testified that a copy was sent to the defendant. He did not say when. I could find no other evidence concerning the fact or date of delivery of the audited accounts to the defendant.

The accounts for the year ending 30 June 1995 were audited by Price Waterhouse Cairns. McClusky was the responsible partner. He had commenced preliminary work for the statutory audit in May 1995. The audit was completed in December 1995 or January 1996. A copy of the audited accounts was tendered as exhibit 14/129. The audit certificate is dated 17 January 1996. It is a qualified audit certificate. The qualification relates to the dispute between the parties which "awaits a legal determination of the management agreement". Once again, Secco testified that a copy was sent to the defendant but he did not say when. I could find no other evidence concerning the fact or date of delivery of the audited accounts to the defendant.

In relation to each year the accounts were prepared by a reputable firm of accountants. No evidence was led to suggest that the plaintiff failed to use reasonable endeavours to have the accounts audited expeditiously. Some of the delay in the 1995 accounts may be explained by the litigation which was commenced late in December 1995. McClusky testified that he was aware of the dispute at the time. No evidence was led of any indication by the auditor that the accounts did not contain "other information [which] the Auditors shall consider reasonable or necessary". No evidence was led from which it could be concluded or inferred that the accounts were lacking in any detail which would render them insufficient for the purposes of monitoring the plaintiff's performance or calculating the management fees.

The defendant's claim, insofar as it relies on a breach of the requirements of cl 14.2(b) to submit audited financial statements, must fail.

It follows that the defendant has not made out its case under either of paras 10(d) or(e) of the defence.

This is the issue numbered 2(k) in the summary. It also covers the matter raised in issue 2(f)(11). In para 5(c) of the defence the defendant alleges that one of the obligations that the plaintiff had not performed and which was the subject of the 27 July letter was the failure to investigate whether there had been overpayments to employees and to recover the amount of any overpayment from the relevant employee. Paragraph 5(f) alleges a failure to take action to recover an amount of approximately $67,000 overpaid to PGAC. The same factual base affects para 10(c) of the defence. It pleads that the plaintiff failed to take steps to recover substantial overpayments made by it with the result that the operating expenses for the Resort were increased and the prospects of recovery reduced. The particulars to para 10(c) refer to the PGAC overpayment. It is alleged that the overpayment was approximately $86,239, it had been discovered in September 1994, no action was taken to recover it until July 1995 and by 12 December 1995 proceedings for recovery had not been instituted. The particulars also refer to overpayments to employees that are set out elsewhere in the pleadings.

I should also mention para 10(ba). It alleges that the plaintiff failed to implement appropriate accounting and financial systems to check invoices for air freight against consignment notes and that as a consequence the PGAC overpayment occurred. Paragraph 10(c) is said to be further to, or in the alternative to, para 10(ba). The point of this is that para 10(ba), and accordingly para 10(c), alleges a breach of cl 4.1(aj) of the Agreement. Paragraph 5(c) and (f) allege a breach of cl 4.1(aj) and of the implied term pleaded by the defendant. I have rejected the implication of a term as pleaded by the defendant. Technically, that aspect of the case would fall away. However, as I have found that the arrangement ought to include an implied term of similar, though more limited, import [as pleaded in para 3(a) of the reply], I will examine the defendant's allegations against that term. By way of reminder, the implied term is that the plaintiff would take such steps as were reasonable in the circumstances to recover overpayments of operating expenses. Clause 4.1(aj) of the Agreement required the plaintiff to:

"Establish and monitor appropriate accounting, administration, financial control and budgeting systems to be utilised at the [Resort]."

It appears that the arrangement between the Resort and PGAC, by which PGAC was responsible for the air freight of goods from Perth to the Island, commenced in about February 1994. Goods were shipped to Jakarta in containers and then from Jakarta to the Island by a charter operator. The price charged was $2.50 per kilogram. Late in March 1994 the charter operator changed and the rate was increased from $2.50 per kilogram to $4.70 per kilogram. The then purchasing manager, Mr Jordan, was concerned about the massive jump in freight costs. Jordan and a Mr Innes of PGAC negotiated with the charter operator to obtain a better rate. Following this negotiation it was agreed that the rate would be $3.40 per kilogram on condition that the Resort would use a minimum of $2000 of freight on each of three flights per week.

According to Bartholomeusz there were occasions when the air waybill had not arrived at the time when the invoice was due for payment. On those occasions Jordan would telephone PGAC to confirm the weights. So far as Bartholomeusz was aware Jordan did not do a physical check after the waybill had arrived.

In September 1994 Mr Peter Foley succeeded Jordan as purchasing manager with control over purchasing of goods and the control of freight costs. One of the things that Foley did was to check air waybills against invoices. Not long after he started in the job Foley advised Secco that there appeared to be problems with PGAC payments in that there may have been an overcharge. Secco instructed Foley to follow up the possible overpayment and that as the Resort owed money to PGAC those invoices should not be paid until the matter had been researched. On 16 September 1994 Foley wrote to PGAC seeking information. According to Secco, Foley's investigations continued throughout the remainder of 1994 and into January 1995.

On 17 November 1994 the Resort was advised that a company called Air Express International (Australia) Pty Ltd had purchased the business of PGAC. On 22 November 1994 Foley wrote to a Mr Steve Marchesi of Air Express indicating that the Resort had been experiencing problems with PGAC and asking him to go over PGAC records to see the irregularities and "to correct their wrongdoings". Foley asked Marchesi to advise "when we are likely to have the overcharging of the accounts rectified by means of a refund" and that he would settle the outstanding invoices that he held when it had been done. On 24 November 1994 Foley sent further information to Air Express. Further information was requested by Air Express in December 1994.

On 6 December 1994 Foley prepared a summary of the PGAC account. It indicates variances of $76,387 from which was to be deducted $35,822, being amounts due by the Resort to PGAC, leaving a balance of $40,565 owing to the Resort. This is exhibit 7/148. Foley also assembled copies of the invoices and waybills upon which the summary was based. These are exhibit 7/149. Secco received these documents from Foley in December 1994 or January 1995.

In his evidence Gani said that he had no criticism of the way that the plaintiff handled the PGAC matter until after December 1994. It was common ground that there was a set-off arranged between the Resort and PGAC. Just what the set-off was and how the account balance was dealt with does not appear clearly, or at all, from the evidence. Secco said that he heard nothing more about the PGAC overpayment until the Citeko meeting. He said that he had instructed Foley to follow it up and that to the best of his recollection Foley put together documents and continued to pursue PGAC during 1995. No one drew my attention to any such documents and, of course, Foley did not testify.

Counsel for the plaintiff submitted that there was no evidence that there was an overpayment to PGAC. I think that the proper inference to be drawn from the evidence of Secco, the documents prepared by Foley and other documentary evidence is that the plaintiff satisfied itself that there had indeed been an overcharging. The language used by Foley in his letter of 22 November 1994 to Marchesi certainly carries that suggestion. He speaks of the Resort having been "ripped off". I am not suggesting that this is an admission that would bind the plaintiff but it certainly signifies a particular view. The task force report says (at p19/20) that the financial controller has referred the PGAC matter to solicitors and is awaiting a reply as to the appropriate action to take "in recovering the overcharged amount". Secco's letter of instruction to Parker and Parker dated 16 October 1995 says that PGAC has "overcharged [the Resort] --- for the period February 1994 to October 1994". In his letter of 1 November 1995 to Sumampow, Tucek refers (at p26/6) to "the overcharged airway bills [having been] picked up by the operator in November through a routine audit". I am not prepared to decide this issue on the basis that the defendant has failed to establish that there was an overpayment to PGAC.

I do not think there can be any criticism of the plaintiff for the actions that it took towards recovery of the PGAC overpayment after July 1995. The question was raised at the Citeko meeting. On 11 August 1995 Secco instructed Mallal to take action to recover the overpayment and on 24 August Mallal agreed to act. By letter of 8 September Mallal said that he had a conflict and could not act. He was asked to return the documents and he did so around 19 September. On 20 September Secco first contacted Parker and Parker with a view to having that firm act. I am satisfied on the basis of the evidence referred to in paras 16 to 31 of part 23 of the plaintiff's written submissions (which I accept) that the plaintiff took all reasonable steps to implement recovery action once the matter had been raised at the Citeko meeting.

It appears that PGAC was deregistered under the provisions of the Corporations Law on 18 September 1996. No moneys were recovered.

There is a lacuna in the evidence. It covers the period from January to July 1995. Secco's evidence (that he left the matter with Foley to follow up) is far too general to be afforded weight in this respect. I therefore find that the actions of the plaintiff in pursuing the PGAC overpayment between September and December 1994 were reasonable, that from January 1995 the plaintiff (through Secco) was aware that a debt remained owing by PGAC to the Resort but that no steps were taken between January and July 1995 to recover it. I also find that the actions taken by the plaintiff after July 1995 were reasonable.

In my opinion the system which operated when Jordan was the purchasing manager was not an effective system for checking invoices for air freight against consignment notes for goods shipped by air to the Resort. As a consequence, the plaintiff overpaid with the defendant's funds an amount of approximately $86,239 to PGAC. The complaints in para 10(ba) of the defence have been made good. However, I am satisfied that when Foley took office as purchasing manager the problems were rectified and there can be no complaint of systemic deficiency for the period after October 1994. I also find that in the period January to July 1995 the plaintiff failed to take reasonable steps to recover the PGAC overpayment. This constitutes non-compliance with the implied term in its more limited form. There is no evidence on which I could make any assessment or on which I could find that the delay between January and July 1995 had any effect on the likelihood of the debt being recovered. There is no evidence on which I could decide whether the transaction between Air Express and PGAC was such that Air Express would, or could, have been held responsible for a debt incurred by PGAC. There was no evidence which went to the financial position of PGAC at any material time so as to enable an assessment to be made whether recovery proceedings would have been fruitful or whether the six-month delay in pursuing the debt contributed to a loss.

This is a payroll question. It cannot easily be divorced from the broader questions that are posed in relation to payroll, which is issue 2(f)(1). As will appear from the discussion under that heading I have come to the view that the plaintiff was not in breach of the Agreement by failing to collect from employees monies that been paid to them erroneously.

17. Breach - Promotion of the Resort and Occupancy Rates

This is the allegation that is numbered 2(a) in the summary of issues. In the defence the defendant pleads:

"10(h) [I]n breach of clauses 4(1)(f) and 4(1)(l) the Plaintiff failed to advertise, promote and publicise the hotel and casino to encourage occupancy of the hotel rooms and expenditure provided by the hotel and casino and failed to achieve the highest rate of occupancy reasonably achievable".

The defendant then sets out particulars of the claim. The particulars focus on three omissions by the plaintiff. First, the plaintiff failed to appoint a marketing manager from June 1995. Secondly, it failed to take certain nominated marketing steps. Thirdly, the plaintiff achieved an occupancy rate of 37% when the figure should have been 45%.

In its reply, the plaintiff denies the allegations. It says that marketing was the responsibility of the defendant; that adequate steps were taken to appoint a marketing manager; that it was the defendant's fault that a marketing manager was not appointed; that the defendant prohibited marketing campaigns aimed at tourists; that the air services to Christmas Island were limited and that the defendant failed to provide adequate recreation facilities on the Island for tourists. The plaintiff also says that it reached the highest level of occupancy reasonably obtainable.

There is no clause "4(1)(f)" of the Agreement. However, cls 4.1(f) and 4.1(l) provide:

"4.1 Subject to the provisions of this deed the [plaintiff] agrees that during the Term the [plaintiff] shall have the following duties and obligations in the operation of the [Resort:...

(f) advertise promote and publicise the [Resort] in order to encourage occupancy of the Hotel rooms and expenditure by guests and invitees on the amenities provided by the[Resort];

(l) maintain the highest possible rate of occupancy reasonably achievable for the [Resort] with the intention to maximise financial return ---."

I am able to summarise much of the defendant's allegations and plaintiff's responses. The defendant claims that the plaintiff breached the Agreement by not taking sufficient steps to market the Resort to tourists. The plaintiff denies this. The defendant also says that marketing was the plaintiff's responsibility. The plaintiff response to that is that the defendant instructed the plaintiff to ignore tourists and concentrate on gamblers; and, in any event, the facilities were not such as to attract tourists to the Resort. I will develop these issues in more detail.

The defendant complains that the position of marketing manager was vacant from the middle of June 1995 and that the plaintiff did not take any adequate steps to fill the position. The plaintiff's response to this allegation is to claim that in order to appoint a marketing manager, the Advisory Committee had to approve the appointment.

I need to preface the discussion of the evidence of this issue by summarising one of the key points in this issue. The plaintiff and the defendant had different conceptions of what a "marketing manager" was. As I understand it, a "marketing manager" is a person who is responsible for marketing generally. An "international marketing manager" is a rather more high profile position, with the holder taking responsibility for contacting and attracting the "high rollers". One of the departments within the operation was called "player development" and there was a player development manager. The international marketing manager fell more closely within the player development area than did the marketing manager.

Taking the witnesses in chronological order, the first relevant witness was Gani. He testified that Vincent Thio was the first "international marketing manager" for the Resort. Gani said that Thio was introduced by one of the defendant's representatives to the plaintiff's General Manager, Farrow, in mid-1993. The defendant's representative suggested that Thio be appointed international marketing manager. Gani was unsure, but thought that Farrow arranged terms of employment with Thio. Thio reported to the player development manager. Gani said that Mr Steven Bland was appointed marketing manager in December 1993, and remained in that position until June 1995. Gani said that he did not personally observe or meet anyone acting as the marketing manager for the Resort between 27 July 1995 and 12 December 1995. He also said that Mr Ronald Lines was appointed the player development manager for the Resort from mid-November 1995. Gani then became aware in mid-December that Lines was acting as the international marketing manager. However Gani, as a member of the Advisory Committee, had not been aware of any agreement of that committee to appoint Lines or anyone else as international marketing manager. Gani also testified that Andrew Owen was appointed as "marketing assistant" in mid-September 1995. McClusky testified that he knew in November 1995 that the position of international marketing manager was still vacant.

Farrow said that the position of "international marketing manager" was vacant when he arrived at the Resort for his second tour of duty in mid-June 1995. Farrow testified as to the attempts he made to secure an international marketing manager, which I will discuss later. In relation to this issue, Farrow testified that when he travelled to Jakarta in December 1995, he was "reminding Mr Gani in relation to the employment of Miss Chaya", who was then under consideration for the position.

In cross-examination Farrow appeared to suggest that Mr Lines was in fact acting as a de facto international marketing manager.

Assistant to whom? --- At the time maybe an assistant - he came under me, took direction from me but once a ---

Were you in fact --- ? --- I was overseeing that department from time to time, yes."

This passage may suggest that although Lines was in fact titled "assistant", he was in reality acting as the manager proper, as he reported to the General Manager. Farrow also testified that Lines had performed well:

"During that period just from one location - that is, Thailand - the resort earned just over $3,000,000 in GGR - gross gaming revenue. Therefore he more or less covered his wages of 45,000 a year."

In cross-examination Farrow was asked whether a Thai employee of the Resort named "Nancy" had in fact organised the Thai tour and been responsible for the earnings from Thailand. Farrow disagreed, saying that Lines and the Casino operations manager had gone to Thailand and returned to the Resort with several junket operators. The plaintiff appears to contend that Mr Lines had "a function corresponding to that of international marketing manager."

I do not think there is any doubt that there was no formal "international marketing manager" for the Resort between June and December 1995. There is a question whether Mr Lines was fulfilling the function of an international marketing manager without the title. Lines' initial position was described as "marketing assistant" by Farrow and "player development manager" by Gani. Gani also testified that Lines was described as "the new international marketing manager" by a member of the Jakarta office staff.

Gani gave evidence as to his understanding of the role of an international marketing manager. In relation to Lines, Gani testified that in mid-November 1995 Lines was employed as the player development manager but after that he became the international marketing manager.

As the player development manager, Lines had reported to the general manager. Basically, the duties of the player development manager were to handle or to provide a service to all of the players coming into the Resort. He had to prepare the list of customers under the junket program to be reported to the government or the casino control division. He was also responsible for liaison with the players in terms of making or building up the relationship between the Resort and the individual players and junket operators. Between 1993 and the end of 1995 player development managers had duties in regard to "drumming up business" outside the Casino itself by making phone calls to customers.

This was a matter taken up during cross examination. He was shown the memorandum and his attention was drawn to the phrase "a real international marketing manager". He said that up until that time the appointment of a person at a salary range of $80,000 to $100,000 had been discussed. When he received this memorandum he did not really understand the difference between that sort of person and a person described in this memorandum as "a real international marketing manager". He was surprised because it meant to him that the previous one "is taken like a doll, or whatever --- not a real one, you see, probably imitation". He did not understand what Farrow meant by the term "real international marketing manager". Following receipt of this memorandum he called Farrow and asked him what he meant. Farrow gave him an explanation. He explained about the need to have a professional person, one who had enjoyed many years' experience in the casino industry. In particular, it was important to recruit a person who had developed contacts with high rollers. During this conversation Gani asked Farrow to send him the curriculum vitae of applicants. Through this he understood the sort of person Farrow was talking about was someone of many years' experience with particular contacts with high rollers who would then be able to use those contacts to bring high rollers to the Casino. In relation to the distinction between a real international marketing manager and some lesser person, Gani agreed that after his discussion with Farrow he understood the positions to be quite different in terms of functions that were to be performed. However, he said that the main difference was in the degree of experience which the person should have and his or her knowledge for the players.

It was put to Gani that what Mr Farrow said to him was that the lower salary range would attract a person who could supervise marketing campaigns, distribution of brochures, advertising and the like. In the higher range the Casino would get a quite different type of person who would make personal calls upon prospective players at the Casino and use his or her personal contacts to encourage those persons. Gani said that this was not the way Farrow had put it but he did agree that it could be understood in that manner.

It is unclear from this evidence whether the duties mentioned by Gani as applying to a "player development manager" would also apply to an "international marketing manager". Gani said that he was not able to say what duties Lines would be required to perform as international marketing manager. On 17 October 1995 Farrow sent a memorandum to Gani (ex 25/107) in which he said that a "real" international marketing manager could be appointed but at a cost of $250,000 per annum. Gani said that until he saw this memorandum he did not realise that there were two types of international marketing manager.

It would seem from this evidence that Gani was aware, at least from 17 October 1995 that there could be different types of international marketing managers. Gani also commented upon the difference of opinion between the plaintiff and defendant as to the role of the international marketing manager:

"Then there was debate about the proper functioning of this area. `Developer' - that is you, presumably - `maintained that a marketing manager should handle both marketing and junket management functions whereas the operator asserted the need for two separate positions"?---Yes."

This comment was made during cross-examination on the minutes of a joint meeting of the Consultative and Advisory Committees on 16 February 1994 (ex 5/13). It is perhaps worth setting out the relevant portion of the minutes in full. The "W Richards" mentioned was a previous international marketing manager employed for a short period of time:

"H Gani asked whether the salary package for W Richards had been approached by F Woodmore. H Resmann recapped the history of discussions and undertakings reached in the appointment of W Richards. That is, that the Developers had agreed that specialist resources were needed in the junket marketing, and that W Richards be assigned to the task; that the necessary salary and associated costs were discussed at that time; that the appointment of W Richards was intended to be long term; that the letter of appointment, which was issued some time later, was not subsequently approved by the Developers as a consequence of matters that had subsequently transpired.

F Woodmore said that his understanding had been that the engagement of W Richards was a short term option and that the $100 000 figure related to all up costs to the Developer for the programme. He said that he had never envisaged a long term new position being created for W Richards or anyone else in the role. H Gani agreed with F Woodmore.

H Gani said that before any permanent appointment could be made, the salary package had to be brought to the Advisory Committee. In his opinion, the salary was too high.

Considerable discussion followed on the structure and requirements for the Marketing and Junket management functions, with the Developer maintaining that a Marketing Manager should handle both functions and the Operator stating the need for two separate positions, due to the significantly different skills required of each area."

This exhibit suggests that the defendant was aware, at least by 16 February 1994, that the term "marketing manager" could encompass a variety of roles. This seems to me to be at odds with Gani's earlier evidence about when he was informed of the distinction, and perhaps more importantly, that the distinction may have involved more than the level of salary offered.

Gani also testified that the issue of the international marketing manager had been discussed at the Citeko meeting. Gani said that the plaintiff's representatives told him that Bland was leaving the position in mid-June, the plaintiff would be interviewing candidates in Singapore, and the defendant would be advised of the result of the interviews. He said he thought he was to be advised in early August 1995. Gani then testified that the next time he heard from the plaintiff on this issue was the October facsimile. Gani testified that his response to this facsimile was to ask for the CV and details of the candidate. This facsimile was not adduced in evidence. However, Gani testified to receiving a memorandum from Farrow in October suggesting that Chris De Lima could be employed as international marketing manager. Gani's opinion was that Chris de Lima did not have sufficient experience in the South-East Asian market, and was therefore not suitable as a candidate.

Gani also described how Farrow informed him of the results of a newspaper advertisement for the position of international marketing manager. Gani said that Farrow told him by facsimile that the plaintiff had received "about 300 applications" for the position. Farrow had interviewed a short list of six candidates and suggested Nick Corey as the marketing manager. Gani said that in his facsimile response, he asked for the curriculum vitae of all the six short-listed candidates. Gani said that he made a "personal reference check" on Corey and concluded the candidate was not suitable for the defendant. Gani also said that Farrow refused to provide the other curriculum vitaes.

Gani said that he had suggested Agnes Chaya to Farrow for the position of Jakarta marketing manager, but Farrow had proposed Chaya for the position of international marketing manager. Gani did not think that she was qualified for that position and therefore rejected this proposal. Gani testified that he did not have any problem with engaging someone for marketing manager for $100,000, depending on the candidate.

McClusky also testified as to the need for an international marketing manager:

"Yes. The international marketing manager, Steve Bland, had resigned and had left?---That's correct.

"In relation to marketing, did you form any views as to the implications of Steve Bland leaving?---Well, the view that I formed was that he needed to be replaced. If he wasn't replaced then the responsibility would rest with the general manager and it was then a question of whether there would be sufficient resources applied to that particular function, so far as the resort's overall objectives were concerned.

What was the cause for concern about resources? Are you talking about the ability of the general manager himself to apply himself to the problem or are you talking about the lack of other people, or both?---Well, there was an international marketing department and without its manager then the responsibility rested on the shoulders of John Farrow. John Farrow had substantially [sic] responsibilities and my concern was whether sufficient energies would be placed into the area of international marketing, which was a strategic direction that the resort was following."

There was evidence from the plaintiff's witnesses on this matter as well. Tucek testified as to the role of an international marketing manager, and in particular the relationship between the two terms "international marketing manager" and "player development manager". He said that in this part of the world, especially in Asia, the word "casino" and any relation to gambling is sometimes forbidden and it is necessary to call positions by certain names to prevent that problem arising. For instance, the junket operation is not called casino. In some parts of the world the CAI group will call their operating entity something like "CAI Resort Pty Ltd", rather than include the word "casino" in the name. It does not mean anything and feelings are preserved. The same goes with the position of a player development manager. Player development obviously points towards a casino, to its gambling, whereas international marketing manager is a pretty neutral title. The title itself does not say very much but the players know what it means. Other people who might be offended obviously do not know. It is officially a neutral title. In the Asian context, where someone is referred to as an international marketing manager they operate, in the main, just as a player development manager would operate. They may have other tasks to perform but player development is their main task.

Resmann said he had the same view as Tucek on the distinction between the various types of marketing officers. He was asked about a document (ex 9/106) dated 1 August 1994. It is entitled "International Marketing Status Report". He was asked whether that was to be understood in the sense of player development or in the broader sense of marketing across national boundaries. He said that the two areas are sometimes inextricably intertwined. He gave the example of the Singapore flights where the Resort wanted to attract players (junket players, premium players) and therefore did advertising. He said the plaintiff not only advertised to the individuals but also placed advertisements in newspapers to attract any other players, such as medium players, with whom the Resort might not, at that time, have developed a relationship. These were people whom the operator did not know personally, but who might go on the ship casinos. In such a case there was an overlap between these two areas.

His later testimony during cross-examination also supported the notion of two differing marketing roles. He was asked about the position of marketing manager on 12 December 1995. His recollection was that the plaintiff had a person called Andrew Owen as marketing manager. He described Owen as "more the classic marketing manager --- not the international marketing manager [but as a] marketing manager who looks after advertising and so on". This would be at a lower salary than the international marketing manager to whom he had referred.

Resmann also said that it was necessary for someone to conduct "direct marketing". He was asked about this in the context of a meeting that had been held to discuss the terms and conditions on which Richards would be employed. He said it was necessary to go back in time. The situation at that time was that Kathy Ryan was heading player development on the Island and Steve Bland was in Jakarta. The plaintiff considered there was a need for a person to focus on junket marketing, that is, direct player marketing. This is the focus of attention of the position called "the international marketing manager". Resmann said that in the early stages he wanted to have someone from the CAI group or someone who was known to the group. Richards was, at that time, heading the CAI group player development office in Sydney. He was marketing the Canberra operation to the Sydney market. He was attracting many junkets and premium players. In Resmann's opinion Richards was doing quite a good job. He referred to the general distinction between the two types of marketing person, one devoted to attracting premium players and the other a more general publicity type. He said that at the meeting when the subject of marketing manager was discussed, the owners were not very clear about the distinction of marketing functions. For him (Resmann) marketing has three functions. One is really a function of advertising, that is addressing an anonymous segment of the market. The second one is public relations, that is, promotions. Finally there is direct marketing where the operator addresses identifiable people. This is the junket marketing. There was a range of discussions which covered the field of marketing but Resmann was not clear as to exactly what the owners wanted in terms of marketing. Resmann said he told the defendant's representatives at the meeting about the distinct functions. The function that Richards was supposed to fill was the international marketing manager, meaning the direct sales person, whereas the marketing plan put together by McGrath covered a wider range. It included advertising which was obviously wider than the job description for Richards.

Farrow also gave evidence about the role of an international marketing manager. He was asked about the terms "player development manager" and "international marketing manager". During his 1995 stay at the Casino, Ryan was the player development manager. Around this time he was contemplating the employment of, for example, Mike Johansen as international marketing manager. Player development manager is part of the marketing team but based and employed at the Resort and on the Casino floor. That person will oversee the operation of the player development department. They will prepare the forms such as the junket agreement forms or the complimentary player program forms or premium player program forms. They also implement the role of public relations on the floor. This involves looking after the day to day needs of gambling patrons. The international marketing manager goes out from the casino and searches for business. He gave the example of Johansen. He was employed at the time by Jupiters but was stationed in Hong Kong and worked from Hong Kong. Farrow said it did not really matter where the international marketing manager was based because he or she was always travelling out. He said: "It doesn't really matter where you work but basically you go out. You're out in the field and you basically get in touch with the operator's players, take them out, entertain them and see what they're doing and try and get them back to the Resort. If there's a problem, discuss the problem".

Farrow was asked, in terms of an organisational chart, where the international marketing manager would fit. He said that the international marketing manager would be in charge of the marketing department. In this case, had he employed, for example, Johansen, he would have been in charge of the marketing department and Ryan, as player development manager, would have been answerable to him. The international manager is responsible directly to the general manager of the Resort.

