EW Blanch Pty Ltd and Anor v Robert Ashley Cooper and Anor

CATCHWORDS : [CONTRACT] - Claims that the first defendant breached certain sale warranty clauses of a Share Sale Agreement with the first plaintiff whereby he sold to the plaintiff shares in an insurance broking company - Construction of clause in Agency Agreement requiring broker to transfer to insurer "money paid" to it by insureds - Provision for adjustment of purchase price reliant upon certain figures shown in "Specified Accounts" - Whether 'substantial performance' of Share Sale Agreement sufficient to trigger operation of clause adjusting puchase price - Whether Share Sale Agreement contained an implied duty to co-operate in the doing of acts necessary to the performance by the parties of fundamental obligations under the contract. - [TRADE PRACTICES] - Claims that the first defendant engaged in misleading and deceptive conduct by making representations in respect of the status of the relationship between the subject company and the insurer - Whether reliance by first plaintiff on representations. LEGISLATION CITED : Mining Act 1978 (W.A.) Trade Practices Act 1974 (Cth) Ankar Pty Ltd & Anor v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia (1977) 139 CLR 54 Arcos Ltd v E.A. Ronaasen & Son [1933] AC 470 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 Butt v M'Donald (1896) 7 QLJ 68 Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 CASES CITED : Henville v Walker (2001) 206 CLR 459 Hunter Resources Ltd v Melville (1987) 164 CLR 234 Mackay v Dick (1881) 6 App Cas 251 Newmont Pty Ltd v Laverton Nickel NL [1983] 1 NSWLR 181 Pan Foods Company Importers & Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 170 ALR 579 RDJ International Pty Ltd v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417 Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979)144 CLR 596 South Sydney Council v Royal Botanic Gardens & Anor (1999) 10 BPR 18,961; [(2002) 76 ALJR 436] Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 EW Blanch Pty Limited (First Plaintiff) ACN 002 544 569 Pty Ltd (Second Plaintiff) PARTIES : Robert Ashley Cooper (First Defendant) Maco Consulants Pty Ltd (Second Defendant)

FILE NUMBER(S) : SC 50163/01 COUNSEL : SD Robb QC, JA Hogan-Doran (Plaintiffs) JC Kelly SC, TP Duggan (Defendants) SOLICITORS : Cutler Hughes & Harris (Plaintiffs) Rutter Morgan (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