Farrow said that in September or October 1995 he had interviewed Agnes Chaya and suggested to Gani that she would be suitable for the position of international marketing manager. Gani had told him that he would speak to Chaya and discuss a package. In December 1995 Farrow went to Jakarta and reminded Gani about the position of Chaya. Gani said that he had forgotten to contact her and that he would do so. Farrow heard nothing more about it. Farrow had also had discussions with Craig Ashton and a Mr Mike Johansen about the position of international marketing manager. He told Gani about Johansen and about the salary range of $250,000. Gani told him to discuss the position first and the money later. Farrow said that engaging people for this type of position did not happen like that. Eventually Johansen said he was not interested.

Lines had been at the Casino in 1993 but left before it opened. In mid-1995 he was appointed again on Woodmore's suggestion. Gani had reservations about Lines, partly fuelled by his physical appearance and dress standards. Gani queried why Lines had been appointed and eventually he and Farrow agreed to place Lines on a six-month contract and monitor his performance. Farrow said that the performance was satisfactory in all respects. He had been working at Burswood and had helped build up the premium clientele. Gani was unsure of his suitability in the international area because he had not had much contact with Asian players. But four of Lines' referees were of Asian extraction. There was no evidence that Gani had made any enquiries about Lines and relied on his impressions formed in 1993.

Andrew Owen was appointed to the position of assistant marketing manager in September 1995. Farrow said that he thought Owen deserved a chance because of his background experience and enthusiasm. He spoke Indonesian. His job was to liaise with people in Jakarta and Singapore and with the marketing department being under Farrow's control. Gani agreed with Farrow's proposal to appoint him.

The defendant referred me to exhibit 28/111, at page 133. This exhibit is the operating results for the Resort for the month of December 1995. In the "Year to date" column, the amount spent on marketing is shown as $987,845.26. The amount budgeted to be spent on marketing was $2,324,680.15. I was also referred to exhibit 30/177. This exhibit is a page from a report compiled by Mr McClusky entitled "Review of Monthly Results - October 1995". It states that the actual amount spent in the month was $191,000 and the budgeted amount was $250,000.

The plaintiff contends that it did attempt to fill the position of international marketing manager but was not able to do so due to the strictures imposed on it by the defendant. The plaintiff also says that it is not as if the positions were entirely vacant. It had appointed an assistant international marketing manager, Ron Lines, and a marketing assistant, Andrew Owen.

It seems to me that there was some confusion about just what the position entailed. I have set out at some length the different descriptions of marketing manager, international marketing manager and player development manager and the various functions that each was to perform or cover. During the period from June to December 1995 the Resort was not without a person performing the functions of each position. The actual offices of international marketing manager and marketing manager were not formally filled. But the functions of each of them were being performed and Farrow was taking ultimate responsibility. It was by no means an ideal situation. Efforts were made to find suitable appointees. Discussions were held with De Lima and Chaya. Gani did not consider the former suitable and with the latter he either considered her unsuitable or forgot to approach her to discuss terms. Newspaper advertisements were placed and candidates short-listed. The focus changed with the introduction of the phrase a "real" international marketing manager in October. The salary range presented difficulties. The failure of the defendant to approve a budget for the position before discussing it with a candidate such as Johansen made it unlikely that a high profile person such as him would accept the job.

In all of the circumstances I do not think that the failure to appoint an international marketing manager before December 1995 constitutes a breach of the Agreement as alleged.

From the first meeting between the parties (May 1993) it was the intention of the defendant that the Resort would be marketed to high rollers from Asia, particularly from Indonesia. The Heads of Agreement signed in June 1993 contains a provision that the defendant would be responsible for marketing. It is to be noted that while no formal feasibility study was done the projections made by the defendant showed 1993 revenue as $273,000 from tourists and $56,000,000 from junket players. The pre-opening marketing efforts of the plaintiff were consistent with the stipulation of the defendant that Asian high rollers were the target. At a meeting on 14 October 1993 it was stated that the Resort was hopeful of attracting South East Asian high rolling gamblers rather than tourists.

At a meeting between the owners and the operators on 9 November 1993 a marketing plan was submitted to Koesnendar. The November marketing plan is exhibit 4/87. It was probably prepared by Mr Warren Richards. I will not refer to it in detail. It suggests that the primary target market would be junket, premium and complimentary players and to a lesser extent the Resort would be marketed as a tourist destination. At all times junket, premium and complimentary players were to receive preference in relation to Resort accommodation. Gani's evidence was that this plan was not approved because the emphasis against tourism was not in accord with the owners' instructions. However, he conceded that there were no documents in which the owner instructed that greater emphasis be placed on tourism.

There was an Advisory Committee meeting on 17 December 1993 and a revised marketing plan was discussed. There are two versions of the revised plan. One contains material about tourist or "grind action" players (ex 4/196) and the other does not (ex 4/226.1.1). Because of the additional content, it is likely that exhibit 4/226.1.1 was tabled at the December meeting and that exhibit 4/196 was a revised version that came some time later. The documents were prepared by McGrath. The two versions are substantially consistent. Exhibit 4/196 contains reference to tourist and grind players to increase Hotel occupancy and revenues and to increase mid-week occupancy. The plan states that geographically the tourist market would be sourced from the same market as junket and premium players. There is a reference to the role of the marketing manager in promoting the destination as well as the Resort. Gani agreed that these references were to grind action gamblers rather than to tourists per se.

The revised marketing plan was considered by the defendant and put to an Advisory Committee meeting on 9 July 1994. It was decided to refer it to a special marketing meeting which was to be held in Canberra at the end of July 1994. A marketing meeting was held in Canberra on 31 July 1994 and the marketing plan, exhibit 4/196, was approved.

At the Canberra meeting, Gani said that there had been recent press advertising in Indonesia promoting Resort packages of US$230 per night. McGrath was instructed to investigate who had authorised the promotion. The inference is that Gani did not approve of marketing expenditure in the absence of approval of the marketing plan. On 11 January 1994 Gani and Woodmore wrote to Resmann with a general warning about performance and making reference to the possibility of action under cl 17 of the Agreement. There is a complaint that the marketing plan (which, presumably is either ex 4/87 or 4/226.1.1) leaves "too many questions unanswered" but makes no reference to the tourism issue. On 15 January 1994 the plaintiff responded to that correspondence. The plaintiff makes the point that until recently it had been under the impression that the main marketing thrust would be on the junket market and due to sensitivities in Indonesia general marketing avenues would not be pursued. The use of the term "sensitivities" is consistent with a low key approach to promotion of gambling in an overwhelmingly Muslim country. The plaintiff also said that the plan submitted to the Advisory Committee meeting had been "a rough outline to see if the owners were willing to go ahead with a more general marketing strategy", which it now appeared they were and that McGrath would go to Jakarta to discuss it. Again there is no reference to tourism in the broader sense.

There was a joint meeting of the Consultative and Advisory Committees on 16 February 1994. By that time the initial plan had been replaced by a detailed plan which was under consideration by the defendant. There was discussion about the importance of the junket operators and the need to attract them back to the Resort. So far as concerns advertising, it was agreed that the target should be medium to low players. Again this is a reference to grind action players rather than to tourists generally. On 9 April 1994 Resmann wrote to Sumampow with some ideas for obtaining a greater share of the junket player action and some proposed initiatives in relation to player incentives. It contains the comment that "the hotel is after all a backup service to the casino and not an attraction in its own right". The defendant did not respond to this correspondence. On 24 June 1994 and again on 18 July 1994 Resmann wrote to the defendant indicating a view that the marketing strategy should finally be agreed. At the Advisory Committee meeting on 9 July 1994 there was some disagreement between Gani and Resmann as to whether revised advertising plans had been submitted. Resmann said he was concerned that the current advertising was taking place on an ad hoc basis. Gani said that the marketing plan would be finally approved at the special meeting to be held in Canberra.

The sequence of events appears to be that the initial marketing plan, ex 4/87, had a proposal to market the Resort as a tourist destination, that is, tourists in the true sense. It was not approved by the owners. At the December meeting exhibit 4/226.1.1 was tabled. It included the comment that "it is not in our interest to attract the `tourist' market" but the "$10K" could be attracted. The plan that was approved in July 1994 refers to the "tourist market" but explains this as referring essentially to "grind action" players. I think this is consistent with a change to increase the focus on tourist or grind action "$10K" players but it does not suggest any particular emphasis on tourism generally. There is no evidence that things such as attraction of conferences and eco-tourists were specifically discussed or contemplated at the time. However, I do not think that there is any warrant for a conclusion that tourists would not be accepted or that no effort was to be made to attract them. The wording in exhibit 4/196 is that the reference to tourists is "essentially" to grind action players. This suggests an emphasis, even a strong emphasis, on players but I do not think it goes as far as exclusivity. This conclusion is supported by the reference on p4/204 (part of ex 4/96) to promoting the Island to the tourism industry and promoting the Resort as a destination. This concept is repeated in the 1995/96 Business Plan, to which I will refer in more detail shortly. The approved budget for 1994/95 (ex 5/139) also says: "Marketing was originally focused on gaming activities, and it is only in the last three months that we have tried to attract the normal tourist".

From 1 to 3 December 1994 a series of marketing meetings were held on the Island. Attendees included Gani, Secco and Bland, who was the marketing manager at the time. The meeting discussed the primary target market being Casino players and resolved to focus on attaining a market of 80% players and 20% other patrons of the Resort. Secco said that this spilt was used as the basis for the preparation of the 1995/96 business plan. At this time junket operators had complained to Secco about unavailability of seats on weekend flights on the Sempati Air service. It was agreed that air seats should not be taken up by tourists at the expense of players. There was discussion about appropriate programmes for target markets in Asian countries and that the services of Mr Thio should be used as the initial contact with players in big markets.

Gani's evidence was that 80% - 20% split referred to the weekends rather than to mid-week. However, the minutes also contain reference to tourists providing a market during the quiet mid-week period and to the need to keep rates discounted. There is also reference to a plan to reduce the number of tourists and increase the number of players proportionally and to the defendant's priority for players. As there are no contemporaneous documents from the defendant suggesting that the marketing of the Resort should focus on tourists, such as eco-tourists and conferences, I do not think that the meeting limited the 80% - 20% split to weekends.

During 1995 the plaintiff sent to Gani a status report of international marketing for the period December 1994 to February 1995. In large measure (although not entirely) Gani agreed with the assertions in the report.

Throughout the documents that relate to promotion and advertising in the period December 1993 to December 1995 there are constant references to marketing in the key Asian countries, namely, Indonesia, Singapore, Thailand, Taiwan and Hong Kong. Gani seems to have been firmly of the view that advertising should not commence in a country until a representative office or other communication system had been established in the country: see, for example, ex 6/192. I found the evidence about the appointment of general sales agents in some of these countries, particularly Reliance in Thailand and Worldrich Travel in Singapore, confusing and I do not think I can place much weight, either way, on it. What is clear is that there were marketing efforts in at least Indonesia, Singapore and Thailand in 1994 and 1995.

During 1994 and 1995 special events occurred at the Resort. The purpose of the special events was to allow the Resort to invite selected players that the Resort wanted to attract. The events included Chinese New Year, a Baccarat tournament and the first anniversary of the Resort. For each special event the plaintiff was required to prepare an individual budget and submit it to the defendant for approval. One event that was not approved was a pro-am golf tournament.

On 5 June 1995 Resmann sent to Gani a copy of the Business Plan for 1995/96 asking for comments. It included a marketing plan (see pp13/60 to 107 of ex 13/44). The marketing plan contains an analysis of the target markets being junket market, premium players, complimentary players and tourist market. In relation to the latter, the plan refers to the creation of good grind action on the main floor. It is proposed to have attractive mid-week packages and incentives to keep the Resort busy mid-week. It includes the 80% - 20% split. Secco's evidence was that the defendant did not make any comment on the marketing plan within the business plan.

From July 1995 the procedure was the same. There was no approved budget in place and the plaintiff had to submit all marketing expenditure to the defendant for approval. Some special events were submitted to the defendant but were rejected. In the second half of 1995 player development staff were sent to Jakarta to meet junket operators and players to promote the Resort.

In the latter part of 1995 Lines and Smith (the casino operations manager) travelled to Thailand and met junket operators. From that trip they attracted about $3,000,000 in gross gaming revenue to the Casino.

It seems to me that I should find, and I do find, that the efforts made by the plaintiff to promote the Resort to its target market, namely the high rollers, were reasonable in the circumstances. Having discussed the issue of marketing generally I should mention the specific omissions to which the defendant has drawn attention in the second particular to para 10(h) of the defence. The defendant complains that the plaintiff should have taken a number of steps during the year that ended on 30 June 1995 and should have continued to implement those steps up to 12 December 1995. I do not think it would be fruitful to go through each of them. They are a series of points, most of which are in themselves small, but which together add up to what the defendant says is a total failure to market the Resort properly.

I will, however, mention some of them. I am satisfied, on the basis of exhibits 6/192 and 7/115, that marketing efforts and budgets were centralised on the Island during the relevant time. In my opinion there is no substance in this complaint up to June 1995, when Bland left the Island. The steps taken by the plaintiff to replace Bland have already been the subject of discussion and I do not think the plaintiff can be held responsible for a breach based on the failure to make a formal appointment to the position of marketing manager. The various marketing plans contain provision for associations with tourism commissions, travel agents, special events, television and radio advertising and market analyses. The absence of an approved marketing budget made the implementation of some of these things difficult. The complaint that the plaintiff failed to promote the Resort in Europe and the United States of America seems at odds with the statement in most of the documentation that the primary geographical and cultural market was Asia.

It seems to me that the fundamental point is whether, once it became clear that there was difficulty in sustaining the occupancy figures in the Hotel, the plaintiff should have taken remedial steps that might be seen to be outside the bounds of the original marketing plan and focus. As I have already said, I believe that the defendant and the plaintiff were agreed that the target market was the high roller player. The tourist trade was very much a secondary market and then primarily concerned with tourists who would gamble. But this does not exclude the attraction of non-gambling tourists. The real issue is the extent to which the plan should have been changed to take up the slack. This involves issues such as the physical facilities at the Resort, the desirability of attracting eco-tourists and conference participants and the type of cost - benefit analysis that I mentioned earlier.

It is difficult to reach a final conclusion on this issue without determining the allegation made about the failure to attain the highest occupancy rates reasonably achievable. Many of the issues overlap. The question of occupancy rates is repeated, in a slightly different context, in issue 2(d). Even within that issue, it is hard to separate the allegation about occupancy rates from that about operating the Resort in a proper and efficient manner. It is no less simple to distinguish those points from issue 2(e), which focuses on an alleged failure to review and correct Resort operations. At the heart of all of this is the continuing losses incurred in the food and beverage area of the Resort.

I will now turn to consider the matters raised under issues 2(d) and (e). It will then be possible to enunciate the conclusions to which I have come and the findings that I have made on issues 2(a), (d) and (e) together.

18. Breach - Efficiency of Operations and Occupancy Rates

The gravamen of the complaint that I have numbered 2(d)(1) is that the plaintiff failed to achieve the highest rate of occupancy possible. This is one aspect of para 10(h) of the defence. In this section I wish to concentrate on the third particular in para 10(h), namely that the plaintiff ought to have achieved an average room occupancy rate for the Hotel between 1 July and 12 December 1995 of 45% but only achieved a rate of 36.7%. Issue 2(d)(2) is that the plaintiff failed to operate the Resort at all times in an efficient manner. This is one of the aspects covered in para 10(i) but in this section I will deal only with the room occupancy rate, which arises again, in a different form, in the first particular.

18.2 Occupancy Rates - Projections and Discussions

No formal feasibility study was undertaken before the Resort was developed. Gani's evidence was that the defendant had done no projections of occupancy rates before the Resort opened. There is some evidence that the plaintiff was looking to a rate of 44% rising to 65% within five years. Farrow said that during the pre-opening phase the occupancy forecast was set at 45%. Later, the defendant asked that the Resort prepare for close to full occupancy. Gani said that the staffing levels were to be set on the basis of 75% to 100% occupancy.

Minet pointed out (ex 2/251) that this would require a change in staff numbers because the original budget had been prepared on the basis of 50% occupancy. This was discussed at a meeting on 14 October 1993 and the defendant agreed it would be necessary to increase staff numbers. In exhibit 3/104, sent on 15 October 1993, Farrow advised Koesnendar that the staffing schedules were now being arranged on a basis of 85% rather than the original estimate of 45%.

The early history of the Resort showed marked differences in mid-week and weekend occupancy, with the latter being much higher. Occupancy rates fell between November 1993 and April 1994. In a report to Resmann dated 19 April 1994, Farrow described the results for March and April 1994 as "a disaster". During the first half of 1994 occupancy averaged 25%: see ex 5/139 at p5/140.

In his report of 2 February 1994 (ex 5/1) Buckingham commented that from his limited observations Hotel staffing levels seemed high. During the quiet periods of Monday to Thursday there was excess capacity and rostering appeared to have been structured so as to give all permanent staff their minimum hours. He recommended that staff be used in quiet times in other departments to reduce the total numbers required and overtime charged.

At the joint meeting of the Consultative and Advisory Committees on 16 February 1994 (to which I have already referred) it was agreed that staffing would be set on the basis of a maximum of 70% occupancy. Reductions in staff numbers was to be by natural attrition. The plaintiff, through Archer, warned the defendant that if it wished to provide a "Five Star" service for guests it would have to accept the associated operating costs. Things such as keeping kitchens open 24 hours per day (which were part of the "Five Star" concept) would inevitably lead to higher costs. Archer's evidence was that staff rationalisation took place in March 1994. There was an exchange of correspondence on 6 April 1994 (ex 5/57 and 58) in which Gani asserted that no initiatives were being taken to improve service and efficiency and to reduce costs. Resmann replied to the effect that the plaintiff was consistently analysing staffing and cost levels, that it was working towards a 70% occupancy and that the new general manager (Taylor) should be given an opportunity to report on desirable staff levels.

The issue was raised again at the Advisory Committee meeting on 9 May 1994: see ex 5/103 at p5/105 At the meeting Gani complained that occupancy was only 25% when the target was 45%. He agreed that the plaintiff's response was that the higher rate could not be achieved unless the plaintiff's marketing proposals were accepted (see previous section). Gani said that the staff levels were set at a 70% occupancy rate even though 45% was the target to meet weekend demand which could be as high as 75% to 80%. The defendant still hoped for 100% occupancy on Indonesian holidays. The extra staff requirement would come from people working overtime rather than from additional hirings. Gani requested a staffing level breakdown for each department. Archer provided the information immediately after the meeting.

After the May meeting, Archer introduced cross-training of staff so that individuals could do more than one job. This would permit maximum utilisation of the workforce. By this time many of the staff contracts (which were of 12 month duration) were falling due for review. This presented an opportunity further to reduce numbers. At around this time Archer reviewed positions held at the Resort in conjunction with Taylor to establish whether there were positions that could be dispensed with. Archer and Taylor made decisions about cutting staff numbers. Natural attrition was occurring, especially because of dissatisfaction with staff accommodation. In relation to staff accommodation, the plaintiff's case that it was sub-standard received support from Compton. He described it as looking like a construction camp.

There is no doubt that the plaintiff was consistently monitoring staff levels and had information available to it. The monthly reports sent by the general manager to Resmann contained summary details of personnel including staff numbers, category (full time, part time and casual) and departures and additions. Examples of these monthly reports can be seen for the months of February 1994 (ex XX), April 1994 (ex UU), June 1994 (ex 6/127.1), September 1994 (ex 6/235), August 1995 (ex 22/198.1), October 1995 (ex VV) and November 1995 (ex WW).

On 22 June 1994 what was called a "brainstorming case study" was held at the Resort. It was attended by Gani and Taylor, among others. The issue of overstaffing and cost overrun was raised and a suggestion was made to reduce staff numbers from 220 to 155.

When the occupancy issue was raised at the 9 July 1994 Advisory Committee meeting, Resmann said that the 70% occupancy rate should not have been used and that they should staff the Hotel as necessary and as required to provide the service. Any occupancy in excess of 40% would result in the staff having to work overtime. Taylor told the meeting that within three months the Hotel staffing levels would have been reduced by 25%. He detailed calculations on staffing levels and advised that some staff previously counted as Hotel personnel should have been allocated to the Casino operation. Archer was involved in weekly discussions with Taylor concerning staffing levels. On 24 August 1994 Taylor sent to Gani a memorandum (ex 6/216) detailing the steps that had been taken to reduce numbers and reporting a 17% reduction on the Hotel side from May to August. The numbers had been reduced from 196.5 to 163.5 in the Hotel and from 387 to 356 in the Resort overall.

Early in 1994, programmes were introduced in an attempt to boost mid-week occupancy. They were directed, in the main, to the "grind market". I have previously referred to complaints made by high rollers in December 1994 that they were experiencing difficulty in getting aircraft bookings due to the presence of low and medium players.

The Advisory Committee meeting on 14 March 1995 received a report from Taylor on staffing levels (which had decreased) and occupancy rates (which had increased). Gani commented that the Waterfall Café appeared to have been over-staffed in quiet times. Taylor's response was that this may have been due to rostering to extend maximum allowable shifts. These matters apart, there were no complaints from the defendant at the meeting about occupancy or staff levels.

By a memorandum dated 28 March 1995 (ex 9/279) Taylor informed Resmann and Gani that turnover in room sales for February was higher than the previous year. Monthly occupancy was 42.5% (almost on budget) at an average room rate of $154.

Exhibit 9/310 is a comprehensive report on staff levels and structures at the Resort. I believe this was the document tabled at the Advisory Committee meeting in March 1995. It included details of ten new positions that had been created with the defendant's approval. It summarised changes in staff turnover (calculated on an annual basis) from 72% in September 1994 to 43% in February 1995. This represented 107 less terminations per year at a saving of $500,000 and facilitating greater stability and harmony in the workforce. Details were also provided of savings made in relation to salaried staff. On p9/315 the author commented on comparison of the Resort's staffing levels with those of a 140 room city hotel. The author made reference to "headaches" that the city hotel would not confront. They include vehicle wear and tear because of appalling road conditions, staff units in poor state of repair, poor airline services, maintenance of 12 acres of gardens without irrigation and in a high salt region, deterioration in the buildings and equipment, unpredictable supply systems, lack of storage facilities, absence of a pool of skilled casual labour and absence of technical back-up. The author said these problems demonstrated the uniqueness of the Resort but the list was not exhaustive. This section of the report was put to Gani in cross-examination. He agreed with some of the points but thought others were overstated. It will be apparent from these reasons taken as a whole that I accept that the uniqueness of the location added significantly to operational difficulties. Most of the complaints were made out in the evidence. At p9/317 is a graph showing occupancy rates for 1994 and those for the year to date (1995). Gani agreed that the current year figures were a significant improvement on those for the preceding year. At pp9/318-29 there is a detailed list of the staff establishment. Forty staff on the list are shown as casual employees.

The operating results for May 1995 (ex 11/153 at p11/156) indicate that occupancy rates for May 1995 were 47% compared to a budget of 42% and to the previous year figure of 25%. These figures were put to Gani and he gave an affirmative answer to the question: "At this stage, at least, would you agree that things were looking promising in relation to the operation of the Hotel?" In the same exhibit it is noted that the Casino had made a gross profit of $30,000,000 against a budget of $10,000,000. As had been reported at a management meeting on 29 May 1995, the flight schedules for Monday flights from May to June 1995 were full.

The actual occupancy rate for 1994/95 was 39.82% (average). This figure is arrived at by recognising that there were 56,185 room nights available and 22,373 had been sold. There was a steady improvement from July 1994 to December 1994, reaching a peak of 65.5% in December. The average occupancy rate for the period January to June 1995 was 42.7%. In the second version of the budget (ex 13/44), which was sent by the plaintiff to the defendant under cover of a memorandum dated 14 July 1995, the plaintiff asserted that since the opening of the Resort on 5 November 1993 there had been "steady, consistent growth in terms of occupancy, turnover and gross revenues". In cross-examination, Gani did not dissent from that proposition.

At p13/111 the plaintiff makes an occupancy forecast for the first half of the 1995/96 financial year ranging from 43.1% in July to 59.5% in December 1995. The average monthly figure for the financial year was 51.7%. The same figures appear in the third version of the budget (ex 24/2 at p24/71) sent in October 1995. Those figures assume the commencement of flights by Qantas/National Jet Systems ("NJS") from December 1995. In a later section of these reasons I will have more to say about the issue of NJS flights. At this stage it is sufficient to say that they were material to the projections of occupancy rates.

At the Citeko meeting occupancy rates were not raised other than in the context of a break even point for food and beverage services: see ex 17/114 at p17/126. Secco's evidence was that Sumampow asked him what level of occupancy a resort hotel would normally expect for the food operations to break even. Secco's response was anywhere between 50% and 65%. Sumampow asked for a break-even analysis. Secco said he had not done the calculation but had the formulae available to do so. They were already in the software on the computer he carried with him and it would take him about 20 minutes to do the exercise. He was told not to bother. According to Secco there was no reason to look at a break-even analysis. It did not assist in analysing anything. It would tell the reader what level of occupancy was needed to break even but whether that rate could be achieved on the number of seats that were available on flights and so on was another matter. He said the position might be different if it were a stand-alone hotel.

The defendant called Mr John Smith, an accountant from Horwath & Horwath, to give expert evidence. Counsel for the plaintiff objected to the expertise of Smith but I was satisfied that he could give the evidence tendered. His qualifications and experience appear at transcript pp1361-70 and I do not intend to repeat what is there set out.

Smith took the budget occupancy rates from ex 24/2 and calculated the estimate for the period 1 July 1995 to 12 December 1995 as 45%. From the same document he extracted the average room rate at $158. Smith then looked to the operating results for December 1995(ex 28/11 at p 28/129) to ascertain the actual results for the same period. This he calculated at 41%. Smith was also able to calculate that the average daily room rate for that period was $158 against a budget of $168. Smith proffered the opinion that the rooms department should have returned a profit of 40% of rooms revenue. He based this figure on an annual survey of the operations of hotels in Australia. All of this formed the basis of the defendant's damages claim in relation to this issue. However, at this stage I am not so much concerned with damages as with liability, that is, whether the plaintiff was in breach of its obligations under the Agreement by not increasing the occupancy rate and reducing operating costs so as to maximise financial return. In this respect there are two fundamental issues. The first is whether the plaintiff took reasonable steps to attract guests to the Island. The second is whether the plaintiff took reasonable steps to reduce operating costs in the only feasible area for so doing, namely, by reducing staff numbers. In essence, the defendant says that the rooms division should have made a profit of not less than 40% and should have reduced staff by terminating the employment of about 25 staff at the lowest level and replacing them with part time or casual staff. The retort of the plaintiff is that the profit figure of 40% was never raised with the plaintiff until these proceedings were commenced and that the staff reduction suggestions were "tinkering" at the periphery of the operations.

18.3 Occupancy Rates - Attracting Guests to the Island

In large measure I have set the scene for dealing with this issue by setting out the evidence relating to the plaintiff's marketing plans, discussing the role of the marketing managers and alluding to some of the problems facing the operator.