50163/2001 EW BLANCH PTY LTD & ANOR V ROBERT ASHLEY COOPER & ANOR JUDGMENT Introduction 1 These proceedings arise out of a sale pursuant to a Share Sale Agreement dated 24 December 1999 between the first plaintiff, EW Blanch Pty Ltd (formerly Swire Blanch (Australia) Pty Ltd between 21 February 1999 and 20 January 2000) (Blanch) and the first defendant, Robert Ashley Cooper (Cooper), in which Blanch agreed to acquire from Cooper the whole of the issued capital in the second plaintiff ACN 002 544 569 Pty Ltd, formerly Michael V Mahoney Insurance Brokers Pty Ltd (Mahoney). Blanch is a member of an international group of companies, the ultimate holding company of which is EW Blanch Holdings Inc, a US corporation. Blanch's immediate holding company is EW Blanch Limited, incorporated in Hong Kong (EW Blanch (HK)). 2 On the same day the Share Sale Agreement was executed Blanch procured Mahoney to enter into a lease with the second defendant, Maco Consulting Pty Ltd (Maco) (all the issued capital of which was owned by Cooper) of premises that Maco owned in Newcastle (the Lease). Mahoney operated an insurance brokerage business including for Compulsory Third Party (CTP) and Third Party Property Damage (TPPD) policies for the taxi industry in New South Wales. Mahoney had been offering insurance brokerage services to the taxi industry in an apparently informal arrangement with Zurich Australia Insurance Limited (Zurich) since 1993, with policies effected through approximately fifty taxi co-operatives acting as Mahoney's sub-agents. Mahoney's wholly owned subsidiary, Brisbane Insurance Brokers (Qld) Pty Ltd (BIB) operated a similar business in Brisbane. 3 These proceedings were heard on 24 to 28 and 31 May 2004 and 1 and 3 June 2004 when Mr SD Robb QC, leading Mr JA Hogan-Doran, appeared for the plaintiffs and Mr JC Kelly SC, leading Mr TP Duggan, appeared for the defendants. The pleadings 4 The claims made by the plaintiff in the pleadings warrant close scrutiny particularly because the defendants elected not to call any witnesses in their cases on the basis and on the understanding that the claims made against them were restricted to those made in the pleadings. That latter proposition is not a controversial one, however I regard it as prudent to record it in this case because there were applications to amend the pleadings during the trial that were abandoned and because of the election made by the defendant. 5 The plaintiffs were granted leave on the first day of the trial to file a Further Amended Summons (FAS). The FAS claims that in about 1999 Blanch and Cooper "commenced discussions" for the purchase of Cooper's interest in Mahoney (C9). It is alleged that by letter dated 28 July 1999 Mahoney advised Blanch that Zurich, Mahoney's and BIB's principal underwriter, (a) was attempting to establish agencies with two major Sydney-based taxi co-operatives; and (b) had indicated that Mahoney and BIB may not have been properly appointed as insurance brokers by the persons for whom they acted and requested proper evidence to establish that they had been properly appointed (the July 1999 matters) (C11). The plaintiffs allege that as a result of being notified of these matters Blanch ceased the due diligence investigation that it was conducting with a view to entering into a sale agreement with Cooper (C12).= Zurich Representations 6 It is further alleged that in about October 1999 Cooper and Maco represented to the plaintiffs that (a) Mahoney had entered into an agency agreement with Zurich; and (b) Mahoney was "back on track" and that the July 1999 matters had been "fixed"(C14). These are pleaded as "the Zurich Representations" and are claimed to have been made in a conversation between the director of Blanch, Carol-Anne Priest (Priest) and Cooper. It is claimed that Blanch relied upon and was induced by the Zurich Representations to enter into the Share Sale Agreement with Cooper (C18). It is also claimed that in reliance upon and induced by the Zurich Representations Blanch entered into the Lease with Maco (C19). 7 It is alleged that the Zurich Representations were misleading and deceptive or likely to mislead and deceive because, (a) Mahoney and BIB were in default in making payments to Zurich as required by the Agency Agreement; (b) Mahoney and BIB were not financially able to remedy the default; and (c) Mahoney and BIB were not able to comply with the obligations of payment within 37 days of the commencement of the insurance policy as required by Clause 16.1 of the Agency Agreement (C47). It is alleged that the plaintiffs suffered loss and damage by reason of this conduct and that the measure of damages is equal to the amount of the first instalment under the Share Sale Agreement, the running costs of Mahoney and BIB until they were sold in January 2001, legal and other costs and interest payments totalling approximately $2,631,533.30 (C51). It is also claimed that Mahoney suffered loss and damage including payment of a dividend and a personal loan to Cooper and payment of rental totalling approximately $843,400.41 (C52). Sale Warranties/Warranty Representations 8 It is alleged that the Share Sale Agreement contained various Sale Warranties and that Cooper represented to the plaintiffs that the sale warranties were "correct" (C17). These are also pleaded as "the Warranty Representations". In this regard reliance is placed upon clause 5.1 of the Share Sale Agreement which provides: 5. Representations 5.1 The Seller represents to the Buyer that each Sale Warranty is accurate as at the date of the Completion Date in relation to facts subsisting at that date. 9 There are allegations of breaches of the Sale Warranties and there is reliance upon the Warranty Representations as a basis for further claims of misleading and deceptive conduct (C45:C48). It is alleged that the Sale Warranties, and the Warranty Representations, were not "accurate" as at the date of the execution of the Agreement on 24 December 1999. In this regard the plaintiffs rely upon three Sale Warranties in the pleading - clause 7.2 (h), clause 19.2 and clause 19.3. Those clauses are as follows: 7.2 Each of the Sale Company and the Subsidiary has from the date of the June 1999 Accounts until the Completion Date has (sic) conducted its business only in the ordinary course and there has been no: … (h) other matter in which the Buyer would be reasonably interested which contains any onerous or unusual provisions material for disclosure to an intending buyer. 19.2 No contract to which either the Sale Company or the Subsidiary is a party: (a) is outside the ordinary and usual course of business or is otherwise unusual; (b) is incapable of being fulfilled or performed on time, or only with undue or unusual expenditure of money or effort. 19.3 Neither the Sale Company or the Subsidiary, as party to any contract, is: (a) in default of any material term; or (b) but for the requirements of notice or lapse of time or both, would be in default of any material term of any contract. The transaction contemplated under this Agreement will not lead to a breach of any contract to which the Sale Company or the Subsidiary is a party which is material to the operation of the Sale Company's or the Subsidiary's business. 10 It is alleged that Cooper breached the Sale Warranties and that the Warranty Representations were misleading and deceptive because (C44): (a) As to clause 7.2 (h) of the Sale Warranties - Clause 11.3 (2) of the Agency Agreement required the second plaintiff to only issue a CTP green slip to customers after receipt of the payment of premium and Clause 16.1 and Schedule 7 of the Agency Agreement had the effect that the second plaintiff would pay to Zurich, monies paid to the second plaintiff as a premium not more than 37 days after the day of inception of the Contract of Insurance. At all times from the date of the Agency Agreement the second plaintiff was substantially in default of these terms and was not financially able to make good the default. Further, on 8 November 1999 and 23 December 1999 the second plaintiff had received facsimiles from Zurich containing Zurich's complaints about the default of the second plaintiff. (b) As to clause 19.2 of the Sale Warranties - As at 24 December 1999 the second plaintiff was incapable of operating the businesses in a way which met the second plaintiff's obligations to pay the premium within 37 days as required under Clause 16.1 and Schedule 7 of the Agency Agreement. (c) As to clause 19.3 of the Sale Warranties - As at 24 December 1999 the second plaintiff was in default of Clause 11.3 (2) and of clause 16.1 and Schedule 7 of the Agency Agreement.