The difficulty for the defendant is that no evidence of a marketing nature was called to support the assertion that the Resort would, more likely than not, have succeeded in attracting additional patrons in sufficient numbers from the marketing gambits the defendant alleges should have been taken. Smith is an accountant with considerable experience in the hospitality industry. However, he did not qualify as an expert in marketing and no other expert evidence of that nature was called.

Smith described eco-tourism as a new market segment which is fashionable and lucrative in terms of opportunities for hotel demand in the leisure markets. He said it was a fast growing leisure market and was producing large amounts of revenue to the hotel and tourism industries. For the Australian market eco-tourists generally come from the United States and Europe. There is an increasing growth in the market from within Australia and from New Zealand and to a lesser extent increasing demand coming from other parts of the world including South East Asia. The leading age in socio-economic groups are the people in the age brackets 44 to 64; people who are financially well off, who have travelled extensively, who are looking for an alternative holiday destination and a different type of holiday experience. Smith's evidence was that there were attractions on the Island that could be of interest to eco-tourists. He mentioned the rain forests, bird life and fishing. My recollection was that Smith assumed that 6000 additional tourists per year could be attracted.

In relation to conferences, Smith acknowledged there were no dedicated physical facilities at the Resort but he thought the Ocean View Lounge would have been suitable for temporary conversion for a conference facility if a market demand could be established. His view was that conferences of no more than 50 people could be accommodated comfortably in terms of the resources. He thought that Christmas Island, when compared to similar types of resorts in Australia had conference facilities that were limited and basic but which would be adequate to attract small numbers of conferences. In his calculations Smith assumed one conference per month of 50 delegates staying for 3 nights and with a 1.5-guest room density factor at a $125 per night conference room rate.

Compton was less sanguine about the opportunity to attract additional tourists in large numbers. He said there would be an increase but it would be gradual. He thought the history of the Island as a phosphate mine would reduce its attractiveness as a destination for eco-tourism. So too would the fact that the Resort is primarily a casino. He said that a Casino visitor staying in the Hotel will be looking for the Casino whereas the tourist visitor looks for other types of activities in and outside the Resort. In this area the limited type of sporting facilities on the Island would reduce its attractiveness. He also said that while there was a tourist market of older people willing to pay higher room rates, they generally look for smaller properties and he did believe that would provide a significant level of revenue to the Resort. The other section of the eco-tourist market was the "backpackers". They would be more likely to stay in the Lodge than the Resort.

So far as concerns conferences, Compton thought the market was limited because of the lack of additional facilities at the Resort. There would be little attraction for partners.

One of the great difficulties in this area is that no feasibility study was done for the Resort against which particular occupancy levels could be assessed. The same goes for the later period when the defendant says that attention should have been shifting in the direction of tourism and conferences. It is one thing to say that an increased number of guests would lead to an increase in revenue. But it is quite another thing to postulate a market from where the increased number of guests would be attracted. No evidence was given as to how desirable a location the Island would be for tourists. It certainly has rain forests and bird life. But as I understand the general tenor of the evidence the infrastructure on the Island is not particularly good. The beaches are not of the "Cable Beach " quality or, if they are, accessibility is limited. Compton gave evidence of other Asian holiday destinations that would be, to say the least, fierce competition.

It must always be borne in mind that this was, and was always intended to be, primarily a casino. The Hotel was a service institution designed to maximise the opportunities for revenue from gambling. I think all of the accounting witnesses agreed with the proposition, put in different forms at different times, that a cost-benefit analysis was necessary to assess the financial impact of new strategies.

As this was primarily a casino, I think it would have been necessary to conduct a full cost-benefit analysis of the likely effect of other patrons such as eco-tourists and conference attendees on the primary target group of the Resort, namely gamblers. It is a different sort of market and different considerations apply. As Compton said, casinos tend to become busier and more active at night, which is the time when people like eco-tourists in an older age group may be looking for quieter pursuits. Dress standards may differ between groups. No analysis was done as to the relative attractions of the Resort and the Christmas Island Lodge as the place at which tourists would choose to reside.

One of the assumptions on which Smith based his calculations was that the airlines would move to an 80% flight loading. No evidence was led to support the proposition that this was feasible. In my view, one of the fundamental problems with this entire venture was achieving stability and quality in airline services. I accept the evidence that the service offered, particularly by Sempati Air was unreliable and of suspect quality. Airlines such as Ansett and Qantas do not appear to have embraced the route with unbridled enthusiasm. For a location such as the Island, air services are vital. For an operation such as the Resort, gambling patrons must be assured of a service to get to and from the destination with a minimum of fuss. The same goes for the non-gambling patrons (see transcript p1439). There is the additional difficulty that air services provided for them must not be at the expense of the high rollers. If it is, the overall financial well-being of the Resort is unlikely to profit.

What I have said should not be taken as an indication that non-gambling or low turnover gamblers were to be ignored. The evidence demonstrates that from time to time packages and other incentives were offered to attract patrons who did not fit into the high roller class. But this was the exception rather than the rule. There had been one experience (December 1994) in which high rollers had been forced to compete with other patrons for limited seat availability on aircraft.

I asked Compton how much time would ordinarily elapse after commencement of a property before an operator should become aware that remedial action need to be taken in relation to occupancy rates. His answer was six months. The difficulty here lies in the cumbersome control structure which was implemented for the operation of the Resort. I have no doubt that the plaintiff had an obligation to be pro-active rather than to sit back and wait for the owner to come up with good ideas to enhance the operations. I am satisfied that the defendant complained about lack of profits in the rooms division and that the plaintiff took some remedial action. It may well be that a relatively drastic change of approach was required. But to shift the emphasis from gamblers to non-gamblers in any material way was a matter of real substance that required detailed consideration. In other sections of these reasons I describe how the somewhat cumbersome approval process caused delays in instituting changes, particularly where they were changes of substance. The process for the centralisation of storage facilities and the change from a food and beverage manager to a hotel operations manager are two examples. It would be a matter of speculation as to how the parties would have dealt with a proposal that could have involved a shift in emphasis, however slight, from gamblers to non-gamblers. I do not wish to speculate but I think it is a reasonable inference that some form of comprehensive cost-benefit analysis would have been required. After all, as Compton said, you can increase occupancy and, at the same time lose money. It depends on the level of discount that has to be offered to attract the additional patrons and the affect that this might have on other areas of the operation.

Another problem is the timing. The defendant's complaint centres on the period from July to December 1995. There was a lot happening. Certainly, the issue of Hotel profitability had been raised squarely but not much emphasis was placed on occupancy rates as such. The focus of attention was mainly on accounting and financial systems and information and on restructuring of the food and beverage services. The "green pen brigades" (from both sides) were in full operation. I am not surprised that things more closely allied to marketing took something of a back seat.

The defendant points to the fact that in the period after 12 December 1995 when the plaintiff remained as operator it did change its focus. However, there are many reasons for this, not the least of which is the completely changed nature of the relationship between the parties. The defendant's case, through Smith, is based largely on assumptions about which I have not been satisfied on the evidence. To the extent that there was evidence on the feasibility of increasing occupancy by eco-tourists, other tourists and conferences, I prefer that of Compton which was more pessimistic. On balance I am not satisfied that by 12 December 1995 the time had arrived when the defendant could legitimately say that sufficient time had elapsed in which the failure of the plaintiff to lift room occupancy regularly to a figure of 45% or more was so inefficient as to amount to a breach of its obligations under cl 4(l) of the Agreement.

19. Breach - Failure to Take Corrective Measures

The issue numbered 2(e) relates to the review and correction of Resort operations. Once again, it is difficult to treat this as a separate and distinct matter from those that have gone before. It arises from cls 4.1(l) and 4.1(1)(ab) of the Agreement and from para 10(i) of the defence. It alleges that the plaintiff failed to operate the Resort at all times in an efficient manner and failed to review the operations of the Resort on a continuing basis and to take corrective measures where necessary to improve operating results.

Four particulars are given. The first contends that the plaintiff ought to have taken steps to achieve and maintain a rate of profit in the rooms department of at least 40% from 1 July 1995. This could have been done by reducing staff levels. The second particular relates to the replacement of the food and beverage manager. The third particular relates to the operation of the restaurants at the Resort. The final particular complains that notwithstanding that the food and beverage department had suffered a loss of $2,180,000 in 1994/95, the plaintiff took no steps to remedy the situation. The second particular is dealt with elsewhere in these reasons. I will here concentrate on the other three.

One of the aspects that relates to rooms department profit is whether the plaintiff can be criticised for not reducing staff numbers quickly enough. It is important because of the nature of the plea. Clause 4(l) of the Agreement requires the plaintiff to maintain the highest rate of occupancy reasonably achievable so as to maximise financial return. The remaining part of cl 4(l) contains the stipulation (in some ways not easily reconcilable with the first part) that the plaintiff must provide all appropriate services as are normally provided at hotels and casinos in Australia of a comparable standard to the Resort. This is, of course, a "Five Star" operation.

The assumption made in the defendant's case on this issue was that there could be greater reliance of part time and casual staff to cover for busy periods when the occupancy rate was at its highest, for example on weekends and holidays. Of central importance here is the proposition that there was a pool of local workers who could adequately fill the necessary roles.

Smith testified that he had taken the view that it should have been possible to secure some casual and part-time staff for some of the unskilled and semi-skilled areas in the operations, such as gardening, landscaping, kitchenhand assistants, porterage and the like. So far as concerns rooms, the positions were mainly porterage and housekeeping. In relation to housekeeping he assumed that it should have been possible to take on board limited numbers of local unskilled people if necessary and through appropriate training to bring them into operation. He thought casual and part-time staff could have been employed to a limited extent. He said that on his reading of the manning levels for the Hotel, there was an almost exclusive use of full-time staff. There was a small number of part-time staff. He said it was normal practice in the hotel industry, particularly in the rooms department and the food and beverage department, for a large number of casual staff to be engaged to be called upon as needed at peak-low periods. Such a practice allows a hotel to avoid the risk of wastage and loss of productivity when the occupancy of the hotel is not great. It results in cost savings and helps to achieve higher degrees of profitability in the rooms and food and beverage departments. He said that all hotels try to have a balance between full-time, part-time and casual staff in order to optimise profitability levels. He agreed that it was necessary to have a core group of full-time staff. For the purposes of his report he had assumed that there would be a pool of unskilled labour available for either employment as casual employees of the Hotel for unskilled roles or that they would be available for casual or part-time roles or possibly full-time roles once they had been properly trained by the Hotel's management.

The plaintiff's case was that the pool of local labour was very limited. Resmann described the local labour situation as "one of the major challenges" facing the operation, namely, that because of the remoteness and isolation of the Island a pool of casual labour was not available. He said it was a very obvious piece of information with no other hotel or casino on this island. The plaintiff had a few local staff, mainly in the kitchen and gardening. They could have worked as casuals, but not to any extent necessary or required for an operation of such a size.

Tucek gave evidence that CAI group had a policy that wherever it could it would employ local staff. This policy was followed in relation to the Resort. Farrow also said that this was the policy. He was aware of it and had seen it in operation in other countries.

Farrow testified that he had been made aware of a commitment made by the owner with the Commonwealth to employ as many locals as possible. In the pre-operational phase and after the opening of the Resort the plaintiff established a policy of recruiting locally where possible. The plaintiff recruited locals to be employed in the housekeeping department, the restaurants, the front office, the porters desk, security and a technician in the surveillance department. It was not really possible to employ locals in the Casino because they were dealing with a premium player operation rather than a grind action one. The significance of this for employment was that normally people are trained as dealers and the training required to become fully experienced for employment in a premium area would be somewhere between 18 months to two years.

Archer also testified that the plaintiff's policy was to engage local staff where possible. She said there were about 60 Christmas Island residents employed. The majority being on the Hotel side because they were more suitable for training to that particular skill level. The plaintiff began employing local people at the pre-operations stage. She said there were some problems. The majority of those who were eligible for employment were people who had worked in the phosphate mine or who had not been employed before or who were long-term unemployed. There was a great need to focus on a skill base from the most elementary level. Training was provided in hotel skills such as housekeeping and public area cleaners. The plaintiff also hired some local drivers.

Archer said that with some people there was a language difficulty and there were some religious considerations. There is a large Muslim population on the Island. This created problems such as the inability of a female cleaner to work unaccompanied in a room with a male present. It was also difficult for them to work near alcohol. Later the plaintiff organised with a Commonwealth Government department operating out of Perth to institute training in gaming procedures. Farrow also made reference to this aspect. He said that in 1995 there was a recruiting drive and a training school was run for the Casino. Secco made mention of another problem that detracted from the desirability of the Resort as an employer for some local people. The Resort had a rule that no employee could gamble in the Casino and nor could they gamble at one of the other two gambling sites on the Island, namely local clubs. One was rather curiously named the Christmas Island Literary Association. There was some anecdotal evidence from Secco that some local people found the work too hard. He cited the example of a Mr Zaini, a Malay storeman who had indicated to Secco that this was his reason for leaving the Resort.

Farrow said that when positions were available at the Resort the position would be advertised in-house. It would then be advertised locally by way of the union office, by way of advertising at the bank, the post office and the supermarket. If there was still no reply for the job then advertisements would be placed on mainland Australia. Secco confirmed that this was the policy. In September or October 1994 he had a meeting with Rowena Slattery, the personnel manager. He informed her that prior to recruitment of any staff off the Island, local advertising had to be done on the Island. Brochures or job descriptions, job requests or employment requests had to go up at the bank, at the Poon Saan shops and at the supermarket before they could recruit on the mainland. He said this policy was followed and he personally saw advertisements at the bank.

According to Archer, the policy of recruiting locals continued in 1994 and 1995. One advantage was that it alleviated the accommodation difficulties that were experienced with staff members from the mainland. Archer pointed to ex 6/200.4, which was a memorandum dated 15 August 1994 from Slattery to department heads advising them of the policy. It is referred to as the "standard practice" although recognising that it could be circumvented on occasions.

Secco testified that "genuine efforts" were made in the second half of 1995 to recruit casual labour for the food and beverage services. Secco was personally involved in directing policy. He personally made investigations by finding people that were actually working in other areas on the Island who were willing to work as food and beverage people in the Resort. There were lots of full-time local staff in food and beverage. There were not many people available as casual labourers because most of the people on the Island wanted full time work. He said: "They may work for a short while as a casual, but most of them want full-time employment and the full-time employment would come generally from one of the other, say, bar outlets on the Island or from construction, which was a place where a lot of your male casuals would end up taking a full-time job". The plaintiff also looked at persons who would work regularly but part-time. But generally most people wanted 38 hours per week and if they could get those hours elsewhere they would take that job. Secco also said that the Island only had education facilities up to Year 10. Upper secondary students and university students (who would normally form a source of casual labour) were not resident on the Island except at holidays.

The defendant led evidence from Mr Donald McLane. He is the general secretary of the Union of Christmas Island Workers ("the Union"). He said that the preferences of the local people concerning work were, in descending order, permanent, part-time then casual (on an ongoing basis). People were reluctant to take on ad hoc casual work because it interfered with unemployment benefits and resulted in time being taken up filling in forms.

McLane said that at some time in 1995 he raised the question with Ms Dianne Dale, the personnel manager, as to why more long-term Island residents were not employed by the Resort and why the Resort continued to recruit people from the mainland to fill the jobs which could be done by locals. These were jobs towards the bottom of the range. He spoke to Dale on a range of subjects but the most important one was just before she left. This was in September 1995. Dale advised McLane that Farrow had instructed her to tell him the Resort felt it was overstaffed and needed to make some people redundant. The main overstaffing was in the food and beverage area and a couple of others. They would need to cut the numbers. Discussion ensued as to the preference clause in the EBA and McLane advised against terminating the services of Union members. He said that Dale never made requests to him in relation to labour. After Dale left there was a large break between personnel officers and Farrow was the person with whom McLane advised on industrial issues.

In October or November 1995 the special events manager requested casual staff to undertake work for the second anniversary celebrations. He provided seven to ten workers for a period of about two weeks. At around the same time McLane had a meeting with Farrow at which Farrow asked for assistance to find unemployed people. He said he would.

On 4 December 1995 Farrow wrote to the Union (ex 28/221) saying: "Would you please advise me today as a matter of urgency if you are able to supply us with staff to cover all areas except the Casino". On the same day McLane replied (ex 28/222). He said the Union would assist and would advertise the vacancies in the next month's issue of the Union newsletter. He also gave the names, ages and telephone contact details of nine people who were "available for immediate start". Three of them wanted full-time employment and six were casuals. McLane said that to the best of his recollection two people were picked up from that list as casuals and one as a full-time storeman. On 5 December 1995 McLane wrote to Farrow asking for more details of the work that was available. He needed this information to give to prospective employees. He did not receive a reply. On 6 December 1995 (ex 28/226) and 28 December 1995 (ex 28/227) he sent further lists and applications. One of the people who sent an application was employed by the Resort. A student also mentioned in ex 28/226 was offered a position.

Farrow was critical of the standard of these employees. He said they were not good workers: see transcript pp5348-49. McLane disputed this: see transcript p1538.

Gani contested the proposition that the ability to reduce staff numbers was conditional on there being an available pool of casual labour. He said the plaintiff could have met the problem by rostering the employees for four days, each of 12 hours, and then giving them the rest of the week off. This was permissible under the EBA. He also said a pool of casual labour was available on the Island even though the numbers were not great. He had seen casual employees used at the Resort. For example, the functions for the grand opening and the second anniversary. He could not say the exact number but said they had probably used 20 to 30 people.

McLane was asked to describe the local employment scene towards the end of 1995. He said that if 50 permanent jobs had become available, full-time or part-time, he could have filled them so long as they were the "bottom rungs of the responsibilities". He said there was a large pool of unskilled to semi-skilled labour. Skilled workers were in shorter numbers and were harder to find. He acknowledged that a lot of local people would not want to work for the Resort. He did not expand on that comment. It may well have been a reference to the type of problems to which Secco and Archer alluded in their evidence. McLane did not say to what extent the pool could provide casual, as distinct from part-time, employees.

The plaintiff's case was that in mid-1995 about 30% of the workforce was local. McLane agreed with that proposition but he disputed the plaintiff's definition of local. He said that "local" referred to long-term Island residents. The plaintiff's assessment was based on the definition of "local" as someone who was on the Island at the time of engagement.

The question is whether the plaintiff can be criticised for not making further reductions in permanent staff numbers. It was obviously vital that there be sufficient workforce available to provide the appropriate level of service during the busy times, namely at weekends and on holidays. I am satisfied that the plaintiff had a policy of employing local people where possible. I find that there were difficulties with the availability of local labour for casual employment. Whether this is due to cultural factors or the alleged inefficiency of some members of the population is immaterial. I think that there were limitations in the extent to which the plaintiff could have reduced staff numbers in the Hotel operations without jeopardising the required level of service at busy times.

One of the difficulties with the defendant's claim in this area is that there was no evidence led to support the contention actually raised in the first particular to para 10(i). The bald statement is made that a staff of 14 porters, 14 housekeepers and 20 cleaners was sufficient to cope with an occupancy rate of double the average occupancy rate of 39%. However, no evidence was led to support the proposition that in the busy times staff in these numbers could have handled the workload and could provide the appropriate level of service. Smith did not give evidence that staffing cuts of this nature should be made. Rather, he assumed the availability of casual and part-time people to fill porterage and housekeeping roles.

In the period from November 1993 to 30 June 1994 the rooms department returned a loss of $598,015 on revenue of $1,419,382 (ex 6/92 at p6/94). In the financial year to 30 June 1995 the profit from the rooms department is shown as $216,152 on revenue of $4,143,880 (ex 14/129 at p14/133). In the period from 1 July 1995 to 31 January 1996 the rooms department returned a profit of $450,798 on revenues of $2,531,653 (ex 30/1 at pp30/91-92). I have mentioned the seven-month period because that is the period over which Smith did his initial calculation.

Smith then did an exercise to relate the results back to the period from 1 July 1995 to 12 December 1995. He took the actual figures from the monthly operating results to 31 December 1995 and deducted a pro rata amount to allow for the 12 days in December. Assuming a 40% rooms department profit contribution level, the additional profit would have been $530,000. He then assumed an additional 2114 guests taking the occupancy for the period from 1 July 95 until 12 December 1995 from 41% to 51%. This, he calculated, would result in additional room revenue of $422,800, additional food and beverage revenue of $295,960 and additional other revenue of $42,280. On that basis the total additional revenue would be $761,040. That would translate to an extra profit contribution of $550,000 as a result of the Hotel additional revenue of $381,000 from the rooms department, $148,000 from the food and beverage and $21,000 from other departments such that the total extra profit would have been $550,000. In arriving at these figures he made certain assumptions as to the effect of conference patronage. Details of these exercises are to be found at transcript pp1411-17.

Of particular importance at the moment is that part of the exercise that assumed the rooms department should return a profit of at least 40% of revenue. He had indicated that the profits for the seven months to 31 January 1996 represented just 17.8% of revenue which is considerably below what he would have expected. On my calculations a 40% return on revenues of $2,531,653 would be $1,012,661. This indicates the scale of the problem that Smith believed existed. It is apparent from his evidence that he regarded the high proportion of full-time staff in the rooms department as a significant reason why the profitability was so low. The comments that I have made in the previous section on reduction in staff numbers must be taken into account in assessing the validity of that proposition. He also mentioned other "efficiencies" but the evidence did not condescend to detail in that regard.

In his examination-in-chief, Smith was asked why he had adopted the figure of 40% as the rooms department profit contribution level. He said:

"I chose 40 per cent because I believe that having regard for my understanding of the cost structures of hotel rooms departments in Australian hotels and having regard for what I understood to be the particular additional problems associated with operating the hotel in Christmas Island, in particular the additional problems to do with the necessity to have a higher level of full time staff rather than more of a reliance on part-time and casual staff that is more typical in Australia, allowing for those factors and other factors as I read about in the material I was given, I chose 40 per cent because I believed it to be a figure which the hotel's management should have been able to achieve. I also had regard for other properties where they were in the Australian mainland and bearing in mind that Christmas Island is a territory of Australia, I had regard for the sort of achievable levels of rooms department profitability for other hotels I had seen where there had been low occupancy situations and tried to take into account the particular factors that governed those hotel cost structures in comparison to Christmas Island's."

Smith gave examples of other hotels with which he had been connected and which enabled him to voice that opinion. He also mentioned the Horwath and Horwath Annual Survey to which I have already referred.

Counsel for the plaintiff submitted that Smith's assumptions and opinion had shortcomings. He said that the Resort, unlike the operations with which Smith was familiar, drew its profit from an activity that was outside the Hotel. Accordingly, the level of cost efficiency appropriate to the operation requires factors other than profitability of the particular market sector, such as the particular profit centre under consideration to be taken into account. In particular the derivation of profit in the Casino required a high standard of service irrespective of the effect that that may have upon the particular profitability of the rooms sector of the Hotel. In essence, the defendant's case on efficiency came down to the proposition that the cost to revenue ratio looked, to Smith, to be high compared to ratios that he had seen in mainland operations. However, the evidence fell well short of analysing to a sufficient degree, the extent to which those costs were driven by the assumption that the Resort would be maintained to five star standard, the need to maintain that standard to ensure continued profitability out of the Casino and the limitations placed upon improving efficiency and reducing costs by the location of the Resort and the limitations of the pool of labour available to the Resort.

I accept the broad thrust of this submission. I think it was supported by the evidence of Compton. He said there was a clear conflict between a desire adequately to service the Casino patrons, who comprised by far the most profitable part of the Resort, and the desire to minimise losses in the Hotel. Compton thought Smith's comparison with the rooms department profits in mainland Australian hotels failed adequately to refer to the differences between the Resort and those included in the survey. Compton acknowledged that staff costs were high. But he said this largely reflected the defendant's desire to have the Resort operated as a "Five Star" venue in spite of low occupancy. The staff costs were high but the excess tended to be in the areas of porters and front office where there had to be relatively high numbers to support the Casino operation. The nature of the Casino activity was such that there was considerable activity at night, whereas in an ordinary hotel activity diminished at night. The premium Casino players often commenced to play late at night and went through into the early hours of the morning. He acknowledged that substantial savings could have been made if staff levels were directly aligned to occupancy levels of the Hotel and the demands of the Casino were disregarded. However, in view of the target focus of the entire operation this would not be prudent. Some expenses, such as laundry, were high because of transport costs to and from Jakarta. Other expenses, such as telephones, music and entertainment and electricity which would not normally be charged against rooms were included in rooms department expenses.

In Compton's view the Hotel was not commercially a stand alone proposition. He thought that a feasibility study, had it been done, would have shown that. The Hotel would have needed something to be attached to it to make it viable. In this case it had the Casino attached to it to attract guests who probably would not otherwise have visited the Island. He agreed that the Hotel had a built-in bias to having at least a certain level of occupation but that counted against tourists going there. He thought that any feasibility study would have shown that 150 rooms was too many. The tourist demand, in his view, would not have supported 150 rooms.

On pp 27-29 of his report (ex EEE), Compton set out a series of tables in which he analysed the profit or loss from various divisions over the period from November 1993 to 31 January 1996. He relied on audited accounts for the financial years ending 30 June 1994 and 1995 and the monthly operating results for January 1996 for the period from 1 July 1995 to 31 January 1996. In relation to rooms, he calculated an overall profit of $52,274 rather than the defendant's assessment of a loss of $328,621. He said that the financial performance of the rooms had improved markedly since the first year. A loss of $614,000 (43% of room revenue) in 1993/94 had been converted to a profit of $450,000 in the period to 31 January 1996.

Smith and Compton agreed that a professional standard of competence was required of the plaintiff. I do not think that the plaintiff's main witnesses such as Resmann, Tucek and Secco said anything to the contrary. Smith and Compton also agreed that a competent manager would be trying to reduce losses and would look to ways in which that could be done. But there was, quite clearly, a difference of opinion between Smith and Compton. They differed largely on the adequacy of the steps that the plaintiff had taken and on the times at which the existence of problems should have been appreciated. Where they differ I prefer the evidence of Compton. In some areas I think Smith's views were predicated on assumptions that were not borne out by the evidence and which did not accord with my view of the general thrust of evidence which I have accepted. There were many marketing related issues that needed to be answered before Smith's opinions could properly be assessed. I am not confident that they were. I think Compton's views were, in the main, more sympathetic to the peculiar problems that the location, the nature of the operation and the organisational arrangements between the owner and the operator presented. I am not suggesting that Smith was ignorant of these difficulties or that he failed to take them into account at all. On balance, I think the approach of Compton demonstrated a better grasp of the issues.

19.4 Food and Beverage - Events Prior to Citeko Meeting

The Resort building had two restaurants, the Waterfall Café and the Golden Bird Reiterant. Each had its own kitchen. In addition there were food outlets in the Casino areas, which were serviced by the restaurant kitchens. All of the preparatory work in relation to the opening of the Resort proceeded on the basis that both restaurants would operate: see ex 1/128 (at p1/135) and 2/153. I have previously commented that the defendant intended the Resort to run as a "Five Star" venue and the plaintiff was obliged to operate it as such. This position never changed up to 12 December 1995.

From an early stage the defendant was aware that the food and beverage department was making a loss: see ex 4/355 at p4/356 and 5/29 at p5/39 for January and February 1994. The directors of the defendant had some involvement in the operations of the food and beverage department. On 18 March 1994 Gani and Woodmore attended a meeting with Thomas, Radford and Farrow at which the menus for, and pricing of meals in, the Waterfall Café and the Golden Bird Restaurant were discussed. There was extensive discussion of these matters descending to some degree of detail. Gani testified that he could see nothing wrong with the owners' representatives getting involved in that level of detail.

At around the same time, the plaintiff was making suggestions for improvements to the operations of the Resort. On 9 April 1994 Resmann wrote to Sumampow about competition the Resort was facing and suggested changes, including the appointment of someone in the food and beverage area: see ex 5/60. At a meeting of the Consultative Committee on 9 May 1994 Gani is recorded as having said that the food in the regency Room (one of the Casino areas) was of a high standard. The defendant continued to receive information about the financial performance of the Resort. For May 1994 the food and beverage department made a loss of $168,000, in June the loss exceeded $300,000 and in July it was $186,000.

The financial results for the year ending 30 June 1994 show food revenue of $1,152,056 and food cost of $2,841,151, showing a loss for the food department of approximately $1,690,000. Beverage revenue is shown at $508,694 and cost of $969,884, to show a loss of approximately $461,000.

In the budget for 1994/95 (ex 5/209) there is a forecast loss in the food and beverage department of $1,297,000. Forecasts are given for the Waterfall Café and the Golden Bird Restaurant and there is a detailed breakdown of the staffing levels. In the narrative the comment is made that without an adequate history it was difficult to estimate when expenses may occur. At the Advisory Committee meeting on 9 July 1994 the budget was discussed. The minutes of the meeting do not record any particular discussion on the food and beverage estimates. The budget was approved by the defendant.

On 24 August 1994 Taylor sent to Gani a memorandum concerning staffing levels (ex 6/216), which I have already discussed. In relation to the food and beverage department it suggests some particular reductions, 26 in number, with two additional appointments. In cross-examination Gani agreed that staffing levels had been reduced in accordance with this memorandum.

The monthly losses continued and were reported in the relevant monthly operating results: see, for example, ex 7/94 (November 1994), 8/202 (January 1995). The report for May 1995 (ex 11/153) included detail of beverage revenues, which exceeded budget by about 70%. The division was $90,000 over budget, although still $15,000 in deficit. Food revenues were lower than the previous two months and losses continued. Information was given about the then imminent appointment of Mr Tony Murphy as the new food and beverage manager whose brief would be to control purchasing and labour costs to bring the situation under control. In a later section of these reasons I have included detailed discussion of the fate of the proposal concerning Murphy and the tortuous process for finding a replacement in this area. At this stage it is sufficient to say that a dispute arose concerning Murphy's appointment and he resigned.

In the operating results for June 1995 the full year figures indicate that there was a loss from food operations of approximately $2,250,000 and a loss from beverage activities of approximately $69,000. In the second half of 1995 food losses were about $878,000 and the beverage division made a profit of approximately $57,000.

At the Advisory Committee meeting on 14 March 1995 Gani requested that more attention be given to purchasing food from Indonesia at lower cost. Secco indicated that this was already the policy, even though he took the view that it was less cost effective. No question was raised concerning food and beverage losses.

On 23 March 1995 a proposal was put to Sumampow and Gani regarding the Golden Bird Restaurant (ex 9/268). It was drafted by Mr Walter Sauer (the food and beverage manager) and Mr Andreas Koker (the executive chef). The objective is stated as being to turn the Golden Bird Restaurant into an outlet of better viability from a financial point of view while catering to the needs of guests. It noted that the Golden Bird Restaurant was operating on a daily loss of about $1300 contributing approximately 50% of the total food and beverage losses. In the proposal there is a suggestion for structural alterations to the kitchens, although of a minor nature and capable of being completed within five days. It included a proposal to change the restaurant from a Chinese focus to an Oriental one featuring dishes from Asia generally. It suggested the redundancy of the dim sum chef at a saving of $50,000. It also suggested cross-training other inexperienced staff as between the Waterfall Café and the Golden Bird Restaurant. There was a proposal to prepare more snack style service for guests promoting a less formal and better "value for money" outlet. Attached to the proposal were a series of sample menus and plans for alterations to the kitchen. It concluded by saying: "we have tried our best to avoid any large expenses. --- A change of concept will definitely be a benefit to all involved, owners, operators and our valued guests". It was put to Gani in cross-examination that this countered the contention that the operator was ignoring the problem in the food and beverage department. He responded by saying it meant nothing to change from the Chinese restaurant to an Oriental restaurant. Changing the hours of operation without reducing the total numbers of staff would achieve nothing. He did not agree with the proposal at the time and maintained that it was still ignoring the loss problem.

In the narrative to the February 1995 operating results (ex 9/279), Taylor advised the recipients (who included Gani) that reduced overtime in the kitchens and restaurants had resulted in lower labour costs. The Golden Bird Restaurant continued to be the main burden but plans to redress it were in place. It would be several months before the savings were reflected in the figures. It also reported that although February had been a quiet month, it compared favourably with 1994 and food and beverage sales (among others) were all higher than the previous year. I have previously discussed ex 9/310, which is a detailed staffing report. It indicates that close attention was being paid to staffing levels.

In May 1995 McClusky headed a team of auditors from Price Waterhouse who went to the Island. On 16 May 1995 he reported to Gani on the results of his investigations for the quarter ending 31 March 1995. Parts of his report went into evidence as ex 11/63 and following. It was critical of the monthly reporting concerning food and beverage. It suggested that the system needed to be adjusted to reflect revenue and costs by outlet. It reported that food costs fluctuated on a monthly basis, which could be due to inadequate controls. Food costs were "substantially in excess of what we believe to be appropriate". It was unlikely the targeted food and beverage costs to revenue would be achieved. It was also critical of the fact that freight was allocated to general expenses of the Resort rather than to the cost centres to which the expense related. In relation to January 1995 it said that food and beverage revenue at $251,000 was marginally higher than budget while food loss was $120,000 against a budget profit of $112,000. It said that beverage costs (which excluded freight) were too high. In the food division "salaries and costs total $252,000 which is $120,000 higher than gross revenue of $134,000. This suggests this area is badly controlled".

McClusky gave further oral evidence concerning this review. He said that in the monthly reports he had noted that the food and beverage costs compared to revenues, that is, the cost of sales, was quite high compared to his normal experience. There are a number of industry guidelines for what types of cost of sales should be achieved within a hotel depending on its category. His experience had been across three, four and five star hotels. The Resort was deemed to be a five star hotel. That would mean that the costs of a five star hotel, because of the nature of the food provided and the variety that would be expected, would normally be higher as a percentage than what would be incurred in, say, a four or three-star hotel. At the time of his visit, in regard to food and beverage, he did not form a view as to what ought to be done to bring results into line with his experience elsewhere because he did not class himself as a food and beverage expert or an hotelier. It was his view that a food and beverage manager was required to come in with the right degree of experience to manage the situation. He said he was not a food and beverage consultant. Having diagnosed the problem he wanted someone with special expertise to deal with it.

This report was highly critical of the operator, particularly in the food and beverage area. It is perhaps a little surprising that a copy of the report was not given to the plaintiff. Certainly, no copy had been delivered before the Citeko meeting.

Another event of significance was the preparation of the budget for 1995/96. This is the subject of detailed consideration in a later section of these reasons. It went through four, and possibly five, drafts or versions. Of particular significance at the moment is the fact that the first version was prepared on information supplied by Woodmore that Qantas/NJS flights to the Island would commence in July 1995. This obviously affected visitor numbers. On 5 June 1995 the plaintiff sent to the defendant the first version of the budget. It estimated the loss in food and beverage at a little over $1,000,000: see ex 16/76 at 16/232. Woodmore then advised that the Qantas/NJS service would not commence until December 1995. In the second version (delivered on 14 July 1995) the projected loss was $1,670,000: see ex 13/44 at 13/198. Approximately $750,000 of that loss was to be incurred in the first five months of 1995. By the end of December that would increase to $894,000. The forecast loss in the beverage department was $156,740 to November, $190,893 to December and $355,000 for the full year. The defendant did not comment on the food and beverage estimates in the budgets before the Citeko meeting.

I have set out in some detail the financial results for various periods and the exercise carried out by Smith in relation to them. There are a couple of points I should make about these figures. The plaintiff was at pains to point out that in most of the monthly operating results the profit from the Casino was significantly in excess of the type of figures referable to the Hotel. I mention by way of example February 1994 where the Casino made a profit of $10,120,000 (against a budget of $2,167,000), which is to be compared with the food and beverage loss of $212,000. This, the plaintiff says, supports the general proposition that the main profit centre of the Resort was the Casino and that the Hotel was merely a support mechanism. The Smith exercise was, of course, largely directed to the measure of damages. The defendant also points to it as support for its contention that the Hotel operations could nonetheless have made a significant difference to the bottom line figure of the Resort operations.

19.5 Food and Beverage - the Citeko Meeting and Beyond

The subject of losses in the food and beverage department was discussed at the Citeko meeting. By reference to the minutes (ex 17/114 at pp17/125-28) it seems a number of matters were canvassed. Gani asked the plaintiff to suggest ways to improve operating costs and some proposals were advanced. Gani is reported as saying the defendant could not seriously contemplate an operation which was planned to lose $1,670,000 (ex 13/44 at p13/198). He reminded the plaintiff "of the earlier commitment that every department of the Resort should be a profit centre". Gani acknowledged that the plaintiff had provided some ideas in the past "but nothing firm and the Owner wanted ideas and solutions and initiatives from the Operator" and that it could not "plan to lose millions of dollars". The minutes conclude on this aspect with the comment that "it was agreed the Operator would supply the Owner with a fully reconsidered and revised budget by 31 July 1995". Reference was then made to the size of the loss since November 1993 with a comment that it was "totally unacceptable and request [sic] an explanation from the operator". At the Citeko meeting, Sumampow is recorded as having said that "five star hotels always have kitchen [sic] attached to every restaurant". This was in answer to a comment by Secco that there was a design problem in having two kitchens for two restaurants. The design problem had been referred to in the proposal made by Sauer and Koker in March 1995 (ex 9/268).

Counsel for the plaintiff submitted that the Citeko meeting was the first documented occasion on which the defendant had advised the plaintiff that it was not prepared to suffer a loss in the food and beverage department. The position prior to this, as was known to the defendant, was that the manner of operations of the food and beverage department (namely, 24 hour room service, two restaurants, various bars and outlets in the gaming areas) would result in the incurring of a loss. Counsel submitted that the only reasonable inference was that the defendant accepted that the cost of running the two restaurants would be borne by the Resort as part of the overall operation consistent with the terms of the Agreement, requiring facilities commensurate with a Five Star hotel and casino for the benefit of the Resort as a whole. On the other hand, counsel for the defendant submitted that the plaintiff's management in relation to the food and beverage section was incompetent. Minett had been employed only to set up the Hotel operation. Thomas was relatively inexperienced. He was followed by Sauer who had been made redundant in May 1995 as a "non-performer". No serious attempt was made to tackle the high cost of labour until after the rejection of the second version of the budget at Citeko on the ground that it provided for continuing and massive losses in the food and beverage operation. The defendant complains that the plaintiff obtained no expert advice in the food and beverage area until August 1995. These are the opposing points of view. It is necessary to examine what was done after the Citeko meeting to ascertain whether the plaintiff was actionably at fault.

After the Citeko meeting the task force arrived on the Island. One member of the task force was Rowe. Although it was a subject of controversy, I believe that Rowe first sent to the plaintiff a three page document entitled "Report Overview" (ex 18/225). Some time later he sent a second document of nine pages plus schedules entitled "Report - Christmas Island Casino" (ex 18/97). Shortly before 6 September 1995 Rowe produced a third document, also of nine pages plus schedules, entitled "Report - Christmas Island Casino" (ex 22/69). Rowe attended the Advisory Committee meeting on 1 September 1995. There is no doubt that Rowe found some inefficiencies. In the minutes (ex 22/5 at p22/12) he is recorded as having indicated that further controls had been introduced and that he had recommended some changes to improve profitability. He noted that storage was a problem and was leading to spoilage. He recommended that until 60% occupancy was achieved the Waterfall Café and the Golden Bird Restaurant should be rationalised so as not to be open at the same times. Room service and Casino food delivery should be sourced through the Golden Bird Restaurant. More locals should be employed as casuals. He said that if these things were implemented, the food loss could be reduced to $896,000 with some offset from beverage profits. At the meeting the plaintiff undertook to send a comprehensive report on the things covered by Rowe by 8 September 1995. These matters were confirmed in the report ex 22/69, a copy of which was forwarded by Tan to Gani on 7 September 1995 as part of ex 22/86.

The report made a number of comments. It acknowledged that there was an urgent need to review and consolidate the food and beverage operation in order to reduce costs and still provide the required level of service. It suggested that a 60% occupancy rate was needed to break even in food and beverage. It recommended that the Hotel re-look at some additional capital expenditure to improve efficiency and to reduce labour costs in all areas. Staffing had to be tailored to the current level of business. It also noted that controls in all areas of food and beverage had been enhanced to ensure correct operational practices. The enhancements were listed. It then attached a detailed budget. These budget figures were carried forward into the third version of the budget (ex 24/2) which was forwarded to the defendant on 5 October 1995. The net loss in food and beverage (after allowing for profits from beverage) had been reduced to about $470,000.

On 12 September 1995 Gani wrote to Tan saying "with regards to your explanation on the hotel operation, we are considering your explanation and will refer to you shortly" (ex 22/162). On 21 September 1995 Tan wrote to Gani referring to the strategy recommended by Rowe in relation to food and beverage and pointing out the importance of the appointment of the hotel operations manager to the overall plan (ex 22/238). On 12 October 1995 Tan wrote to Gani asking for approval to the budget as a matter of priority. The 12 October letter was essentially non-responsive on the question of the Rowe report and the third version of the budget. On 24 October 1995 Gani sent a memorandum to Secco with comments on the third version of the budget. In relation to food and beverage it sets out the results for July and August and says that the projected loss of $809,469 (food) "is still not acceptable". In relation to beverages, it again sets out the results for the first two months and points out the profit is below budget. This aside, no comment is made on the detail of the Rowe report or on any of the recommendations or suggestions made within it.

On 1 November 1995 Tucek wrote to Sumampow concerning the budget and other matters: ex 26/1. In relation to approval of the budget he said that the plaintiff believed it had done everything that could reasonably be expected of it and asked that the defendant approve the budget. He noted: "As operator and as a member of the advisory committee, we confirm our 'approval' of the budget. As the only other membership of the advisory committee is drawn from the owners, clearly, the owners approval of the budget is all that is now required. Any delay on this matter could have serious operational consequences for the resort and the casino and we will not be held responsible for these". The letter goes on (p26/80) to detail some of the controls that had been implemented in the food operation. A further letter from Tan to Sumampow on 9 November 1995 (ex 26/62) again stressed the need to have the budget approved.

On 13 and 15 November 1995 (ex 26/124 and 145) Tan wrote to Gani asking for approval to the appointment of the Hotel Operation Manager. The only response came on 16 November 1995 when Gani wrote saying the defendant was seeking expert advice and would comment "in a few days time": ex 26/153.

On 18 November 1995 Secco sent to Gani the fourth version of the budget. It was prepared on the basis that the Waterfall Café would be the main restaurant with the Golden Bird Restaurant opening only when demand exceeded supply. On this proposal the forecast loss in food was $550,755 with a beverage profit of $440,516, resulting in a gross loss for the food and beverage department of $110,239.

Counsel for the plaintiff submitted that as at 12 December 1995 no budget had been approved by the defendant and none of the proposals in relation to the operation of the food and beverage department had been approved and nor was there any substantive response to specific proposals. I accept this submission. I think this is significant because of the decision making structure of the arrangement. For example, one of the recommendations made by Rowe was that capital expenditure be reviewed. Elsewhere in these reasons I have discussed the process for approval to capital expenditure. Depending on whether it was in an approved budget and whether the financial controller considered it "essential". It was not a speedy process. So far as I could see in the evidence the defendant did not share with the plaintiff the results of the "expert advice" that it had sought.

McClusky made some critical comments about the operations of the Resort generally in his report to the defendant following a visit to the Island to review the results for the quarter ending 30 September 1995: ex 22/230. In May 1995 he had sent to the owners a draft "Client Service Report" on the operations. It was common ground that a copy of the report was forwarded by the defendant to the plaintiff but it was not produced in evidence. Secco thought he had received it in June or July. On 24 August 1995 Secco sent to McClusky his comments on the report (ex 22/122.1). A copy of the comments was sent to Gani. McClusky incorporated Secco's comments in the final version of the client service report, which is ex 27/12. In the main, the reports deal with information and reporting matters rather than losses in the food and beverage area. Apart from the inclusion of freight in the results for the individual departments, I do not think there is much that is of assistance (at least in relation to this issue) in the reports.

It is apparent from McClusky's evidence that one of the things that was of greatest concern to him was the cost of sales in the food and beverage area. In his review of the July monthly operating results, McClusky found that the cost of sales before labour costs and excluding freight was about 57%. In his experience of Five Star mainland hotels the normal figure was about 33%. He conceded that allowance would have to be made for the remoteness of the Island in assessing that figure. He did not estimate what magnitude of allowance should be made. If freight were to be allocated to the cost centres, instead of being treated as a general overhead, the cost of sales would increase. This may be so but it would make little difference to the bottom line because general overheads would be reduced accordingly.

Smith gave expert evidence for the defendant. He felt the figures for June 1994 should have highlighted to management that the food and beverage operations of the Hotel were performing unsatisfactorily and that they needed to address the problems that were giving rise to that level of losses. He was particularly concerned that for the relevant periods the total of the wages costs was approximate to the total amount of revenue that was being earned. In other words, the wages costs alone were absorbing almost all of the revenue even before allowing for the cost of the food and beverage to which the sales were related. He said the Hotel's management should have addressed the loss level in order to attempt to reduce the losses to a break-even position or to a position near that level in terms of that department's trading. The primary area to address was the strategies for the operation of individual outlets, namely, when those outlets should be opened and the interrelationship of the cost of operating each outlet. He was speaking of the Waterfall Café and the Golden Bird Restaurant. He thought the most practical solution in order to satisfy the requirements of both the Casino and the Hotel guests would have been to provide the services required through one outlet, apart from peak periods, where there was necessity for both outlets to be open at the same time. He considered that rationalising the labour requirements through operating one restaurant at a time for all but the most busy periods was an obvious option to consider.

Other issues to be addressed were the labour costs and methods of servicing the Casino and Hotel patrons whilst minimising losses or breaking even in the food and beverage department. Smith was asked what measures should have been adopted to achieve those gains. He said the management should have looked very carefully at manning levels and the way in which the staff at the Island were to be employed. In particular they should have looked at the possibility of increasing the reliance upon local labour, part-time and casual labour, as well as the scheduling of workloads and shifts. He said that labour could have been scheduled in a different way, such as staff working longer shifts in the busy and peak periods. This would have increased productivity. He also mentioned multi-skilling practices. He thought training should have been upgraded for local personnel in order to attempt to reduce the reliance upon expatriate labour

It is obvious that the staff levels were critical to any gains that were to be made in the area. The evidence from the plaintiff was to the effect that there had been staff reductions during the period August to December 1995. Secco said there were redundancies made in the restaurants. About six or seven were reduced by redundancy, including a supervisor. The plaintiff also had a training session for the Casino at that time. It was initially opened up to locals and then extended to the food and beverage staff. It was a training program for new croupiers and part of that training program was to enable the plaintiff to become more dependent on local croupiers. He believed about four bar staff and three waiters went across to the croupier training school. The reduction in numbers in the food and beverage area coincided with changes to the hours of operation of the restaurants in line with Rowe's recommendation.

Farrow's evidence was that there were at least two occasions when staff were reduced during the period. On 5 September 1995 he had written to Dale advising her that the task force had recommended that four positions become redundant from the Waterfall Café and that bar staff be reduced by five. In a facsimile dated 29 September (ex 23/67) the names of ten people removed from the Waterfall Café staff list are given. Between the end of September and the end of November 1995 overall staff numbers at the Resort came down from 443 to 401 (see ex WW). Kuiper was not involved in redundancies from the food and beverage area in the time he was at the Resort. It is not clear what numbers of staff from the food and beverage area were involved in the overall reductions later in 1995.

One of the issues relied on by Smith was that of multi-skilling. Archer testified that multi-skilling was a normal function of a hotel as opposed to a casino. She said that it was discussed at the Resort in 1994 when the plaintiff was looking at the reduction of the staffing numbers. She gave a direction to the Resort to put multi-skilling into effect while still maintaining as much service as possible. There is an element of multi-skilling in the croupier training school about which Secco gave evidence. Smith agreed that to assess the impact of multi-skilling on the size of the workforce it would be necessary to undertake a full review of the staff component and how the staff were organised to see whether it was an option for the operator. He conceded he had not done such an exercise.

Rationalising the opening hours of the two restaurants was covered in the Rowe report and a proposal such as that advanced by Smith was the subject of the fourth version of the budget. I have already been through this evidence. One of the most significant impacts of that proposal was on staffing levels.

Compton's evidence was that food and beverage operations do not usually make a significant contribution to overall profitability, particularly at the early stages of a "greenfields" venture. He said that generally speaking, profitable food and beverage operations depended on things such as banquets, functions and weddings. The Resort's food and beverage outlets had a restricted market from which to draw customers and he was not surprised that break even had been difficult to achieve. The requirement to maintain a Five Star service had made it difficult to reduce costs by closing restaurants. The remoteness of the Island added to costs, particularly labour costs. Compton thought it was not appropriate to treat food and beverage department as a separate profit centre from the rest of the operation, especially from the Casino. Given the circumstances of the Island and the lack of other attractions it was doubtful that the Resort would have survived as a stand alone Hotel operation. The lack of a feasibility study before commencing the development compounded the problems.

In relation to the break even point Rowe suggested that an occupancy figure of 60% would be necessary before that range of results could be achieved. Compton said it would not be unusual for a newly opened hotel, even in an established location, to take up to three years to reach break even point.

I have previously mentioned the tables which Compton included on pp27-29 of his report, ex EEE. In relation to food, he calculated a slightly higher overall loss than that used by the defendant. However, he pointed out that there had been an improvement in food trading. The loss had declined from 147% of food revenue in 1993/94 to 93% in the period to 31 January 1996. In beverages the loss was about the same but also demonstrated an improvement in profitability. The combination of rooms, food and beverage showed a loss of $5,447,412. Expressed as a percentage of revenue the loss had declined from 90% in 1993/94 to 28% in 1994/95 and to 14% in the period to 31 January 1996. He said the analysis showed a substantial reduction in the percentage loss achieved, as well as the actual dollar amount. This had been achieved in spite of low occupancy rates. He said that given it was very early in the development of the Resort the improvement was reasonable and the improving trend was at an encouraging rate.

There was some cross-examination on these figures: see transcript 6453-57. In the main it reflected on the allocation of indirect costs between the Hotel and the Casino. I think it is fair to say that Compton was not moved from the general conclusions that he had reached and which are contained in the tables.

There is a stark difference between the respective positions of the parties on this issue. Based on Smith's evidence the defendant says rooms should have been achieving a profit of 40% of revenue from an early stage. This is obviously dependant on the rate of occupancy and on the ability to maintain operating costs, particularly labour, at a low level. Again based on Smith's evidence the defendant says that the food and beverage department should have at least broken even from 1 July 1994. Again, this is sensitive to labour costs and other staff matters and to rationalisation of the restaurant and bar trading hours.

On balance I prefer the plaintiff's approach to this issue, which was supported by the evidence of Compton. It is to the effect that you look at the circumstances of the entire operation and at the trend in the financial results of the operation. Looked at in this way, although I can understand why the defendant was concerned about losses in the Hotel operation, I do not believe the plaintiff was in breach of the Agreement in this respect. I will expand on this conclusion in the next section.

20. Promotion and Hotel Operations - Conclusion

I will now attempt to tie together my findings and ultimate conclusion on the important issue of losses in the Hotel operations. This is, in effect, my conclusions on the issues numbered 2(a), (d) and (e).

It seems to me that the starting point is the Agreement. Recital "B" calls for a Resort that is to be "conducted as an international five star hotel and casino with associated facilities consistent with those currently operating within Australia". Clause 4.1(l) is to similar effect. I find that from the outset the strategy agreed to by the plaintiff and the defendant was to do just that. I was not persuaded that there was any change to that strategy contemplated by either party or agreed by them before the middle of 1995. The comments of Sumampow made at the Citeko meeting, to which I have already referred, support that view.

This is not to say that the plaintiff was entitled blithely to proceed along without any regard to financial performance of the various sectors of the Resort. However, I believe that at all times the plaintiff and the defendant were aware of the financial position of the Hotel operations and the Resort overall, primarily through the monthly operating results. The question is if and when remedial action should have been taken to reduce the losses or, better still, turn a profit, in those sectors that were not making a positive contribution to the bottom line. I do not believe this question can be answered in a vacuum. It must have regard to the circumstances of the particular venture, in this case the Hotel and Casino on Christmas Island.

The first point to note is that this was a "greenfields" operation, developed without the benefit of a comprehensive feasibility study of the type that Compton said (and I accept) would normally be expected. The second point is the situation of the Island. It is remote and poorly serviced by airlines or other forms of transport. It has a very small local population. This meant that the opportunities to obtain labour and revenues from the resident population were limited. The next point, and it is one about which I was convinced (should there be any doubt), is that this was primarily a casino. It was developed for the major purpose of attracting gamblers from Asia and Australia. The Hotel was there not as a stand alone facility but as an adjunct to or service for the Casino.

It seems to me that it was reasonable for the plaintiff to have assumed that to provide a five star service it would need to have two restaurants open for extended hours, operate room service 24 hours per day and provide other food and beverage outlets to service the Casino. It would also need to have staff (both in rooms and food and beverage) in sufficient numbers to provide an adequate level of service in peak periods.

I have already referred to Compton's evidence (which I accept) that it would not be unusual for a newly opened hotel, even in an established location, to take up to three years to reach break even point. Indeed, in another part of his evidence he said that there may be circumstances where an owner is prepared to tolerate losses in a particular sector indefinitely depending on its situation within the overall venture. I am not suggesting that this should have been of any comfort to the plaintiff in this case because, certainly from the Citeko meeting on, the defendant made it abundantly clear that it would not do so. However, it has an effect on the issue of timing, which is critical to an assessment of the adequacy of the plaintiff's response in the second half of 1995.

Once it had become apparent that losses were continuing and that the owner wanted the situation remedied the question is, as I have already said, what is a reasonable time within which the operator can be expected to react? Compton said it was a matter of judgment but he thought four factors were important. First, the materiality of the item, of the loss being incurred. Was it material in terms of the total revenue or profit or loss, of the operation as a whole? Secondly, the prospects of making a profit from that operation. He said some will never make a profit. Thirdly, the cash flow that the owner has. How long was the owner prepared to accept a loss in that area? Finally, the capital investment in the particular department.

In relation to the third factor, I think the critical time is the Citeko meeting. I have recited the evidence about events before July 1995. There is no persuasive evidence that before the Citeko meeting the defendant put the plaintiff on notice that it would have to adopt a different strategy so as to reduce losses. There had been some exchanges and references in 1994 and early in 1995 but nothing of significance. I believe that the gravity of the situation, in terms of Hotel returns, (at least from the defendant's perspective) really became apparent to the defendant in May 1995 when McClusky reported on his review of the quarter ending 31 March 1995. There is no evidence that this information was given to the plaintiff, apart from the draft Client Service Report. That document went to Secco in June or July and focussed on reporting issues rather than on losses. So far as concerns the fourth factor, it is difficult to isolate the capital investment in the Hotel from that in the Resort generally. This means that the question falls to be answered largely by reference to the first two factors.

The materiality of the loss is a matter of importance. There is absolutely no doubt that the main revenue centre for the Resort was the Casino. In the period from November 1993 to January 1996 revenue from Casino related activities was $279,938,377 (93.5%) and from Hotel related activities was $14,954,940 (4.9%). In assessing profit or loss, Compton pointed out that 50% of the indirect costs ($10,486,646) was allocated to the Hotel. This was higher than usual. Compton thought there would be a case for allocating all of the indirect costs to the Casino rather than the Hotel because the former was the main revenue centre and the latter was a service for the Casino. The logic of that appears to me to be compelling. However, I do not need to make a finding on that point other than to say that it demonstrates that the loss from the Hotel operations might not be as large as the defendant's case suggested and that there is an area of doubt on the defendant's evidence concerning damages.

Counsel for the defendant submitted that the losses in food and beverage had to be assessed against the profit from the Resort operations after taking into account management fees and allocations to refurbishment reserves. For the year ending 30 June 1995 the profit figure was $6,234,193. The loss in food and beverage was $2,318, 878. The comparative figures for the half year to 31 December 1995 were $1,406,403 and $877,000 respectively. This, counsel submitted, showed a deteriorating trend and supported the assertion that a small turn around in the fortunes of the Hotel operations would have made a significant difference to the bottom line of the Resort overall.

As is so often the case in commercial disputes, bare figures (whether they be good or bad) have to be viewed with caution. There are at least four things to which regard should be had. First, it would, I think, be necessary to revise the figures to adjust the allocation of indirect costs. Even allowing for that I do not suggest that improvement in the rooms and food and beverage operations could not have been regarded as material to the bottom line. Secondly, throughout the history of the Resort, trading fluctuated from month to month. In the period between July and December 1995 there were peculiar circumstances that affected the relationship between the parties. In what I am about to say I will use rounded figures because they illustrate a general point for which a knowledge of the precise extent of losses or profits is not necessary. The information that I am about to quote comes from the monthly operating results. Revenue and net Resort profit for selected months throughout the period were as follows:

It is, I think, significant that most of the July trading occurred before the Citeko meeting. For the remainder of the period the attention of the plaintiff's operatives must, at least to some extent, have been distracted by the flurry of activity that the defendant's requests and the presence of the task force demanded. I am not saying that the defendant was not entitled to demand information and seek answers. The contrary is the case. But it is a factor that might well have impinged on the trading results. For the rest of the year trading continued to fluctuate.

The year to date profit figure as at the end of July 1995 was, of course, $9,000,000. The year to date profit figure declined in August 1995 to $2,500,000, in September it rose to $5,000,000 and it was steady in October. In November it fell to $3,500,000 and there was a further fall to arrive at the December figure of $1,400,000. It is certainly the case that (leaving July to one side) the revenue figures in the second half of 1995 never approached those that had been achieved in some of the months from November 1993 to July 1995. But they continued to fluctuate. By far the greatest contribution to revenue fluctuations came from the Casino by way of differences in gross gambling turnover. There were very few complaints in the defence and counterclaim about the conduct of the Casino. To a very large extent the defendant concentrated on the operation of the Hotel. In the circumstances I am not convinced that the figures themselves demonstrate a failure to take all reasonable remedial measures to maximise financial returns.

There is a third point that needs to be made in relation to overall profitability. It should be noted that the profit figure was struck after transfers to the replacement and refurbishment reserve. Up until 12 December 1995 the reserve had not been spent and nor had a separate account been established for it. Finally, on the evidence of Compton, which I accept, the trend in relation to the Hotel operations was positive in that the losses were decreasing. In any event, materiality is not the entire answer. The issue remains whether reasonable steps were taken to maximise financial returns from the Resort given all of the circumstances. This brings me to the second of Compton's suggested factors.

It would be trite to say that to reduce a loss the operation must increase revenue or minimise expenses or both. In relation to revenue, an increase could only have come from increased occupancy. With a small population such as existed on the Island there was limited scope for increasing revenue from local sources. The defendant's allegations are that the Resort was not properly promoted. In particular the plaintiff failed to appoint a marketing manager from June 1995, it failed to take certain nominated marketing steps and it achieved an occupancy rate of 37% when the figure should have been 45%. It will be apparent from section 17 of these reasons that I reject these complaints. I find that the efforts made by the plaintiff to promote the Resort to its target market, namely the high rollers, were reasonable in the circumstances. The defendant must share part of the blame for the delay in appointing a marketing manager. In section 18 I have rejected the defendant's complaint that the plaintiff's failure to lift room occupancy regularly to a figure of 45% or more was so inefficient as to amount to a breach of its obligations under cl 4(l) of the Agreement. In short, I think the marketing activities of the plaintiff were reasonable in the circumstances. There was no cost to benefit analysis of suggested changes in sources of guests to analyse the effect that eco tourists, conference attendees and the like would have on the primary target market, namely high rollers. The lack of facilities on the Island and at the Resort and the poor quality and quantity of the air services compounded this problem. I note also that in the second version of the budget (which the defendant did not approve) the plaintiff proposed to reduce advertising expenditure and utilise $760,000 for private jet charters and large aircraft direct from the target market. The aim was to go direct to players and the plaintiff says the return would have been immediate. This would have had an effect both on occupancy and on the Casino revenue.

In short, I find that there was little room for an improvement in revenue from increased occupancy. Put in a slightly different way, I am not satisfied the plaintiff was at fault in the relevant sense in failing to take steps to increase occupancy rates to the levels suggested by the defendant.

In relation to costs, I think my conclusions will be readily apparent from what I have said in section 32 of these reasons. The primary means of reducing costs involved changes in staffing structures, both in terms of numbers, shifts and training, and rationalising the restaurants. I believe staffing levels were kept under review and, from time to time, reductions were made. I also find that the plaintiff did make use of local labour where possible. However, the pool of local labour, especially for casual work, was limited. There were cultural and other reasons why the local community was not as fruitful a source of labour as might have been the case. I also find that the plaintiff did engage in multi-skilling and in training of local labour. I am not sure that the plaintiff implemented the restructuring of work shifts to any great extent as a mechanism to reduce labour costs but I do not think the result would have been material.

So far as concerns the restaurants, the plaintiff made some proposals for change in March 1995. The defendant did not agree. The defendant did not approve the budget for 1995/96, which created operational difficulties. The defendant must share the blame for the non-appointment of a Hotel operations manager or a food and beverage manager, which also contributed to operational difficulties. After the Citeko meeting the plaintiff engaged Rowe to advise on the operation of the food and beverage department. I did not understand the defendant to say that Rowe was not an appropriate person to conduct such a task. In the second half of 1995 the plaintiff made three separate proposals to rationalise the operation of the restaurants in accordance with Rowe's advice. The first was contained in the first and second versions of the budget. It involved operating two restaurants with limited hours. The second was contained in the third version of the budget. It involved operating the Waterfall Café for breakfast and lunch and the Golden Bird Restaurant for dinner. The third (being the subject of the fourth version of the budget) was to operate the Waterfall Café as the main outlet with the Golden Bird Restaurant reserved for occasions when demand exceeded supply. This was the sort of approach suggested by Smith. There was no substantive response from the defendant to the proposal. As it involved, at least arguably, a shift away from the "Five Star" concept, I believe it was incumbent on the plaintiff to obtain the defendant's response and approval.

I can understand why the defendant was concerned about the financial performance of the Hotel operations. Nonetheless, and taking into account all of the circumstances, I do not believe that the plaintiff was in breach of cls 4.1(f), (l) or (ab) of the Agreement in any material respect arising from the losses incurred in the Hotel operations.

This is the issue numbered 2(g) in the summary. In para 5(b) of the defence it is alleged that as at 27 July 1995 the plaintiff was in default under the Agreement because it had failed to provide a proper operating budget for the financial year commencing on 1 July 1995. In para 10(a) it is alleged that the plaintiff failed to submit a proper annual operating budget for the financial year commencing 1 July 1995 with the result that the Resort operated without any efficient budgetary control from July 1995. Particulars are then given. In para 10(b)(ii) it is alleged that during 1995 the plaintiff failed to establish and monitor appropriate budgeting systems for the Resort so as to be able to prepare, by 1 June 1995, a budget for the financial year commencing on 1 July 1995, with the result that a proper operating budget was not produced and the Resort operated without any effective budgetary control for July to December 1995. Particulars are given.

"In respect of [each financial year] the [plaintiff] shall submit to the advisory committee for approval, such approval not to be unreasonably withheld, an annual Operating Budget 30 days before the beginning of [the financial year]."

In cl 1.1 "operating budget" is defined to mean the operator's estimate of Gross Operating Revenue and Gross Operating Expenses for each financial year. Earlier in these reasons I described the import of the terms gross operating revenue and expenses. I also referred to the replacement and refurbishment budget that is required by cl 5.2 and which covers the budget for capital expenditure.

There are four, or possibly five, versions of the 1995/96 budget. By a letter dated 5 June 1995 received by the defendant on either 10 or 12 June 1995 (it does not matter which) the plaintiff submitted to the defendant the first version of the budget (ex 16/76). The document that was sent is called "Christmas Island Resort Business Plan 1995/96". I might mention that the second and third versions are also called a "Business Plan". By a memorandum dated 14 July 1995 the plaintiff sent to the defendant the second version of the budget (ex 13/44). By a memorandum dated 5 October 1995 Secco sent to Gani the third version of the budget (ex 24/2). The fourth version (ex 26/172) is contained in a document called "Budget Financials 1995/96". Secco sent it to Gani under cover of a memorandum dated 18 November 1995. The possibility of a fifth version was raised during the cross-examination of Tan. On 22 December 1995 he wrote to the Advisory Committee saying that the 1995/96 budget was in final draft form and required formal approval. However, Tan said (and I accept) that he was referring to the fourth version.

Some of the evidence is a little difficult to follow because in the early part of the hearing (perhaps until Tan gave evidence) the parties were proceeding on the assumption that ex 13/44 was the first version.

Secco explained the process that was adopted for the preparation of the budget. The first steps were taken in February or March when there were discussions about the most appropriate format. The parameters were dictated by the Agreement and by the form of the 1994/95 budget, which had been approved without any positive or negative feedback. Gani confirmed that the defendant had made no complaint about the form of the 1994/95 budget. A decision was taken, in conjunction with Resmann, to make it a business plan with more expansive reporting, additional accounts, departmental goals and objectives and a detailed marketing plan. In April 1995 Secco sent a memorandum to all department heads explaining what was required of them and how the departmental budget was to be prepared. Each manager had access to a spreadsheet with that department's financials extrapolated out to the year end so full year estimates could be made. The assumptions on which the estimates were to be made were set out in the memorandum.

For the purposes of the budget there was an assumed occupancy rate (see pp10/98-99). The occupancy forecasts were compiled on information provided by Woodmore that Qantas/National Jet Systems ("NJS") would commence airline services to the Island in July 1995. The final occupancy rate forecast was 50.1%, a figure that Secco said was almost entirely dependent on flight availability. Occupancy would also be affected by special events, details of which were included in the memorandum. Each department head was asked to complete capital expenditure and replacement or refurbishment expenditure request forms. Instructions were also given for managers to consider improvements that they could implement within their departments to increase revenue, improve efficiency and reduce costs. Department heads complied with these requests.

Secco said that he sat down with each manager and discussed the department proposals with them. He checked whether anything had been missed, whether the facts were correct, what deviations there were from the past year in performance to date and what improvements were proposed. He also reviewed capital expenditure and replacement and refurbishment proposals. He advised managers that they would have to convince him of the merits of their capital expenditure proposals because they would later have to argue them with the defendant's representatives. Secco had discussions with Hadi and Kusuma about the approval process. Hadi and Kusuma agreed that the best approach would be for each department head individually to discuss their budget requests and capital proposals with the directors. As it turned out there were no discussions between managers and directors' representatives after the budget had been submitted. Early in July Secco discussed with Woodmore the situation with NJS flights. Woodmore told him that it was now unlikely that the service would commence before November 1995. Secco said that this was the only discussion he had with owners concerning the budget and the assumption criteria.

Each department head contributed information for the preparation of the budget. The document was collated and prepared by Secco. He reviewed and proof read it and submitted it to the general manager of the Resort. It was then sent to Patel in Canberra by downloading it through the computer system. There were difficulties in this process because of the inadequacies of the telephone system on the Island. This delayed the finalisation of the budget. Secco had discussions with Patel and Resmann about the budget and certain amendments were made. The first version was sent to the defendant direct from Canberra rather than from the Resort.

There is no evidence of any particular contact between the defendant and the plaintiff concerning the first version before 14 July 1995, except for the discussions which Secco had with Woodmore about the NJS service. It seems that Gani sent the first version to Price Waterhouse. It was reviewed by McClusky and Mr Paul Beasley of that firm and a report sent to the defendant on 18 July 1995. The contents of the report were not put in evidence so it is only the fact of the review that is relevant.

Secco said that he prepared version two after he received advice from Woodmore about the delay in commencement of the NJS service. With the flight changes it was necessary to revise the occupancy forecasts with consequent amendments to revenue estimates so that the budget would be a more accurate management tool.

The second version was the focus of attention at the Citeko meeting. The minutes (which the plaintiff has not adopted) indicate that there was a wide-ranging discussion over a large number of issues. It concludes with the assertion that it was agreed that the plaintiff would supply the defendant with "a fully reconsidered and revised budget by 31 July 1995". The 27 July letter makes the same point. The plaintiff says that this was not the tenor of the discussions. Secco says that the second version was not withdrawn and was not to be "fully revised". The plaintiff undertook to revise the budget in three areas, namely, capital and replacement and refurbishment expenditure (particularly in relation to staff accommodation), allocation of freight costs to individual departments and food and beverage estimates.

Secco says that the second version was actually utilised by the plaintiff in its operations. In July 1995 he integrated the second version into the general ledger as a budgetary control.

Some information in relation to these matters was included in the task force report of 18 August 1995. There was a meeting of the Advisory Committee on 1 September 1995. The difference of opinion as to whether the Citeko meeting required a fully revised budget or reconsideration of particular issues was aired. On 7 September 1995 Tan wrote to Gani enclosing (among other things) a copy of Rowe's report of food and beverage and a revised food and beverage budget. On 12 September Gani responded saying he required a full and complete budget as requested as soon as possible.

On 5 October 1995 the plaintiff submitted the third version and sought the defendant's approval. On 12 October 1995 Tan wrote to Gani asking that the defendant approve the budget as a matter of priority. In the 12 October letter the complaint is made that the budget was not delivered on time. The letter acknowledges receipt on 7 September of "a part of the revised budget" but no comment is addressed to the third version or to any particular deficiencies in the material presented.

On 24 October 1995 Gani sent to Secco a list of comments on the third version. The concluding comment is that "in general the budget can be accepted subject to revision on the various points as outlined [sic] above". On 1 November 1995 Tucek wrote to Sumampow with a detailed response to the 12 October letter. In it he denied that there was any breach in relation to the 1995/96 budget. He said that the third version was awaiting approval. On 9 November 1995 Tan wrote to Sumampow explaining that the budget had been presented to the owners and awaited approval.

The fourth version was sent to Gani on 18 November 1995. The covering memorandum summarised the changes since the third version. It concluded with the remark that all departmental budgets be approved at a special Advisory Committee meeting held by telephone and that any department budgets needing further amendment be ratified later. There had been no substantive response by the defendant to the fourth version by 12 December 1995.

Having set out the dealings between the parties concerning the budget in its various forms I will return to the specific complaints about the budget that are contained in the particulars to the several paragraphs of the defence. I think it is fair to say that although there are several areas in which the defendant claims that the budget was inadequate and not capable of approval, it is the magnitude of the loss in the food and beverage area that caused the greatest concern. Nonetheless, I will deal with each of the particulars.

Compton made the point that the detail in the budget was quite high, especially in view of the fact that the budgeted Hotel revenue was less than 10% of the total revenue. He also commented on the inclusion of information such as occupancy forecasts on a daily basis. This was information that would not normally be seen in a budget.

It seems to me that there was nothing inherently wrong, in the sense of form or structure, with the budget that was presented to the owner for approval in June and July 1995. That is not to say that there might not have been legitimate complaints about its content but that is a different issue. It is true that the budget was not presented to the owner within the time stipulated in cl 5.1(a). It should have been presented by 31 May 1995. It was about 10 days late. However, I do not interpret the document as requiring strict compliance with the time limit. That would be inconsistent with the general construction that I have placed on the default provisions. In this instance, the plaintiff received from the defendant after the first version had been submitted, information that was material to the projections that it had made. This caused a revision. The defendant was able to obtain advice from its accounting experts in time for the discussions at the Citeko meeting. There is no dispute that at the Citeko meeting the defendant was prepared to allow the plaintiff additional time to attend to the revisions which it was seeking. In the circumstances, I do not think anything turns on the delay in tendering the first or second versions of the budget. The delays that occurred in relation to the third and fourth versions are not, of themselves, directly indicative of breach. It really depends on an assessment as to whether the plaintiff had submitted for approval a budget that the defendant should reasonably have approved.

21.4 Defective Content - Amounts Not Reviewed

The contention in the fourth particular to para 10(a) is that the first three versions of the budget were so defective in content that they were not proper operating budgets. The first of four supporting assertions is that they contained amounts that had not been reviewed by the plaintiff.

The budget contained provision for the expenditure of $60,000 to replace hot-water systems. At the Citeko meeting Gani said that there was no need for new systems and it would be sufficient to replace coils and insert filters. Secco's evidence was that he had seen a report from the personnel manager (ex 14/60) to the effect that the hot-water systems were failing in staff accommodation blocks and one block was without hot water entirely. He had also seen a report from a local plumber recommending replacement and that he had formed the view that replacement was warranted. Subsequently the hot-water systems were repaired rather than replaced. They failed again and Secco said that the item was included again in the 1996/97 budget for replacement.

One of the complaints raised at the Citeko meeting was that certain amounts had been included in the capital expenditure budget when it was properly a replacement and refurbishment item. It was to the defendant's financial advantage to have things allocated to replacement and refurbishment rather than to capital expenditure. The issue was about the allocation of items between the capital expenditure budget and the replacement and refurbishment budget. Secco said that the only item specifically discussed was a microwave oven. It had been included as capital expenditure and Secco conceded that as it was debatable he would transfer it to replacement. Gani said that he queried many other allocations and mentioned the hot-water systems, fire-fighting equipment, safety fencing, guttering, painting and washing machines. He said that the plaintiff's response was that the matters would be checked.

Compton said that it was not usual to allocate replacement and refurbishment between capital and maintenance expenditure at the beginning of a year because often the correct allocation cannot be determined until the task is completed. He said it was common for the replacement reserve to be allocated between capital and maintenance at the end of the year.

Items of capital expenditure were also queried. They included vehicle purchases, window tinting for the restaurants, air-conditioning and hydraulic trolleys.

One of the allegations made by Gani at the Citeko meeting was that the budget provided for $1,600,000 to be spent on staff accommodation. Reference to ex 13/44 suggests that the claim is incorrect. The figure of $1,600,000 is the total of the replacement and refurbishment reserve (p13/163). The combined capital and replacement budget for staff accommodation (pp13/159 and 162) is $593,000.

Secco said that at the Citeko meeting each time he tried to explain the inclusion of an item in a particular area Gani had stopped him saying the detail could be discussed later. Secco said he left the meeting with the understanding that if an item had not been raised specifically it need not be reviewed. Secco said that after the Citeko meeting these matters were reviewed. In ex 24/2 the capital expenditure budget has been reduced to $320,000 (from $600,000) and the replacement budget to $1,400,000 from $1,600,000.

Another complaint was that there was no information in the budget to indicate the occupancy rate required for the Hotel to operate on a break even position financially. At Citeko Sumampow asked what the occupancy level would have to be. Secco said that given 15 minutes he could do the calculation. He was not required to do so. Secco's evidence was that the calculation would have been hypothetical, because there were insufficient airline seats available to support that level of occupancy.

21.5 Defective Content - Food and Beverage Losses

The next complaint was that the food and beverage budget provided for a loss of $2,000,000 without explaining why such a loss would occur and without indicating remedial measures. The whole question of the losses in the food and beverage area has been dealt with in detail in issue 2(e). What I am going to say here is a brief summary only.

In the first version of the budget (based on the assumption that the NJS service would commence in July) the estimated loss in food and beverage was a little over $1,000,000: see ex 16/76 at 16/232. In the second version the projected loss was $1,670,000: see ex 13/44 at 13/198. Secco testified that his general approach to the budget was to look at the previous years result (a loss of $2,200,000) and improve on it. The Hotel, including food and beverage, was there to support the Casino, as the main revenue and profit earning centre. This meant that it was necessary to maintain a certain level of service in the Hotel operation and that level of service came at a cost. This also took into account the market focus, which was on gamblers rather than tourists, and high rolling gamblers demanded a higher level of service than tourists. There were some features peculiar to Christmas Island that affected costs. Included in these matters were things such as laundry (which had to be sent to Jakarta), freight and the absence of casual staff. Within these confines the budget had been constructed with a view to reducing costs where possible. This was to be done by reducing the cost of goods sold to around 33%, tighter controls to minimise wastage and savings in the labour area. It is true that the budget does not spell out these points in narrative form. However, there was discussion along those lines at the Citeko meeting.

The third version of the budget took into account the recommendations made by Rowe. These are reflected in a projected loss in food that has been reduced to $896,000 with a profit in beverage of $420,000, leaving an overall loss in the department of $476,000. It should also be borne in mind that before delivery of the third version the defendant had received the Rowe report.

The fourth version of the budget proceeded on the basis of a radical restructure of the food and beverage department. In particular, there was a proposal to operate a single restaurant rather than the two outlets. On this basis, there would be a loss in food of $550,000 and a profit in beverage of $444,000 resulting in an overall loss of $106,000.

21.6 Defective Content - Allocation of Freight Costs

In the monthly and annual accounts for the periods prior to the Citeko meeting and in the first and second version of the budget freight and transport costs are lumped together under general administration. At the Citeko meeting the defendant informed the plaintiff that the complaint made by the defendant is that freight and transport costs should have been allocated to the individual departments and that the internal auditors had done the necessary breakdown.

In August 1995 Kusuma gave to Secco the results of the internal auditors' investigations concerning freight costs. The third and fourth versions of the budget were prepared with freight and transport costs allocated to the various departments.

The defendant says that this is of concern because the failure to allocate the costs gives a false impression as to the performance of the individual departments. This is of particular concern in food and beverage. Because freight and transport costs were not allocated to the department the cost of goods sold, and hence the loss, was understated. In its further and better particulars the defendant says that the budget understated the costs by 73% of the actual costs. None of the defendant's witnesses gave evidence as to how that figure was arrived at. Compton did an exercise re-allocating freight and transport to the food and beverage department. The increase in the costs of goods sold was 37%, not 73%. By comparing Compton's workings (on p5 of ex EEE) with ex 26/172 (at pp 26/188 and 179) it is apparent that he worked from the fourth version of the budget in carrying out this exercise.

Another point that Compton made (and which I accept) is that the costs should have been allocated to departments rather than being lumped together under general administration. Secco said that the composite allocation had been made because the purchasing manager, rather than departmental managers, was responsible for freight and he had to assess performance against overall budget for freight. However, once the request had been made by the defendant a system was implemented to split freight costs and allocate them to departments. I notice, for example, that the monthly operating costs for September 1995 (ex 23/76) show freight under individual departments.

Compton also said (and I accept) that whether freight costs were allocated to general administration or individual departments made no difference to the total profit of the Resort. It did not increase the fees to which the plaintiff became entitled under the terms of the Agreement.

The result is that the budget was defective in so far as it failed to allocate freight costs. It is, however, a very real question as to whether it was a defect of any real moment. It appears to have been remedied by 5 October 1995.

21.7 Defective Content - No Written Commentary

The defendant makes the point that the second version does not contain any narrative commentary and that the first three versions failed to state the assumptions on which they were based.

Reference to the three exhibits demonstrates that these allegations are factually incorrect. They speak for themselves in this respect. In his evidence Gani seemed to accept this position: see transcript p1174.

The defendant alleges that at the Citeko meeting Farrow conceded that the second version required full reconsideration and that a revised budget would be submitted by 31 July 1995. Farrow denied that he had said the budget required full reconsideration and would be completely revised and resubmitted by 1 August. I have already set out the import of Secco's evidence on this point. Resmann's evidence was that the plaintiff was to amend certain sections of the budget. The amendments were in the areas of capital expenditure, staff accommodation, repairs and food and beverage.

I do not think the allegation that there was a concession that the budget needed to be totally reconsidered has been made out on the evidence.

The sixth particular contends that the fourth version was defective in content because it did not contain any commentary and did not detail the assumptions on which it was based.

It is true that ex 26/172 consists, in the main, of spreadsheets and financial statements. It is called "Budget Financials", unlike the first three versions where the terminology was "Business Plan". The covering memorandum (ex 26/171) indicates clearly that the fourth version is to be read with the third version. The most substantial change between the third and fourth versions was the move to a single restaurant proposal. Exhibit 26/171 explains this and sets out the assumptions used insofar as they differ from the this version.

Given that the full document had been submitted on three occasions, that the document is entitled "Budget Financials" and that it was intended to be read with the earlier versions, there is no substance in the defendant's complaint in the sixth particular.

21.10 Conclusion - Budgeting System Generally

From the time Secco commenced at the Resort he had a procedure for checking expenditure by reference to the budget that was in place. He checked purchase orders against the budget before authorising payment. In the middle of 1995 Secco changed the procedure so that a copy of the computer screen print out showing year-to-date expense against budget was attached to the documentation that went to the owners with the cheque for signing. If expenditure was over budget it would not be incurred unless deemed necessary. The second version of the budget was placed in the computer system so that the same procedure for checking expenditure applied after July 1995.

The procedure used for the preparation of the 1995/96 budget by involving department heads and discussing drafts with the relevant officers of the plaintiff has been outlined.

In my opinion the complaint that there was no proper system in place for the preparation of a budget resulting in the failure to have a budget prepared and approved, has not been made out. While there was no approved budget in place in the second half of 1995, it cannot be said that there was no budgetary control. The second version was serving a purpose. It has to be said that the third and fourth versions of the budget provided for significantly different (and reduced) expenditures in relation to food and beverage. Secco said he did not adjust the budget line in the computer system to take account of the different cost parameters and did not intend to do so until the owners had approved the budget. If this is so, the system was working to an incorrect budget cost base. There is, therefore, something in the defendant's allegations in this area.

21.11 Conclusion - Should the Budget Have Been Approved?

The plaintiff delivered the first and second versions of the budget a little late but not so out of time to be of concern. The defendant requested amendments and reconsideration in several areas.

The budget was deficient in its allocation of freight costs. However, the problems were not material to the end result and by 5 October 1995 they had been remedied.

There clearly were problems with the staff accommodation that needed attention. I am not satisfied that there were misallocations between capital and replacement expenditure that rendered the budget improper.

In my opinion the most significant issue here is the level of projected losses in food and beverage. In the minutes of the Citeko meeting Gani is reported as having said that the defendant could not seriously contemplate an operation which was planned to lose $1,670,000 and as reminding the plaintiff of the earlier commitment that every department of the Resort should operate as a profit centre. Resmann acknowledged that Gani might have made the comment at the meeting but denied that there had been any such prior commitment. The efforts that the plaintiff made to adjust the budget have already been covered.

In my view approval to the 1995/96 budget was unreasonably withheld. The defendant had queries about the first and second versions and these were raised at the Citeko meeting. One complaint was about the allocation of freight costs. But the defendant had in its possession the allocation to each department for the previous financial year which would be the basis for the calculation of freight costs in that year. In relation to the capital expenditure and replacement and refurbishment budgets, most of the contentious items concerned staff accommodation. I believe that the staff accommodation was substandard and the necessary expenditure had been discussed from time to time. Secco had in his possession at the Citeko meeting detailed information concerning each item of capital expenditure and replacement and refurbishment. I have already dealt with losses in the Hotel operations. In my view, at the very latest, the defendant should have approved the third version of the budget. In the light of the prevailing circumstances, I do not think the plaintiff can be held to account for the delay in obtaining the necessary approval.

I now turn to consider the allegations that are, in the main, contained in para 10(b) of the defence. They all rely on alleged breaches of cl 4.1(aj) of the Agreement which obliges the plaintiff to establish and monitor appropriate accounting, administration, financial control and budgeting systems to be utilised at the Resort. Para 10(b) commences with the general allegation that the plaintiff failed to establish and monitor appropriate systems. The plea then advances, in 11 numbered subparagraphs, the ways "in that" the systems did not comply.

The case was fought according to the language used in the pleading, namely, that these are allegations of systemic deficiencies. I took what I described as a benevolent approach to the drafting of some of the subparagraphs to enable the defendant to advance the case on the basis that there was no system at all, or that there was a system but it was not appropriate or that there was a system (appropriate or inappropriate) which was not properly administered.

It became apparent that in all instances pleaded the defendant could not make good its case on the basis that there was no system at all. The particulars advanced in the subparagraphs rather limited the scope for the defendant to establish the third of those alternatives. In most instances it came down to an assessment of the second alternative. In many cases there was a dearth of evidence of a general nature from which a finding could flow that the system itself was inappropriate to the circumstances of the Resort. In most instances the defendant pointed to errors that had been made in the operation of the systems and invited me to deduce from those errors that the system was, or must have been, inappropriate.

Of course, the mere fact of error would not of itself establish systemic deficiency. The nature of the errors, their magnitude (both in numerical and monetary terms) and any possible explanation for them could all be relevant considerations. All of the experts who testified, particularly McClusky, Gavin Buckingham and Compton, agreed that no accounting system is perfect. Errors, human and other, are to be expected in the operation of any system. Buckingham is a chartered accountant from Arthur Andersen Perth. He was primarily responsible for the preparation of report dated 21 July 1994 for the owners (ex 6/145) in which the following comments are made:

"The objects of [an internal accounting control] system are to provide the operator and owner with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorised use or disposition, and that transactions are executed in accordance with the operator's and the owners' authorisation and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. --- Because of inherent limitations in any system of internal accounting controls, errors or irregularities may occur and not be detected."

What is important is whether the errors are "material". These exchanges from the examination-in-chief and cross-examination of McClusky explain generally what the witnesses were saying:

"--- there are two issues. One is: are the payroll records accurate, and from an audit perspective that is important, but secondly, if they're not accurate are they materially accurate, and that is more the issue from an audit perspective, so I --- That's important from an audit perspective - whether it's materially correct, not that it has to be absolutely correct but materially correct.

What you look at from an auditing perspective, as I understand it, is whether or not - not so much whether there are inaccuracies but whether there are material inaccuracies. Is that correct?---Well, the object of an audit is to be satisfied that there are no - that the results of the organisation and the balance sheet are, you know, presented fairly.

To present a true and fair view of the matters the subject of the accounts?---Well, they have changed the wording from true and fair view.

Have they? It shows how out of date I am. What is the current wording?---It's whether it presents fairly in accordance with the applicable accounting standards.

Okay, but the concept remains essentially the same?---The concept is that there should be no material error with the separate concept of materiality being an issue but there should be no material error in the financial statements."

In his evidence Compton pointed out that wages payments in hotels were seldom simple because of changes in shifts and casual staff. When asked to reflect on the concept of materiality directly in connection with payroll systems he said:

"Are errors with respect to payroll - what is the prevalence of errors in payroll, in your experience? How common are they?---I think in my recollection of probably every visit that we have made to the hotel, that I have made, and I think it's 18 or 20 in the last 18 months, there would have been some errors but [sic not?] of a significant value. They were not material in relationship to the total."

In the following sections I will use the general term "systemic deficiency". It must be understood in the sense that I have outlined.

I do not think there is much doubt that there were problems with the accounting and stock control systems in use at the Resort in the early stages. The evidence of Buckingham (ex 5/1) and of Bartholomeusz (particularly in connection with accounts payable, purchase orders and the use of HIS for financial reporting) is to that effect. At the Advisory Committee meeting on 14 March 1995 Secco is reported to have said that when he took over accounting responsibility the inventory system was inadequate. He said that he was close to finalising a system that would enable tighter control. In his oral testimony he confirmed that this was an accurate reflection of what he had said. On 5 December 1994 Secco had a meeting with owners' representatives at which he began to work up a task list.

This is the issue numbered 2(f)(1) in the summary. In para 10(b)(i) of the defence the defendant alleges that the plaintiff's payroll system resulted in the making of substantial overpayments to employees with the result that there was a considerable increase in operating costs. In further and better particulars delivered on 13 March 1996 the defendant indicated that although its investigations were not then complete, its claim under this head was for approximately $160,000 made up as follows:

(a) for overpaid meal breaks, 172 employees with total hours of 7503 and a cost of $85,305;

(b) for overpaid sick leave, 20 employees with total hours of 442 and a cost of $5,398;

(c) for overpaid annual leave, 80 employees with total hours of 2890 and a cost of $54,162;

(e) for overpaid accrued days off, 73 employees with total hours of 939 and a cost of $15,318.

In amended particulars filed on 17 July 1996 the total claim was altered to $371,275. The defendant produced schedules prepared by the internal auditors and the SGV auditors to support these claims. They referred to errors made in payments to 274 former wages employees, 71 former salaried employees and 188 employees who were still at the Resort. As events were to show, the investigations made by the auditors resulting in the preparation of those schedules were hopelessly inadequate and misconceived.

It would not be too unfair to say that when the hearing commenced no-one connected with the case understood what the payroll issue was about. I do not underestimate the difficulty that each party had in relation to the payroll issue. Throughout the hearing there was an ominous presence in a room adjoining the courtroom of 17 large boxes full of payroll documentation. From time to time thinly veiled suggestions were made to the effect that the trial Judge might have to sift through them in the adjudicative process. An enormous amount of time and effort was wasted between July 1996 and July 1997. Most of it could have been avoided if the internal auditors had understood the payroll system and had properly instructed the defendant's counsel and solicitors. During the plethora of interlocutory applications, objections to evidence, arguments about processes and closing addresses, counsel for the defendant was vociferous in his complaints about the plaintiff's conduct in the payroll issue. I cannot help but feel that the defendant was the author of its own misfortune in this respect. At the outset the information and documentation was presented by the defendant in such a way that before Tamin started to give evidence it is entirely understandable that the plaintiff was confused as to the basis on which the payroll exercise had been done. In my view no criticism can be made of the plaintiff for not being more forthcoming with documents and explanations before it had heard Tamin's evidence-in-chief. That commenced on 20 March 1997. I know that the relationship between the parties was not good. However, it seems to me that had the internal auditors made some simple inquiries of people like Secco and Mr Shane Tatnell concerning the structure of the payroll system a lot of time, effort and expense could have been avoided.

The defendant originally planned to examine in detail six examples of overpayments to employees and then to rely on the schedules. The idea was that each entry in the schedule would be of a type that had been explained in one or more of the six examples. It would then have been left to the plaintiff to go through the schedules and question those entries with which it did not agree. The defendant would then, I think, have submitted that the ground had been laid for me to infer or find systemic error from the type and magnitude of the errors reflected in the schedules save to the extent that the plaintiff had established that individual entries were wrong. I felt that this was not an appropriate basis on which to proceed in an area in which the defendant bore the burden.

In the end most of the claims in the payroll schedules were abandoned. The defendant did not proceed with the claim insofar as it relied on things such as overpaid sick leave, accrued days off, double payments and miscellaneous calculation errors. It did proceed with the allegation of systemic error based on overpayments of meal break and annual leave entitlements and on the failure to monitor the proper compilation of time sheets by employees. In relation to time sheets, the defendant's position was that I should find that the failure to control the compilation of these records amounted to systemic error and that the question of damages flowing from it should be sent off for later inquiry.

Prior to the opening of the Resort, Archer had negotiated an industrial award ("the Award") with the Union. It operated from 1 September 1993 to 9 October 1994. A copy was received into evidence as ex 2/268. During 1994 Archer negotiated an Enterprise Bargain Agreement ("the EBA") with the Union. It operated from 10 October 1994 and was still in force on 12 December 1995. Several different versions of the EBA were referred to in evidence from time to time. I mention ex 6/277.1 and 6/282.1. I think the parties were in agreement that I could safely ignore these versions and to rely on ex 6/253 as being the EBA. The Award and the EBA governed the relationship between the Resort and the wages employees.

The terms and conditions of employment of salaried employees were governed by agreements in writing between the employee and the Resort, the common law and relevant legislation [including the Industrial Relations Act 1979 (WA) and the Industrial Relations Act 1988 (Cwth)]. An example of an employment agreement is to be found in ex 47/94 at pp47/101-06 for the employee Suzanne Bassett.

The computer system at the Resort utilised a package known as the Hoteliers Information System ("HIS"). The system was devised by a computer group in Melbourne and, according to Compton, was well known and widely used in the hotel industry. In intellectual property terms the package remained the property of the Melbourne company and was licensed to the plaintiff. Any changes to the source codes of the software had to be made by the proprietor rather than the licensee. The computerised payroll system was part of the HIS. The proprietor had programmed the payroll system initially to reflect the Award and subsequently to reflect the EBA. It was regularly backed up.

The Accounting Procedures Manual (ex 21/1) included the payroll procedures followed at the Resort. According to Secco the procedures at pp21/119-136 broadly reflected the practices and procedures that had applied since July 1994.

At some time late in 1994 the defendant commissioned SGV to review and evaluate the system of internal accounting control over the HIS at the Resort. An audit team from SGV went to the Island in January and February 1995 and carried out the review. The investigations covered the payroll system within HIS. The auditors discussed their findings and recommendations with Secco. On 19 February 1995 SGV sent a report to Gani listing the findings and recommendations. In each section the report contains a "management response", which purported to record what Secco had said. Gani discussed the report with SGV and asked them to prepare a shorter version removing reference to the management responses. He said that he did this "in order to get the valid response from the operators including --- the suggested date of the implementation of the steps to be taken". On 6 April 1995 Gani sent the abridged version to Secco and asked for comments within a week. On 22 May 1995 Secco sent comments to Gani and he referred them on to SGV. On 9 June 1995 Secco sent a slightly different version of the 22 May memorandum to Gani. They addressed each of the recommendations made by SGV in relation to payroll.

Meanwhile, the defendant had instructed SGV to prepare an analysis of the systems based on the accounts as at 31 December 1994. At the Citeko meeting the defendant raised for discussion a document prepared by SGV entitled "Christmas Island Resort Pty Ltd Agreed-Upon Procedures and Related Findings December 31, 1994". The document is ex 17/138 and at pp17/162-63 SGV identified the issues that concerned payroll. One was that some cheques could not be traced to the payroll clearing account. Another was that the Detailed Payroll Analysis Reports ("DPAR") included terminated employees. I digress to say that the phrase "terminated employees" was used extensively in the documentation and throughout the hearing. It refers to employees who had ceased to be employed (for whatever reason) at the Resort. Despite the fact that it has underworld connotations I will, for reasons of economy, use the phrase "terminated employees". A third issue was that test sampling of time sheets had revealed that in respect of 11 employees there was an overstatement of 2 to 2½ hours. Finally, provision for annual leave was programmed to be included in salaries expense. The report itself was not given to the plaintiff's representatives before or at the Citeko meeting. A copy was attached to the draft minutes of the Citeko meeting which were forwarded to the plaintiff with the 27 July letter. The minutes of the meeting indicate that Mr Danilo Limzon (from SGV) referred to the discrepancies and suggested that there was possible collaboration between staff and supervisors signing off on time sheets. It was agreed at the meeting that the plaintiff would initiate an investigation team and that Hadi would be involved in it.

After it received the 27 July letter the plaintiff formed the task force. Perhaps at this stage I should say something of a general nature about the task force. It was headed by Tan, a chartered accountant who had considerable experience of internal and external audits which he had accumulated in private practice and at casinos. Most of the decision-making in connection with the task force was Tan's responsibility. After the formation of the task force Resmann stepped back from the Christmas Island venture somewhat and thereafter it was left, in the main, to Tan. He read the 27 July letter, the minutes of the Citeko meeting, the SGV report and the summary of internal audit findings. He obtained an organisational chart to get an idea of the positions at the Resort. The role of the task force was to investigate, report and correct where necessary the matters the subject of the documentation. In addition to Tan the task force included Alison Galligan (a chartered accountant from CAIL), four accountants from Price Waterhouse (Paul Cochrane, Jonathon Sellar, Andrew Garnsworthy and Robert Lyster), the MIS Manager at the Resort (Trevor Harris) and Rowe, the food and beverage consultant. The plaintiff arranged for a contract computer operator from HIS to replace Harris in his job at the Resort during the task force investigations. The task force arrived on the Island on 4 August 1995 and remained until 12 August 1995. Sellar remained for a further week to assist in stock control issues and to attend a stocktake.

Tan said that while the plaintiff would respond to the 27 July letter in a "professional and robust manner" his overriding objective was to try as best he could to accommodate the request or wishes of the owner wherever possible. He took this decision because he, with Resmann and Tucek, had decided that it was commercially sound and prudent to do so. The plaintiff wanted a harmonious working relationship and he was given the brief to carry out the job along those lines.

The task force, the defendant's representatives Hadi and Cathy Ng and the payroll supervisor met on 5 August for about six hours to investigate the alleged overstatement of payroll. About 1000 time sheets from one box were reviewed during the day. On 7 August there was a further meeting. There were about 34,000 time sheets in boxes in a chalet. The boxes were removed to the directors' office. Sample time sheets were removed from each of the remaining boxes. They were copied for further investigation by the task force. Hadi said that he had wanted to check each time sheet. Tan said this was impractical and unnecessary. He said that his audit experience showed that conclusions could be drawn from sampling techniques. The focus of the investigation was the meal break issue because this had been raised in the SGV report. Approval of overtime and proper completion of time sheets was also discussed.

In the task force report of 18 August (ex 19/1) Tan responded to the payroll complaints. He said that the payroll clearing account was being reconciled monthly and balancing checks were being done fortnightly. He acknowledged that some terminated employees had been included in the DPAR in error. However, it had not had a financial impact because the employees had not been paid. Their names had now been removed. At p19/48-49 an explanation is given for each of the payments listed in the SGV report based on the plaintiff's interpretation of the EBA concerning meal breaks. There had not been any overpayments.

The payroll issue was discussed at the Advisory Committee meeting held on 1 September 1995. Tan said that the defendant raised concerns about the failure to investigate every time sheet and he gave the same explanation he had given to Hadi. Gani asked Tan whether he could say that no person had been paid more than he or she was entitled to. Tan's reply was: "Yes, I could say that based on the work that I had done which was based again on the findings and observations of the reports that were given to me". Tan also testified that he informed the defendant that if there was further information they should let him know and he would investigate, but unless he got more information it was not possible to comment further. He said no further information came to him from the defendant about payroll at that meeting. This is consistent with the minutes of the meeting (ex 22/5).

As early as July 1994 there had been a problem with the payroll system. At the end of July Secco discovered that the payroll clerk had incorrectly processed the payroll information for that month. She was dismissed. The replacement officer had to key in all of the information again. This was a human error in processing the information and was corrected. It also appears that when the payroll system was rebuilt or reprogrammed after the change from the Award to the EBA in November 1994 information concerning accrued annual leave and annual leave taken between July and November 1994 was not accurately reflected in the system.

At some time in August 1995 Hadi came to learn of a problem with annual leave arising from the resignation of an employee, Andrew Rose. As a result the defendant decided to conduct further exercises with time sheets. On 5 September the defendant advised the plaintiff of its intention to remove the payroll documentation to Jakarta for this purpose. The plaintiff objected on the grounds that it had a statutory responsibility to retain the documents on the Island. The defendant insisted that they be released because it was more cost effective to carry out the investigation in Jakarta. All of the time sheets up to July 1995 were then packed up for dispatch to Jakarta. Some were returned on 23 November 1995. Others were not returned until after February 1996.

By a memorandum dated 6 September 1995 Secco instructed Tatnell to engage a temporary employee to go through all time sheets and cross-check the annual leave on the system. This did not proceed because the time sheets were removed from the Island. Tatnell is the payroll supervisor for the Resort. He was first appointed to that position in March 1995.

On 18 September 1995 Secco sent a memorandum to Tan complaining about the presence and activities of the internal auditors and referring to a "defeated accounts department". He said that the operation was a difficult one under normal circumstances but was by then proving to be almost impossible. He also said that the HIS was proving "very unreliable" and that they were gathering information possibly to sue HIS. In his oral evidence he qualified this statement saying that it had proved unreliable in two areas. One was in picking up year end journal entries and the other was the computer bug affecting annual leave. He said that the thought of getting an independent review of the system and possibly suing HIS passed after the SGV review of the system. As a result, Tan sent three accountants to the Island to assist Secco. This was done at the plaintiff's expense. One of the things that Secco did was to establish an exercise called "the payroll project", which I will describe later.

In the 12 October letter the defendant referred to the plaintiff's assurances in the task force report and at the 1 September meeting that there had been no overpayments to employees. The letter said: "However, our evaluation team's investigation on time sheets has found that there are many instances of overpayments that have occurred in the payroll. This has been checked and confirmed by [SGV]. Investigations are continuing". On 1 November 1995 Tucek wrote to Sumampow in response to the 12 October letter. In it he referred to the payroll project and said: "Information is being checked and corrected as necessary and controls and procedures improved wherever appropriate and necessary". On 9 November 1995 Tan wrote to Sumampow again referring to the work of the payroll project team and denying that there was a breach of the Agreement in the payroll area.

Some of the alleged overpayments identified by the internal auditors were explained as being an entitlement to a paid meal break of 30 minutes. This issue only affects wages employees, not salaried employees. The latter were paid for a 38-hour week regardless of the number of hours actually worked. The internal auditors who compiled the schedules apparently did not appreciate the distinction. The list of employees contained at p35/9-10 relates to salaried people and so is misconceived.

The starting point for this topic is the Award and the EBA. Clause 27(d) of the Award provides: "Each employee shall be entitled to an unpaid meal break of not less that 30 minutes nor more than 60 minutes, provided that a continuous shift worker shall be entitled to a paid meal break of a minimum of 30 minutes duration". Under cl 22(a) a continuous shift worker is entitled to five working weeks' annual leave each year while other employees are entitled to four weeks' leave. The Award also provides that the ordinary hours of work are to be eight hours per shift [cl 9(c)] exclusive of meal breaks except for continuous shift workers, in which case the ordinary hours would include the meal break [cl 9(e)]. Clause 9(e) also provides:

"`Continuous shift worker' shall be deemed to be any employee working any part of their rostered shift between the hours of midnight and 7am and/or between the hours of 7pm and midnight."

The term "rostered shift" is not defined. In the section of these reasons relating to payroll I will refer to the period between 7pm and 7am as "the prescribed period".

The EBA also makes provision for paid meal breaks in certain circumstances. The relevant clauses of the EBA are cls 8(e) and 27. The provisions of the EBA are similar to those in the Award except that:

(a) dealers and inspectors are entitled to a paid meal break regardless of whether they are continuous shift workers [cl 8(e)]; and

(b) there is no definition of the term "continuous shift worker", either in similar terms to cl 9(e) of the Award or otherwise.

Accordingly, a "continuous shift worker" is entitled to a paid meal break of 30 minutes and to 5 weeks' leave each year. Clause 21(a) of the EBA deals with entitlement to annual leave and it maintains the four weeks and five weeks' stipulations that are contained in cl 22(a) of the Award. The question whether, in a particular case, an employee is to be treated as a "continuous shift worker" is essentially a question of the proper construction of the industrial instruments.

The legal principles applied in interpreting awards are the same as are applied by courts of law for the construction of deeds, instruments and statutes: Norwest Beef Industries Ltd & Derby Meat Processing Co Ltd v Western Australian Branch of the Australian Meat Industry Employees Union (1984) 64 WAIG 2124 per Brinsden J at 2127. The ordinary and natural meaning of the provisions of the instrument should be adopted in preference to the strict legal meaning: Hospital and Salaried Officers Association of Western Australia v Minister of Health (1981) 61 WAIG 616 per Brinsden J at 618. The same principles are applicable to industrial agreements under s46 of the Industrial Relations Act 1979. It is necessary to construe the instrument as a whole and give the words used in it their natural and ordinary meaning: Robe River Iron Associates v Amalgamated Metal Workers and Shipwrights Union of Western Australia (1987) 67 WAIG 1097 at 1098. The text books on the elements of drafting (for example, Robinson, Drafting, 1980 at p71) express the draftsperson's golden rule in the phrase "never change your language unless you wish to change your meaning, and always change your language if you wish to change your meaning". In Re Birks [1900] 1 Ch 417 Lord Lindley MR said at 418:

"I do not know whether it is law or a canon of construction, but it is good sense to say that whenever in a deed or will or other document you find that a word used in one part of it has a clear and definite meaning, then the presumption is that it is intended to mean the same thing where, when used in another part of the document, its meaning is not clear."

The defendant's general approach was to determine whether an employee was entitled to a paid meal break solely by reference to the hours actually worked by that employee on a particular day. If the employee's hours of work on any particular day were entirely or substantially outside the prescribed period the employee was not entitled to a paid meal break.

The plaintiff's position was that on a proper construction of the Award:

(a) the phrase "continuous shift worker" has the same meaning wherever used in the Award (in particular by reference to the entitlement to a paid meal break and to 5 weeks' annual leave);

(b) the term refers to a category or class of worker (to be determined in advance by reference to the position to which they had been appointed) and accordingly a person's status as a continuous shift worker does not change by reference to the hours worked on a particular day; and

(c) if a person is liable to be rostered on a regular basis to work any part of a daily shift in the prescribed period the person is a "continuous shift worker".

It might be helpful if I were to demonstrate the effect of the rival contentions by reference to an actual example. Mr Rick Eddington was employed on wages as a bar supervisor in the Waterfall Cafe. He commenced employment on 27 October 1994 and resigned on 24 September 1995. The documents that I am about to mention are all part of ex 35/229. In some weeks all his shifts fell entirely within the prescribed period: see, for example, the time sheet p35/252 for the week ending 25 June 1995, where he worked for five days. On other weeks each shift he worked included a period within the prescribed period; see, for example, p35/257 for the week ending 21 May 1995. On yet other weeks he worked some shifts entirely within the prescribed period and some shifts part of which fell in the prescribed period: see, for example, p35/255 for the week ending 4 June 1995, where there were two days in which there was no work in the prescribed period. When it came time to prepare his termination pay, his annual leave entitlement was calculated on the basis that he enjoyed five weeks' leave per year. This can be seen from the calculation multiplying the number of weeks by 3.6538 hours per week: see p35/232. Had the entitlement been four weeks per year the multiplier would have been 2.9230 hours: this also appears in the format on p35/232.

The defendant says that to decide whether Eddington was entitled to a paid meal break you examine each time sheet and see whether there were shifts which included work substantially within the prescribed period. He would then properly be paid for meal breaks for the number of days on which the working hours actually fell within that range. Exhibit Y pE-1 contains the internal auditors' summary of claim for Eddington. For the week ending 25 June 1995 (p35/252) there is a claim for 2½ hours. That is 30 minutes per day for each of the five days he worked that week. For the week ending 21 May 1995 (p35/257) there is no claim. That is consistent with the view that all shifts included hours substantially within the prescribed period. For the week ending 4 June 1995 (p35/255) there is a claim for 1 hour overpaid. That represents 30 minutes for each of the two days during which no work was done in the prescribed period while recognising the entitlement for the other four days worked that week which did involve shifts within the span. In relation to Eddington there is (and never was, according to p35/6) no claim for overpayment of annual leave. That is consistent with the view that for the purposes of calculating pay in lieu of annual leave Eddington was entitled to 5 weeks' (not 4 weeks) leave per year.

The plaintiff says that the correct approach is to classify Eddington's status once, and then for all purposes. If he were liable to be rostered for shifts that fell within the prescribed period he would be entitled to a meal break for each shift he worked and during which he actually took a meal break, regardless of whether the hours fell within the prescribed range. Eddington was an employee who was liable to be rostered in that way, as the times actually worked show. Accordingly he was a continuous shift worker both for purposes of assessing entitlement to a paid meal break and for calculating pay in lieu of annual leave on termination. There was, the plaintiff says, no overpayment to Eddington.

Eddington is not the only employee in relation to whom the internal auditors' calculations have proceeded on view of the term "continuous shift worker" for annual leave and a different view for paid meal breaks. Other employees whose cases are dealt with in ex Y and Z and who fall within this category include Tanko, Girando, Bassel, Ammon and Hendricks.

Counsel for the defendant submitted that the proper construction of the Award was in line with the way that the internal auditors had approached the task. Counsel pointed to the wording of cl 9 which appeared to concentrate on the singular so that it was promulgating rules for a roster (singular) and an 8-hour shift (singular) for an employee (singular). Counsel also referred to the definition of "spread of shift" cl 6(a) which is to similar effect. This, counsel submitted, led to the conclusion that when the document was construed as a whole, cl 9(e) did no more than allow anyone working at any time between 7pm and 7am to have a paid meal break. Counsel also pointed out that the definition was a "deeming" provision which tended to change the focus of attention away from what actually happened.

On the other hand the Award was negotiated in the context of a business that contemplated operating 24 hours a day. It seems to me that if it had been the intention of the parties to the industrial instrument that entitlement to a paid meal break depended on the hours worked on a daily shift within the 24-hour period, it could have been expressed in a clear and simple fashion to encompass only those shifts that actually involved hours within the prescribed range. I think the purpose of the definition of continuous shift worker in the Award was to make it clear that the only relevant shift hours were those in the prescribed range. I do not think the use of the word "deemed" in the definition is particularly significant. In Hunter Douglas Australia Pty Ltd v Perma Blinds [1970] HCA 63; (1970) 122 CLR 49 at 65 the Court made the point that the use of the word "deemed" does not necessarily indicate there is a fiction involved. There may be some circumstances where "deemed" is used in its ordinary and natural meaning, namely, to judge or conclude from. I think that is the proper construction of the word "deemed" where it appears in the definition of continuous shift worker in the Award.

Counsel for the defendant submitted that the effect of moving to the EBA was to contract rather than expand the provision for paid meal breaks. He pointed to cl 27(d), which is in identical terms to cl 27(d) of the Award, and drew attention to the comparison between that clause and cl 8(e) of the EBA. Clause 8(e) provides: "The hours of work shall be exclusive of meal breaks except for dealers and inspectors". Counsel suggested that the proper way to read the document was to substitute for the words "continuous shift worker" in cl 27(d) the words "dealers and inspectors". Otherwise, the provisions of cl 8(e) were being ignored because employees other than dealers and inspectors would be treated as if the hours of work were exclusive of meal breaks.

I am not sure that this necessarily follows. It seems to me that the two subparagraphs have an entirely different field of operation. Clause 8(e) governs whether a period used as a meal break is to be brought into calculation for determining whether the minimum or maximum hours of work have been completed. So, for example, in relation to inspectors and the obligation to roster between 6 and 12 hours, if the inspector had worked 6 hours including a 30 minute meal break the stipulation in 8(c) would have been complied with because the meal break is to be taken into account in assessing the total hours of work. On the other hand, if the worker is not a dealer or inspector the meal break period is excluded in determining whether the appropriate hours have been worked in accordance with cl 8(c). That, it seems to me, is quite a different issue from entitlement to a paid meal break the subject of cl 27(d).

All of these matters militate against the defendant's position on the issue. I think an even more telling point in favour of the construction advanced by the plaintiff is that the parties must have intended the definition of "continuous shift worker" to be applied consistently to the terms of employment of a particular individual. It must be borne in mind that cl 22(a) of the Award applies to the amount of leave that could be taken as well as to the calculation of pay in lieu on termination. On a strict view the person's entitlement would be determined by comparing the number of days in which shifts fell within the prescribed range with the number of days in which the shift did not involve those hours, converting each to a number of weeks and then applying the appropriate multiplier. That would be a complex calculation and would lead to uncertainty. I say this because an application to take leave is usually lodged well in advance of the nominated leave commencement date, as was the case in many of the leave application forms that were adduced in evidence. The employee would not necessarily know what shifts he or she had been allocated in the period between the leave application and the commencement date. There would, therefore, be no way of knowing how much leave the employee could take. In other words, for annual leave purposes I take the view that once a "continuous shift worker" always a "continuous shift worker". Applying the principle of construction to which I have referred, namely that words used in more than one place in a document generally have the same meaning, I think that the phrase "continuous shift worker" should be construed in the same way for paid meal breaks as it is for annual leave entitlements.

In my view the position was no different under the EBA. For present purposes the general structure is the same. The only difference is that while the phrase "continuous shift worker" is used, the definition has been excluded. However, I can see nothing in the EBA to indicate that the parties intended a different regime to apply from that which they had been using under the Award. The same point counts against the defendant's construction based on the comparison of cl 27(d) and cl 8(e) of the EBA. If cl 27(d) is to be read as if the words "continuous shift worker" meant "dealers and inspectors" it would follow that only dealers and inspectors were entitled to five weeks (as opposed to four weeks) annual leave. The EBA just does not say that and I can see no way in which it could properly be construed to do so.

23.4 Was the Plaintiff's Interpretation Reasonable?

The plaintiff submitted that even if its interpretation of the meal break entitlement was wrong it was reasonable and the plaintiff was not in breach. The conclusion to which I have come on the construction of the Award and EBA makes it strictly unnecessary to deal with the alternative submission but I will do so briefly.

Based on the principle in Ranieri v Miles (supra) I do not think the plaintiff could escape liability for a breach simply because its actions were reasonable. However, it may have ramifications for the argument on repudiation. If a party is acting reasonably it might be argued that it has not evinced an intention no longer to be bound by the contract.

Secco's evidence was that when he first arrived at the Resort he considered the Award and later the EBA and while he did not find anything conclusive in them, he formed a view on the meal breaks question that was in line with the position put by the plaintiff at trial. At the Citeko meeting the issue of hours discrepancies on time sheets was raised but it was not put as a meal breaks question. After the meeting Secco sought an interpretation from the Union and from the Australian Hotels Association. On 28 July 1995 the Union wrote to Secco in terms that Secco interpreted as in line with the construction that he had adopted. The last paragraph of the letter says that if a person is not a "day worker" there is a strong possibility that he or she is a "continuous shift worker". In my opinion, given that statement, it was not unreasonable for Secco to have read the letter as he did. The response of the Australian Hotels Association is dated 29 August 1995. It provides a different interpretation. According to the Association the question can only be answered by looking at a two-week roster. An employee might be a continuous shift worker in one two-week period (if there was any shift in the period in which he or she worked during the prescribed hours) and not in another. Secco said that he considered that interpretation and rejected it. He thought it would be impossible to get the Union to agree to it. Secco conceded that at no time did he take legal advice on the issue.

By this time it was clear that the "problem" mentioned at the Citeko meeting was, at least in part, a meal breaks issue. That is the approach the plaintiff took in the task force response on 18 August 1995 to this aspect of the defendant's complaints. I can understand Secco's reaction to the letter from the Union. At the end of August he received a contrary interpretation from the Association. Given the way the problems with the defendant were then developing (and the Advisory Committee meeting of 1 September 1995 followed shortly thereafter), I think it would have been prudent at that stage to seek legal advice. In the light of the failure to do so (and assuming for these purposes that the interpretation placed on the industrial agreements was wrong) I do not think the plaintiff can now say that its actions in this respect after September were reasonable.

23.5 The Reliability of the Auditors' Workings

Given that to succeed in this area the defendant would have to show not just that there were errors but that the errors were material, I must examine the information presented by the internal auditors in support of the claim.

In the end I was left with an uncomfortable feeling as to the reliability of the schedules prepared by the internal auditors. The cases of 15 separate employees were examined in detail. The results of the auditors' work in those cases is summarised in ex Y and Z and the supporting documentation is to be found within those exhibits and in volumes 35, 36, 37, 41 and 47 of the tender bundles. By the end of the case, some effort had been made to quantify the problem insofar as it relates to annual leave. So far as I can recall (and see from the papers) no such effort was made concerning meal breaks. I was left to wade through a mountain of paper to ascertain what claims were left standing and whether they were material.

The plaintiff's schedule incorporating the claims made for meal breaks is to be found at p35/3-16. I am not sure if this document was formally tendered as an exhibit. I think, consistent with the way that other such documents were treated, it was intended that it should go into evidence not as proof of the contents but as evidence of the calculation that had been done. The schedule was prepared by Mr Alexander Adi, an auditor employed by SGV. There were at least six internal auditors and six auditors from SGV involved in the payroll investigations. It is apparent from the evidence that in examining the time sheets and other records to generate the information included in the schedule individual auditors may not have applied a consistent process. I will detail some of the concerns that I have in this area.

There are claims for meal break errors in relation to some salaried employees: see, for example, the employee Tanya Foster at p35/10 and ex KK, which shows that she was a salaried employee. Adi, and I think also Tamin, accepted in evidence that there could be no claim for meal breaks in relation to salaried employees.

Tamin accepted that there was an element of discretion left to the auditor in deciding whether hours worked in a shift fell "substantially" within the prescribed range. I will give some examples of the problems that this throws up. At p35/281, the time sheet for the week ending 11 December 1994, the employee Eddington worked from 6.30am to 3.00pm on the Thursday and was paid for a meal break. Because the shift extended by only 30 minutes into the prescribed range, the auditor disallowed the claim for a paid meal break. At p35/280, the time sheet for the week ending 18 December 1994, he worked from 3.00pm to 8.30pm on the Tuesday and was paid for a meal break. In this instance the auditor allowed the claim, presumably because it extended 90 minutes into the prescribed range. In relation to the employee Tanko, at p35/59, the time sheet for the week ending 20 November 1994, she worked from 7.30am to 7.30pm on the Monday and was paid for a meal break. When the claim, as described in ex Y pA-3, is examined it appears that the auditor has allowed the meal break claim even though the shift extended only 30 minutes into the prescribed period. There was no evidence as to how the individual auditors interpreted the word "substantially" in deciding whether to allow the paid meal break.

Another problem arose in relation to part-time employees. In conducting the payroll investigations the internal auditors concentrated on the EBA. In fact it seems that they were using a version of the EBA which is, in at least one material respect, different from the version that is ex 6/253. It was common cause that ex 6/253 was the version of the EBA that governed the employment relationships at the Resort from October 1994: see transcript p6819. Both the internal auditors and the SGV auditors worked from a copy of the EBA which is ex 6/282.1. It also appears from the evidence of Tamin that the internal auditors never consulted the Award and from the evidence of Adi that the SGV auditors did not receive a copy of the Award until some weeks after they commenced their investigations.

The problem arises in this way. Under cl 10(a) of the Award (subject to exceptions that are not relevant) a part-time employee was to work not less than 3 nor more than 8 hours in any one day. In other words, even if a part-time employee worked less than 3 hours he or she would be paid for 3 hours. It should be remembered that the Award governed the situation until 10 October 1994. Under cl 9(a) of the version of the EBA which is ex 6/282.1, and which is the version from which the auditors worked, part time employees would not be required to work less than 2 hours per day, again subject to an irrelevant exception. Clause 9(a) of the version of the EBA which is ex 6/253 is identical except that it commences with the words: "Staff employed after 10 October 1994 ---". Clause 4 of the EBA provides that no employee will be disadvantaged by comparison to the provisions of the Award in the overall context of the terms and conditions of the EBA. In other words the provisions of cl 10(a) of the Award would continue to apply to part-time staff whose employment had commenced prior to 10 October 1994. It seems that neither the SGV auditors nor the internal auditors appreciated that part-time employees had to be paid not less than 3 hours or 2 hours per day, as the case may be, even though they may have worked less than that number of hours on that day. It seems that the auditors simply calculated the number of hours actually worked without regard to that requirement: see transcript p3339.

An example can be seen from the case of the employee Alexander. On either 6 July or 21 August 1994 her status changed from casual to part-time. At p37/245, the time sheet for the week ending 23 October 1994, she worked less than 3 hours on each of 4 days, 3 hours on each of 2 days and 3¼ hours on the other day, a total of 17¼ hours. She was paid for 21¼ hours for that week. The summary of claim relating to Alexander within ex Z indicates a claim for an overpayment of 4 hours in that week.

The schedules within pp35/3-16 do not indicate which of the employees are members of the part-time staff. Accordingly, it is not possible to say from the material in evidence just how widespread the problem is.

Under the heading "Calculation Errors" in the schedule there are references to "meal breaks" and to "other findings". The same terminology appears in the summaries of the claims in ex Y and Z. However, in some instances the hours claimed as meal break errors in the schedule include other types of calculation errors unrelated to the meal break issue. Again I refer, by way of example, to the employee Angela Alexander. The schedule, at p35/5, shows a claim of 167.5 hours under the "meal break" column. Both Adi and Tamin accepted that this was an assessment of the hours recorded on the time sheets rather than a meal break claim. It would be unusual for a part-time employee to qualify for a meal break under the defendant's construction of the industrial instruments because generally speaking they worked during the day.

There are other examples of calculation errors that are not related to meal breaks. The evidence was that if an employee had been rostered for an 8-hour shift but was not required to stay for the full 8 hours, perhaps because there was insufficient customers at the Resort, the person would be sent home but was still entitled to be paid for the 8 hours. This situation was often noted on the time sheets by the letters "LEWP". The evidence was that this meant "leave (or left) early with pay". The auditors apparently did not appreciate the significance of those entries. Again, I can give an example. In the summary of claim for the employee Jodie Girando in ex Z there is a claim for 13½ hours overpaid for the week ending 20 February 1994. The time sheet for that week is at p37/332. On the Monday there is a claim for a 30 minute meal break overpaid. On the Tuesday, Wednesday and Thursday she worked 2½, 5½ and 5 hours respectively and for each day she was paid for 8 hours. On each occasion there is a notation "LEWP". The auditors have simply reduced the 24 hours for those 3 days to 13 hours. The difference explains 11 of the 13.5 hours that the auditors said was overpaid. In my view at least some of the alleged overpayment was satisfactorily explained and , in any event, it throws into doubt just how many of the errors alleged as meal breaks are properly to be explained on that basis.

In my opinion the plaintiff correctly interpreted and applied the industrial instruments in deciding whether an employee was entitled to a paid meal break. If I am wrong in that conclusion, I believe that the plaintiff acted reasonably in so deciding up to the beginning of September 1995 but thereafter should have sought legal advice. In any event I am not sure that it would permit the plaintiff to escape liability if it were in breach.

As an additional matter, I am not satisfied that the information presented by the defendant is sufficiently reliable for me to make any valid assessment as to the extent in numerical and monetary terms of overpayments caused by an inappropriate system in relation to meal breaks. In other words I am not satisfied that the overpayments were material in the sense that the experts used that term. I wish to add that I am not here confusing liability with quantum. In my view it is necessary, having identified what the error is and how it arose, to decide whether it is material. To do that I would not need to know the precise amount of the alleged overpayments but I would have to decide whether it is more probable than not that the schedules reflect the magnitude of the problem. I do not have the requisite degree of confidence in the schedules for that purpose.

23.7 The Annual Leave Problem - The Defendant's Case

In the particulars delivered on 17 July 1996 the defendant claimed annual leave overpayments to terminated employees for 3397 hours amounting to $66,652. The schedules at pp35/3-10 indicate errors in annual leave payments for 78 wages and 35 salaried employees. In 11 of the 15 examples included in ex Y and Z there is a claim for annual leave errors.

During the cross-examination of Tamin it became apparent that the auditors had not properly understood the accounting records that they were examining. I will not go through each of the examples to explain the process by which the auditor's investigations went off the rails. It would be far too tortuous to do so. It is sufficient to say that the auditors did not properly understand the entries in the DPAR (hours), DPAR (value), Payroll Report (by employee) and Payroll Report (by department), among other documents.

One relatively concise example which illustrates the point is to be found in the case of the employee Jodie Girando. In ex Z there is a claim for a miscalculation of annual leave of 22.8 hours resulting in an overpayment of $426.46. This includes 38 hours annual leave taken in the week 1 January 1995. The auditors looked at the time sheet for that week (p37/374) which showed 5 days each of 8 hours, all of which carry the notation "annual leave". They appear to have overlooked the fact that two of those days were public holidays. I should also say that the system which operated at the Resort was that the employees would work 40 hours in a week but would be paid for 38 hours and would "bank" 2 hours to be taken as "accrued days off". The auditors simply took the 38 hours from the time sheet and included them in their history sheets (p37/295) as all being attributable to annual leave. However, when regard is had to the Employee Leave Details Inquiry (p37/311), the leave application form (p37/310) and the DPAR (p47/305) the true picture emerges. In the DPAR for the week ending 1 January 1995 (p47/305) the 38 hours shown on the time sheet is split as to 15.2 hours of ordinary time and 22.8 hours of annual leave. The 15.2 hours is the two public holidays less the "banking" aspect. The cross-examination of Tamin explaining these entries is to be found at transcript pp3360-63. At the end of the exchange Tamin conceded that Girando had taken 22.8 hours, rather than 38 hours leave in that week. This means that the defendant's claim should have been for 7.6 hours rather than 22.8 hours. But the matter does not stop there.

In the summary of claim in ex Z there is an entry showing that Girando took 38 hours' annual leave in the week ending 8 January 1995. Again, the auditors gleaned this information from the time sheet for that week (p37/373). It overlooks the fact that Monday 2 January 1995 was a public holiday. Reference to the Employee Leave Details Inquiry (p37/311), the leave application form (p37/310) and the DPAR (p47/306) shows that in the week ending 8 January 1995 Girando was paid for 7.6 ordinary hours (the public holiday) and 30.4 hours annual leave. This reduces the claim by a further 7.6 hours. The cross-examination of Tamin explaining these entries is to be found at transcript pp3377-81. At the end of the exchange Tamin conceded that Girando had taken 30.4 hours, rather than 38 hours leave in that week and that there was no overpayment of annual leave to her.

By the end of the hearing the defendant had reduced its claim for annual leave overpayments to 34 employees involving $23,048.02. The plaintiff acknowledged that there had been some errors and conceded an amount of $17,287.81. The employees concerned, the amounts of the overpayments contended for by the parties and the respective explanations for the claims are set out in a table which I have attached as annexure "B" to these reasons. Of the 11 specific examples in ex Y and Z, the defendant maintained a claim (in all but two instances at a lesser amount than that originally specified) for eight of those employees. The plaintiff acknowledges the claim in respect of five of those eight employees.

The causes of the overpayments fall into a number of different categories. The first involves errors in the calculation of accrued leave entitlement. Secondly, overpayments due to a computer system bug. Thirdly, payments made pending resolution of a dispute concerning the interpretation of a part-time employee's entitlement to leave and the status of casual workers. Finally there was a series of miscellaneous issues.

23.8 Annual Leave - Calculation of Leave Entitlements

The table indicates that somewhere between 15 and 17 employees were overpaid due to the incorrect calculation of their leave entitlements. They are identified in the table by the notation "C". In relation to the employees Wilson, Hjort and Craig the reason for the overpayment is difficult to identify because the original termination calculation forms could not be located.

The HIS calculated annual leave accrued from the day of the first entry in the payroll system. It did not take into account any period of employment prior to the first entry in the system. A number of employees commenced work before the system was installed in November 1993 and most workers would have worked a few days before the first payroll entry was made. For this reason the system did not pick up the entire work history and it was necessary for the payroll officers to do a manual calculation to arrive at the leave entitlement. They would calculate the number of weeks that the staff member had been at the Resort and multiply the result by 3.6538 or 2.9230 (as the case may be) to arrive at the entitlement expressed as a number of hours. As a result of the payroll project, the calculation was effected by the use of the Excel spreadsheet. This came into effect from about October 1995.

It is interesting to note that of the 34 employees listed in the table, 20 commenced employment before November 1993 and only three were terminated after the plaintiff's investigations into the payroll matters were commenced. They are Alexander and Mokak (in respect of whom the plaintiff denies there was an overpayment) and Khor.

The issue of materiality arises here. During the latter half of 1995 Price Waterhouse was conducting the audit for the year ending 30 June 1995. Part of that audit involved an investigation of "payroll errors in termination payments": see ex 22/228 at p22/236 and ex 25/81 at p25/84. I do not know what the defendant had discovered about the extent of annual leave payroll errors by the end of December 1995. The 12 October letter refers to "many errors" but none are specified. In attachment 11 to the letter which accompanied the 12 December notice (ex 27/278) examples of overstatement of annual leave are given but, again, there is no indication as to the extent of the problem. Whatever the state of knowledge may have been it is highly unlikely that Price Waterhouse had identified annual leave errors amounting to less than the $23,000 in which the defendant's claim now speaks. On 17 January 1996 McClusky signed an audit certificate saying that the accounts to 30 June 1995 presented a true and fair view of the state of affairs of the Resort. In view of McClusky's evidence about materiality, I think this is significant.

On the defendant's case the total value of overpayments of annual leave is $23,000 while the plaintiff puts the figure at $17,000. On Secco's evidence the total number of terminated employees between commencement of operations and 12 December 1995 was about 700. If there were calculation errors in 17 cases, it would represent approximately 2.5%. Secco also testified that the value of the payroll to December 1995 was about $35,000,000 of which about $3,000,000 would relate to annual leave. If there were errors amounting to $23,000, it would represent approximately 0.8%. On errors of $17,000 the figure would be 0.6%. In his evidence Compton said that overall payroll errors of $180,000 on a payroll of $30,000,000 (which works out at 0.6%) would not be material. In my view the increase from 0.6% to 0.8% (if that be the case) would still be immaterial.

According to the table, the overpayments to up to 14 of the employees listed can be explained by the problems associated with the computer systems bug. They are identified by the notation "S".

Compton was asked a general question about the likelihood and frequency of bugs being encountered in computer systems such as HIS. He said they do occur. Some are built into the system and only appear when a particular circumstance occurs. Others are of more general application, such as the "millennium bug". A third type is introduced through viruses.

Secco testified that from the time he arrived at the Resort he did an audit check on the termination payments to employees who were leaving. He said he found occasional arithmetic errors, human errors, that were corrected. He said that the owners also checked the calculations. Both he and Tatnell said they were not aware of a possible problem with the computer system failing to identify leave actually taken until July or August 1995. There is no evidence that anyone else in the plaintiff's organisation was aware of the problem.

Hadi said that he first became aware of a problem with annual leave payments in connection with terminated employees, with the resignation of an employee named Andrew Rose. He said that this happened when the time sheets were being checked in the directors' office. The documents that had been prepared by the plaintiff came in for approval. Because he had the time sheets Hadi did an exercise and noticed something. He called Secco down to the office and discussed it with him. Hadi said that Secco did the calculation and corrected the payment and the cheque to the amount that he (Hadi) had worked out. Rose got the amount to which he was actually entitled. The "request for payment by cheque" in relation to Rose (ex X) is dated 9 August 1995 in respect of a termination on 13 August. The entry for annual leave has been changed from $1,160 to $168.46. Secco acknowledged that Hadi had raised with him at around this time a problem with a termination payment but he could not be sure it was in relation to the termination of Rose.

Tatnell said that he first became aware of a possible problem of overpayment for annual leave around the beginning of August 1995. He was processing the termination payment of an employee called Judith Tanko. He told her of the amount of her accrued annual leave. She expressed surprise and said that she did not think she had that much accrued leave. Tatnell said that he told Secco about the problem and began to do some work on it. The request for payment form concerning Tanko (ex 35/41 at p35/53) is dated 19 July 1995. Secco said that he could not recall a specific discussion with Tatnell about Tanko but agreed that the problem concerning Tanko, Hackman and Rose came up at around the same time. He knew there was a problem but did not know the cause. He asked Tatnell to confer with Harris to identify the problem. I will return to this aspect in a moment.

There is ample evidence that the problem with annual leave calculations came to light in August 1995 and was the subject of discussions and investigation. Tan said that he was not aware of the Tanko incident until told of it by Gani in October 1995. He said that prior to writing the task force report and prior to the Advisory Committee meeting on 1 September 1995 he had no knowledge of overpayments to terminated employees on accrued annual leave. He had instructed Alison Galligan to investigate the eleven examples referred to in the SGV document. He had not asked her to look for other instances of possible overpayment. Secco said that while he could not recall mentioning Tanko to Tan he would be surprised had he not passed on the information that he had. This is one instance in which I found Tan's evidence less that satisfactory. His comment at the 1 September 1995 meeting that based on the work he had done he could say no person had been overpaid might have been technically correct but I am not sure it is a full disclosure of the extent of his knowledge.

Tatnell's evidence was that until the Tanko incident the payroll office had been relying on a computerised report generated by HIS known as "Accruals Maintenance Field" to identify leave actually taken. An example of the Accruals Maintenance Field is to be found at p35/239 for the employee Eddington. This report was not capturing and reporting annual leave taken by the employee from the commencement of employment. The relevant information was in the HIS but not all the annual leave taken was showing up in the Accruals Maintenance Field. Tatnell contacted Hoteliers Information Systems in Melbourne who advised him that the figure in the accruals maintenance was only the leave taken since the last anniversary of the employee. This advice proved to be inaccurate. Tatnell did some checks on other employees and was not satisfied that the Accruals Maintenance Field was capturing all leave taken and nor was he satisfied about the explanation offered by Hoteliers Information Systems. The problem seemed to be confined to employees who had commenced employment before October 1994.

Tatnell asked Harris to produce a report that would show every week where the employee had been paid annual leave. An example of the report is contained within ex 35/41 at p35/42-45. In fact, that is the document that Harris produced for Tatnell on 29 August 1995 specifically concerning Tanko's leave. Tatnell felt that the report was not reliable because it was not picking up all of the leave taken either. When Hackman's termination was being processed Tatnell checked the accruals maintenance report against actual leave application forms and found that 4 weeks' leave taken in July 1994 was not brought to account. From August on there was a manual check to ascertain the correctness of the computer generated calculations (as to which see ex FF). The manual check for accrued leave entitlement was done on an Excel spreadsheet format generated outside the HIS. The manual check of the leave taken was compared against documents generated within the HIS. The document at p47/195 (within ex 47/180) is an example of the latter format. This was a time consuming exercise and placed considerable pressure on the payroll officers. Tatnell himself revised the format of the accruals maintenance field: see, as an example of the format, ex EE and FF. According to Tatnell the discrepancy in the system was not rectified until July 1996.

In September 1995 Secco established the payroll project. It was done partly in response to the problems thrown up by the cases of Hackman and Rose. One of the accountants who had been sent to the Island, Mr Richard Nouthard, was assigned to the payroll project. He was assisted by Tatnell and by Harris. Secco described the brief given to Nouthard in these terms:

"I wanted him to review the allocation of staffing in the different departments and look at rationalisation of those departments. I wanted him to review the human resource information that we had and history of employees on the human resource side. I wanted him to look at a request that Shane had where he believed and - that everyone so often people would be taxed at a higher rate. It was a sporadic bug. I wanted to see if that was there. I wanted him to review the budgets in payroll and the use of budgets in payroll. I wanted him to look at the time sheets and whether we needed to adjust our time sheets. He looked at the investigation of the annual leave termination bug, check all the information on the payroll system to see if it could be brought up to date - ie, there were some instances where not all the information was on there, like people's addresses - check that all the superannuation reports were tallied up and correct, check that the reporting that we were getting was correct in the way of annual leave accruals, etcetera. So basically it was a fairly - it was a fairly big project."

Nouthard reported progress to Secco from time to time and prepared a report. According to Secco there was one report which was updated from time to time as the work progressed. Nouthard finished his work and left the Island about 25 October 1995. There is a copy of the payroll project report in evidence as ex CCC. Much was made of the date of this document and whether it or part of it had been given to the defendant. The first 14 pages, which describe the project, its aims and timing, bear the date 29 September 1995. Appendix A is called "Recommendations" and the first page is dated 10 October 1995. Appendix "B" is called "Detailed Project Findings" and is dated 5 October 1995. Appendix "C" is a work outline and miscellaneous documents. It is dated 10 October 1995. There was a meeting of the payroll project participants (possibly attended also by Tan) at which the problems and progress were discussed.

Much was made also of the fact that part only of ex CCC (probably limited to Appendix "A") was given to the owners. I should say that ex CCC did not emerge until relatively late in the hearing. It was not shown to Gani or Hadi. Gani said he was not aware of the payroll project until he received a letter from Tan on 11 October 1995. The letter simply refers to the "payroll project" without explanation. This suggests that there had been some prior communication to describe what the project was. I have no reason not to accept Secco's evidence that the owners would have received a copy of the payroll project printed off late in September 1995. There are notations in Tan's handwriting on a copy of a portion of ex CCC (see ex 23/65.1) which led to a submission by the defendant that the plaintiff was deliberately concealing information from the defendant. This is not the only instance where sanitised versions of documents were delivered by one party to the other. It is symptomatic of the aura of distrust and disaffection that existed between the parties and I do not read much into it.

I believe that the defendant would have been aware of many of the issues that are contained in ex CCC from sources other than the document itself. I refer, by way of example to ex 23/23, 23/28 (at p23/57), 25/38 (at p25/43).

Secco was not able to say whether there was a later version of ex CCC that had been updated to take into account what was done between 10 October and 25 October 1995. However, he did say that Nouthard was a methodical worker and it is likely he had presented a further update. Nothing much turns on it though because the point of ex CCC is not the exact nature of the problems identified but the fact that the plaintiff, at least through Secco, knew of the existence of the problems. Secco did not deny that by October he was aware of the problems. At p113 of ex CCC, under the heading "annual leave reconciliation", the problem is identified and there is an explanation of the results of the investigation. The following comments are included:

(a) the error appeared to have occurred as a result of attempts to get the system to accept EBA changes in October 1994, largely due to the fact that leave loading had become obsolete and entitled annual leave should have been transferred to pro rata annual leave;

(b) the problem appeared to be confined to wage earners who were engaged by the Resort prior to 10 October 1994; and

(c) the end of year procedure for June 1994 may have been instrumental in disturbing the Master File Records carried for leave.

As I understand it, the "Master File" is a record of details which are relevant to an employee's terms of employment such as name, address, position, salary rate, allowances and the like. It was altered and updated as adjustments were made to those factors. The end of year procedures for June 1994 is a reference to the data operator's error in processing of information in July 1994. I have already mentioned it.

Secco testified that he had not been able to determine whether the system bug was brought in when they had an upgrade to adjust for the EBA or whether it was something that occurred in July 1994 or something else. His understanding of what was occurring was that leave taken 12 months before the leave inquiry was dropped off the system. However, this explanation did not fit all of the instances of overpayment. According to Secco the exact nature or cause of the bug may never be known.

One of the things that came out of the payroll project was a refined version of the HIS reports. The Employee Leave Detail Report, of which p47/195-96 is an example, is one such document. There is some suggestion in Tatnell's evidence that he remained dissatisfied with the reports. Counsel for the plaintiff submitted that it was unclear whether Tatnell was referring to p47/195-96 as well as to p32/42-45. I think he was. This is consistent with his evidence that the problem was not fixed until about July 1996.

There clearly was a system error and it persisted well into 1996. But what follows from that? I incorporate here what I have said about the materiality of the overpayments when I was commenting on the calculation errors. If there were 14 employees whose termination payments were affected by the computer system bug, it would represent 2% of the 700 people whose services ended between November 1993 and December 1995. There were no overpayments of annual leave as a result of the computer system bug between 30 July (that is, the approximate time of the Tanko incident) and 12 December 1995. According to pp35/3-10, there were at least 97 employees whose services ended between 30 July and 30 November 1995.

23.10 Annual Leave - Part-Time and Casual Employees

There was uncertainty as to the entitlement of part-time and casual workers to annual leave. If there were an entitlement to leave, then on termination a pro rata amount of leave accrued would be paid. If there were no entitlement to leave there would be no pro rata amount paid on termination.

One of the committees that operated at the Resort was called the Employee Consultative Committee. It met with managers at the Resort. There were two or three managers at different times to discuss human resources issues so as to avoid disputes and to minimise the involvement of the Union in negotiations directly with management. A problem arose as to the interpretation of the entitlement to leave. The committee resolved that until the EBA had been clarified part-time employees would be paid four weeks' annual leave without a pro rata calculation being made. In other words they would be paid for annual leave at the rate of 2.9260 hours per week without regard to the average number of hours actually worked per week during the period. Late in 1995 or early in 1996 the dispute was resolved in favour of part-time employees receiving a pro rata leave entitlement. Tatnell's evidence was that the dispute was resolved in January 1996.

There is some evidence that the defendant was aware of the arrangement and agreed to it. On the request for payment form for the employee Mokak (p41/256, part of ex 41/255) there is a notation next to the approval that reads: "Subject to interpretation of annual leave entitlement for a part timer". There is then a set of initials and the date 20 September 1995 which Secco identified as being in the handwriting of Hadi. Tatnell thought the handwriting was that of Sagita but in any event it was one of the directors' representatives. Tatnell also gave this evidence:

"Well, the procedure that was handed to me in March 95 was they get 4 weeks' annual leave per year if they're part time.

And you said the matter had been discussed with the directors - the varying interpretations? ---Later that year, yes, in 95.

And it was left on the basis, at least in September 1995, that the part timers would be paid on the basis of no pro rating subject to the dispute being resolved with the directors?---That's right, to get a correct interpretation."

I have some hesitation here because the document p41/256 was not put to Hadi or, for that matter to Gani. I do not know when the documents in volume 41 first appeared at the trial, I suspect it was rather late in the piece. The documents were tendered by the defendant. However, the evidence of Tatnell (who was called by the defendant) was that the arrangement was in place. It is not part of the pleaded case that if there were such an arrangement it was beyond the power of the plaintiff to have concluded it. I find that there was such an arrangement and the defendant was aware of it. This issue affects three employees: Mokak, Khor and Alexander.

Mokak was a part-time employee. She ceased employment in September 1995, during the currency of the arrangement agreed to by the Employee Consultative Committee. The annual leave termination form (p41/257) shows that she had worked for 26.57 weeks. No pro rata was applied so the number of weeks was multiplied by 2.9230 to arrive at an entitlement of 77.66 hours. From this was deducted the 24 hours' annual leave that she had taken. She was paid for the balance of 53.66 hours and received a net sum of $652.55. Tatnell did a calculation, which appears at 41/255 and 41/259 of the entitlement on a pro rata basis. He calculated that she had worked, on average during the period, 18.52 hours per week. This is 48.74% of a 38-hour week. The pro rata entitlement in her case is 1.42 hours per week, being 48.74% of 2.9230. On this basis she was entitled to 37.85 hours and had been paid for 77.66 hours, an overpayment of 39.85 hours amounting to $484.58.

Accepting, as I do, that there was an arrangement in place for the pro rata effect not to be applied until the interpretation question had been resolved and that resolution was effected in January 1996, there was no overpayment to Mokak as at 12 December 1995.

The termination wages form processed at the time of the employee Khor's departure in November 1995 is to be found at p41/248. Tatnell could not be sure how the error came to be made. He treated her as a full-time employee throughout her employment and as a continuous shift worker. He said there were several possible explanations. He might have included a period when her status was casual. He did not pro rate the entitlement because he did not know that she was a part-time worker. He said that at the time he was denied access to those parts of HIS that would disclose an employee's history outside the then current financial year. When he called up the information it would only disclose the status as at the date of the inquiry.

Secco's evidence was that the information was always available on the HIS. On this occasion I prefer Tatnell's evidence because he was the one processing the claims. However, I do not think it is material. This is the only instance about which evidence was led of an error occurring because of the failure of the system to disclose the status of the employee.

The initial explanation proffered by Tatnell as to how the error in calculating the employee Alexander's termination pay came about was that he had not seen that her status was casual for part of the time. Reference to the termination wages sheet (which he prepared and which is p47/229.1) demonstrated that explanation to have been wrong. Tatnell conceded that this was an interpretation case. Her termination was effected on 14 December 1995. For the same reasons as applied in relation to Mokak, I find that there was no actionable overpayment concerning Alexander.

I find that there was a system error that contributed to an overpayment to Khor but there was no overpayment to either Mokak or Alexander. Again, materiality counts against the defendant on this claim.

This leaves the cases of the employees Taylor, Bassett and O'Connell.

Taylor was a salaried employee who resigned on 14 May 1995. The defendant says that Taylor was entitled to 87.27 hours' leave and on termination was paid for that number of hours. This, the defendant says, overlooks the fact that she took 76 hours' leave during the period of her employment and that is the quantum of the overpayment. The defendant points to a leave application form (p35/22, part of ex 35/17) which shows that she applied for 10 days' (76 hours) annual leave in the period 23 March to 24 April 1994.

The payroll report (p47/2) and another document called "Leave Details - Special Report for Frank Hadi" (p47/5) do not disclose any payment for leave made to or leave taken by Taylor in that period. The only entry in relation to Taylor's leave is the termination payment. No time sheets were produced for the period in question.

Tatnell said that he signed the leave application (p35/22) on 1 May 1995. A few days later Taylor withdrew the form and told him that she had not taken leave and had worked for those two weeks. Tatnell said that she was then paid 38 ordinary hours for each of those two weeks. Taylor was the wife of the then manager of the Resort. He was her supervisor and he signed the form. I read nothing untoward into the fact that the form was signed by her husband. Secco's evidence was that Taylor was the special events co-ordinator and during the period in question had accompanied her husband to Thailand for the opening of the Thai office. He said that he had contact with her about the work she did in Thailand.

There are obvious problems with hearsay in this area. However, I am satisfied that there was a communication by Taylor to the payroll office to the effect that she did not take leave and had worked during the period. I am satisfied that the payroll office then paid her for the period by way of ordinary hours rather than leave. There is no evidence that she was paid for that period as leave. The application form notwithstanding, I am not satisfied that there was an overpayment to Taylor for annual leave.

Bassett's position is different again. She was in a salaried position on a written contract. The agreement is to be found at p47/101, part of ex 47/94. The term of the agreement is specified as 12 months from the date of commencement, namely 30 August 1993. The document is silent as to leave entitlements. Her services were terminated early. An arrangement was reached which is documented in a letter from the general manager to Bassett dated 1 July 1994 (p47/100) confirming that her last day at work would be 3 July 1994 and that "the remainder of your contract, that is to 30 August 1994, will be fully paid ---".

In the summary of claim in ex Y the defendant says that she was entitled to 128.62 hours but was paid 152 hours, an overpayment of 23.28 hours. The entitlement is calculated for the period 30 August 1993 to 4 July 1994, being 44 weeks at 2.9230 hours per week. It is apparent that the 23.28 hours represents the period from 4 July to 30 August 1994. Counsel for the defendant suggested in cross-examination of witnesses that the employee was not entitled to any leave until she had completed the one-year contractual period. Whether or not that is a true reflection of the common law, it is not in accord with the way the claim was advanced. The internal auditors have clearly acknowledged that some leave was due and that is the basis on which the defendant went to trial. It is a question of how much. The wording of the letter of 1 July is that the "contract" would be paid. I interpret this to mean the entitlements under the contract. In my view, leave entitlements fall into this category and the obligation was properly recognised by the plaintiff. There was no overpayment to Bassett.

The final employee is O'Connell. She was employed as a soft count cashier. From September 1993 to March 1994 her status was casual and there would be no entitlement to annual leave. From April 1994 until her termination on 30 August 1994 her status was part-time. I think that her termination pre-dated the arrangement with the Employee Consultative Committee and pro rata applied. Her termination pay was calculated on the basis that she was a continuous shift worker and the appropriate multiplier was 3.6538. Based on Tatnell's evidence soft count cashiers usually worked in the mornings and so would not be continuous shift workers. Accordingly, the appropriate multiplier was 2.9230.

No source documents were produced to enable me to make any assessment as to whether she was liable to be rostered on shifts which fell wholly or substantially within the prescribed period. This claim fails for lack of that proof.

It follows that the cases of Taylor, Bassett and O'Connell do not assist the defendant to establish systemic deficiencies.

I accept the submission of counsel for the plaintiff that the Agreement did not oblige the plaintiff to be the insurer of any loss suffered by the defendant as a result of the operation of the payroll system. The plaintiff installed the HIS and there is no evidence that the system generally, was not adequate for the Resort's requirements. Certainly, problems emerged with it but, in the main, they were given appropriate attention.

There was a system bug that resulted in the Accruals Maintenance Field not capturing all of the leave that had been taken. There were manual calculation errors made from time to time in relation to leave entitlements and leave taken when termination payments were being processed. The level of errors made during the entire period was not material. From the end of July to 12 December 1995 there was only one proven incident of overpayment of annual leave. It was due to a combination of system error and human error in not identifying the status of the employee concerned.

23.13 Payroll - The Proper Compilation of Time Sheets

The payroll procedure at the Resort was that all employees were required to complete a time sheet. Each week a time sheet was printed for each employee by the payroll supervisor and the printed time sheet showed the employee's payroll number, name and department along with the week ending date. The time sheets were completed by employees and then checked by a number of people including the employee's supervisor, the departmental head, payroll staff when inputting information into the computer and again once the computer had generated a time sheet report. From September 1994 an overtime authorisation sheet had to be signed by the department head and forwarded to the financial controller or general manager for review at the same time as time sheets were forwarded to payroll for processing.

On 27 July 1995 Secco sent a memorandum to all department heads saying: "it has come to notice that employee time sheets are not being completed correctly". Instructions were then given on a number of matters relating to time sheets. Secco said that the memorandum was prepared by Tatnell and he [Secco] may have revised it after receiving the letter from the Union of 28 July 1995 and then sent it out shortly after that date. In early August the task force began its investigations. Payroll and time sheets were considered. At a management meeting on 8 August 1995 Tan is recorded as saying that the filling up of time sheets was "very sloppy and current standards [were] unacceptable".

On 16 August 1995 Farrow sent a memorandum to all staff referring to Secco's memorandum of 27 July and to Tan's discussions with department heads. He said: "I wish to re-emphasise that the time sheet is a very important document". At a management meeting on 22 August 1995 Secco is reported as saying there were still problems with time sheets and overtime additions were incorrect. Secco said that he took incorrectly completed time sheets to management meetings to highlight errors. On 28 September 1995 Secco sent to department heads another memorandum in similar terms to the one he had distributed on 27 July. In his evidence he explained that this was sent at about the same time as, and in conjunction with, the commencement of the payroll project.

As part of the payroll project a proposal was advanced to redesign the time sheet format: see ex 25/71. Secco said that it was not proceeded with because they had been through an extensive period of training staff and there were significant stocks of the forms. He did not think a redesign was warranted.

The nature of the errors identified by Secco included failure by supervisors correctly to add up the time sheet additions and failure to describe why overtime had been claimed. Some salaried workers were simply recording whether or not they had worked rather than including the number of hours. Some employees were not submitting time sheets at all. Tan also identified what he described as "cosmetic errors" in the time sheets in the course of the task force investigation. Tatnell said that it was important for salaried workers to record hours so they could account for things such as sick leave. He said that time sheets were often late and sometimes not filed at all. Some employees waited until the end of a week rather than completing them each day. I accept the evidence of Tatnell and Secco about the problems.

Secco testified that he kept taking incorrectly completed time sheets to management meetings and highlighting the problems. After a couple of months there were no more errors coming through. Secco said that he was not aware of any instance where the incorrect compilation of a time sheet led to an overpayment to an employee. Tan said that when he visited the Island in September 1995 he reviewed the then current time sheets. There was a significant improvement in the completion of the time sheets. This is consistent with what Tan is recorded as having said at the management meeting on 5 September 1995 (ex 22/68). Tan also testified that at no time did the time sheet problem give him cause for concern that it may lead to overpayments to employees.

Tatnell also testified that if no time sheet was received, the employee simply did not receive pay. He also said that if he had concerns about a time sheet, he would speak to the relevant supervisor to amend the document. However, he did say that there were limitations in the design of the time sheet that he thought could lead to overpayments.

Counsel for the defendant submitted that the proper finding is that the plaintiff accepted that the time sheets were not being prepared properly and that the time sheet aspect of the payroll system needed urgent attention. The matter drifted well into September 1995 because Secco himself sent out ex 23/23. In his evidence Secco said that that was done because more time was needed to get the time sheets problem corrected. Secco also conceded that before 27 July 1995 nothing had been done to get time sheets properly completed. I think there is some force in this submission. In my view the oral evidence of Secco and Tan underplayed the extent of the problem with time sheets. The language used in the various memoranda and in Tan's comments to the department heads on 8 August suggest a rather more significant problem than a merely "cosmetic" one. On the other hand, I have no reason to doubt Tan's evidence that by September there had been an improvement or Secco's testimony that at some point (presumably after the memorandum of 28 September) the difficulties ceased.

Counsel for the plaintiff submitted that the defendant had not identified any alleged time sheet deficiency which is said to have resulted in an overpayment. Counsel for the defendant did not bring to my attention in his closing submissions any incident where a time sheet inaccuracy had led to an overpayment. That is not to say that there are none in the myriad of time sheets and other payroll documents that found its way into evidence. The difficulty is that it is not sufficient simply to go to a time sheet, identify what appears on the surface to be an error and to conclude from this material alone that there has been an overpayment. It is necessary to trace the transaction through the various other payroll documents to see if the apparent error was picked up or adjusted at a later date. I can give an example. The time sheet at 37/332 seems to contain a 1-hour addition error on the Friday. However, when the history of that claim is traced through the Employee Leave Details Inquiry at 37/308 and the Payroll Report at 47/294, it appears that the 1-hour error was picked up and adjusted before payment was made.

There clearly were problems with the time sheets and with the system for their completion. Until the matter was raised at the Citeko meeting there does not seem to have been much attention by management to an insistence that employees and supervisors comply with their respective obligations. Whether I would be justified in finding that it was more probable than not that the defects had resulted in the plaintiff making overpayments to employees (and after all, that is the way it is pleaded) is problematic. The other matter is that it is, in the end, something that goes to repudiation. I am satisfied on the evidence that after July 1995 the plaintiff took steps to insist on the proper compilation of time sheets. The ramifications of that for an argument about repudiation I will leave for later consideration.

23.15 Recovery of Overpayments From Employees

In an earlier section in these reasons (that dealing with the failure to recover the overpayment to PGAC) I made some introductory comments that are applicable here. The question is whether, by failing to recover overpayments from employees, the plaintiff was in breach of the implied term which obliged it to take such steps as were reasonable in the circumstances to recover overpayments of operating expenses.

It has to be viewed in context and it speaks as at 12 December 1995. What was the position then? At the Citeko meeting the SGV auditors had alleged possible overpayments by terminated employees being included in the DPAR. They also alleged possible overpayments because of overstated hours on time sheets. These questions were considered by the task force. The task force report says that the inclusion of the terminated employees in the DPAR did not result in any overpayment. It is not now suggested that this assertion was incorrect. The examples of overstated hours on time sheets turned out to be meal break problems. In the light of the findings on that issue no question arises of a breach due to non-recovery of the amounts concerned.

Leaving Tanko to one side, there is no evidence that prior to 1 September 1995 the plaintiff was aware of actual confirmed examples of overpayments that could have been recovered. Certainly, neither Hackman nor Rose resulted in an overpayment. It is not suggested that the defendant raised with the plaintiff particular examples of overpayments either before September or at any time before 12 December 1995. The 12 October letter mentions that the defendant has found "many instances where annual leave entitlements was [sic] overpaid" and refers to checks by SGV and Price Waterhouse but does not condescend to particulars. In saying that, I am not criticising the defendant. It had placed the plaintiff on notice that it was dissatisfied with the payroll information, had requested the plaintiff to investigate possible overpayments and had embarked on its own substantive inquires into the payroll situation. The Client Service Report sent by Price Waterhouse to the plaintiff on 21 November 1995 contains no information about annual leave overpayments. The point of this is that up until 12 December 1995 particular cases of overpayments (other than Tanko) had not been canvassed or established.

I have already described what the plaintiff was doing in relation to the payroll issue generally. Apart from Tanko no other overpayments were identified by the payroll project because all the source documentation was in Jakarta. According to Secco, in the second half of 1995 identification of annual leave taken could be done manually by looking on the computer at each week the employee was at the Resort. That information would need to be cross-checked against source documentation being the termination forms, annual leave application forms, DPAR, payroll reports and electronic banking reports. Once the DPAR, payroll reports and electronic banking reports had been "rolled" they were not available on the computer system in that form. It was necessary to go to hard copies of the documents. Many of the source documents were in Jakarta and were not available for this purpose. I note that the external auditors also expressed concern about the absence of the documents from the Island: see ex 22/228 at p22/236.

Counsel for the plaintiff submitted that it was not reasonable or appropriate to take any steps to seek to recover overpayments unless and until the Resort was satisfied that it had correctly identified the fact of an overpayment and its extent. Thereafter it was necessary to undertake a cost-benefit analysis of taking recovery action having regard to the size of the overpayment and the possibility of successful defences. It was also necessary to consider the effect on staff and the industrial ramifications of such action. I accept this submission. It accords with the evidence of Compton (ex EEE p21) and with common sense. I do not think that the plaintiff can be criticised for failing to take recovery action, by 12 December 1995, against terminated employees who had been overpaid.

But what of the Tanko situation? By the August 1995 the plaintiff, through Secco, was aware that there had been an overpayment to Tanko. It was under investigation. At some time (it is unclear when) the defendant advised the plaintiff that it had calculated the overpayment at in excess of $6,000. In the summary of claim, ex Y, the defendant puts the annual leave overpayment at $4005.7. Tatnell said that he did a recalculation, as did Nouthard as part of the payroll project, and they both came up with a figure of about $3,000. In fact, the payroll project report, ex CCC p67 shows the net overpayment to Tanko as $1,576.57.

Accordingly, by 25 October 1995 the plaintiff had information from its own consultants that there had been an overpayment in an amount of $1,576 or thereabouts. However, Secco said that up to 12 December 1995 there had been no resolution of the dispute between the plaintiff and the defendant as to the exact amount of the overpayment. Secco did contemplate taking recovery action. Farrow said that Secco had told him he was taking action to recover the amount from Tanko. Secco said that he had not given that advice. He had told Farrow that they would attempt to recover it. As to the general state of inquiry, Secco gave this evidence, which I accept:

"Did you take any steps to ascertain what was involved in recovering any amounts overpaid to terminated employees? ---To ex-staff?

What steps did you take and around about what time?---I think it was after the Citeko meeting that I sought to find out how difficult it would be to get payments back from staff: (1) I went to Malleson Stephen Jaques in Melbourne who I subscribe to and they advised me that if there are any overpayments to ex-staff, then first it has to be clearly identified and then (2) possibly solicitors letters sent out to that staff would be appropriate. I also asked Dianne Dale to find out what the situation would be. She came back --- and I believe I discussed the matter with Price Waterhouse.

Do you recall who at Price Waterhouse you discussed the matter with?---It might have been Paul Beasley.

Do you have a recollection of what Price Waterhouse said in relation to this matter?---It would be difficult

But prior to 12 December 1995 your evidence was that you weren't aware of any overpayments except perhaps to Judy Tanko. Is that right?---That's correct.

Can you say whether you gave any consideration to taking steps to proceed or recover any moneys from Judy Tanko? ---Not at that stage, no.

You didn't give it any consideration?---I needed source documentation and I didn't have that source documentation."

23.16 Conclusion - Investigation and Recovery of Overpayments

In my opinion the steps taken by the plaintiff between the Citeko meeting and 12 December 1995 to investigate the cause and extent of overpayments to employees were reasonable, as was the decision not, at that stage, to implement recovery action.

This is the issue numbered 2(f)(2) in the summary. It arises from paras 5(d) and 10(b)(iii) of the defence. In the former the defendant says that as at 27 July 1995 the plaintiff had not established stock control procedures to remedy deficiencies stated in the report of the internal auditors which was attached to the 27 July letter. Para 10(b)(iii) alleges a systemic deficiency in that the plaintiff failed to establish and maintain an adequate system for controlling stocks with a result that stock was lost or not properly allocated to accounts. Several particulars are then given as to the way in which it is said the stock control system was inadequate.

In the reply the plaintiff says that it did establish and monitor adequate systems for stock control. Alternatively, if there were deficiencies they were caused by the defendant, predominantly because the defendant delayed in approving expenditure for staff training and failed to provide proper facilities for stock storage.

In February 1994 Arthur Andersen had reported to the defendant that in its opinion there were no effective controls in place with respect to the ordering, receiving and safeguarding of inventory. In a report dated 21 July 1994 (ex 6/145) Arthur Andersen again reported to the defendant on these issues. It discussed the inventory and expenditure functions under five headings: purchasing, receiving, stock issue, accounts payable and cash disbursement. In each case it set out desirable control objectives. In relation to each of purchasing, receiving and stock issue the conclusion was that the "controls and procedures currently in place --- are adequate to ensure the above control objectives are met". It is apparent from the report that, at least in Arthur Andersen's opinion, changes had been made in the period February to July 1994 and those changes were adequate. There were, of course, recommendations for further improvements to the controls then in place.

The procedures in relation to stock control utilised at the Resort are recorded in the Accounting Procedures Manual, ex 21/1. In a later section of these reasons I will explain in more detail how this composite document came into existence. It is sufficient to say at this stage that while the manual was finalised in August 1995 it documented the procedures that had been in use at the Resort for some time. Most of the evidence about the procedures comes from the testimony of Secco.

It was, of course, necessary for goods to be transferred from store to store and to the department requesting them for use. For goods to be transferred from the main storerooms, which were the food store, the beverage store, the stationery store and the general store, a requisition form had to be completed by the department requesting the goods. The requisitioning form would have to be completed by a supervisor (or someone higher than a supervisor) and the form would have to be signed to authorise the transfer of stock.

The requisitioning of stock was recorded on the computer system relating to stock. During the month, as the departments completed requisition forms for the supply of stock, those requisition forms would be punched into the computer system to record where the stock had gone. At the end of each month, a stocktake was done and the details of the stocktake would be entered into the computer system to have an opening balance of stock for the next month.

During the relevant period there were (at least) monthly stocktakes undertaken at the Resort. The stocktakes were organised by the purchasing manager, who would issue instructions in conjunction with the head storeman as to when the stocktake was going to be done. The purchasing manager was responsible for the stocktake until around October 1994 when the stock controller took charge of stocktake.

The procedure in relation to cut-offs for stocktakes was that a memorandum would be sent out by the purchasing manager or, after October 1994, the stock controller, with instructions as to when the stores would be closed. There would be no further delivery or transfer of goods out of stores so that the stocktake could occur. The memo went to Secco, to department heads and to the storeman. After the cut-off date, a physical count proceeded and stocks were counted wherever they were stored by the storeman. If a new storeman was employed at the Resort, then they would be accompanied by a more experienced storeman.

The stock would be counted in the main food store, the beverage store, at the main food containers at the Resort, at the containers on Lily Beach Road and, if goods were at the wharf, then at the containers at the wharf. During 1995 containers were situated at the VLU2 site (about which I will say more in a moment) and these too were counted. Stock in the kitchen stores and bars would also be counted. The lobby shop stock would be counted by the lobby shop attendant and the lobby shop attendant would either have the front office manager or the rooms division manager or a member of accounts staff accompany her for the stocktake as a verification