11 There is one matter that needs to be highlighted having regard to the forensic decision made by the defendants not to call any witnesses. It relates to the last sentence of subparagraph (a): "Further, on 8 November 1999 and 23 December 1999 the second plaintiff had received facsimiles from Zurich containing Zurich's complaints about the default of the second plaintiff".

12 When the plaintiffs were granted leave to amend the Summons on the first day of the trial (24 May 2004) to include the abovementioned sentence, such leave was conditional upon the amendment being limited to the period commencing on 14 October 1999 with a requirement that the plaintiff provide to the defendant the actual alleged breaches. At the close of the plaintiff's case on 31 May 2004, Mr Robb QC drew attention to the two faxes of 8 November 1999 and 23 December 1999 referred to in the sentence in question and noted that they contained complaints about defaults "under the pre-existing and informal agreement" between Mahoney and Zurich. Mr Robb QC sought to amend the Summons further by removing this sentence from subparagraph (a) of the particulars and adding it to subparagraph (c) of paragraph C 44 which, as can be seen above, alleged a breach of clause 19.3. 13 Mr Kelly SC opposed the amendment on the basis that it raised a whole new and different case. It was submitted it departed completely from the way in which the plaintiffs had run their cases upon which careful forensic decisions had been made. This was the first time it was alleged there was a breach of something other than the Agency Agreement of 14 October 1999. No agreement other than the Agency Agreement of 14 October 1999 had ever been pleaded nor had any specified breaches of any such pre-existing agreement been identified in the pleading. 14 Mr Robb QC provided a further draft of proposed particulars (MFI-4) that sought to amend subparagraph (c) in relation to a breach of clause 19.3 of the Share Sale Agreement. After further debate on 1 June 2004 the application to amend was withdrawn. Consequently the references to the facsimiles of 8 November 1999 and 24 December 1999 are not relevant to any case other than alleged breaches of the Agency Agreement of 14 October 1999. 15 It is alleged that on 10 April 2000 Zurich terminated the Agency Agreement and as a result of this termination and restrictions placed by Zurich on its underwriting of policies, the aggregate actual commissions and brokerage fees declined substantially. It is alleged that as a result of this substantial decline it became doubtful whether Mahoney and BIB could continue to trade without trading whilst insolvent (C24 & C25). On 10 January 2001 Blanch caused the sale of Mahoney and BIB to OAMPS Insurance Brokers Ltd (OAMPS) for $500,000. 16 It is alleged that by reason of Cooper's breaches of the Sale Warranties and the misleading and deceptive Warranty Representations Blanch suffered loss and damage in the amount of approximately $2,631,553.30. Claim under the Share Sale Agreement - cl 3.4 17 The plaintiffs make a claim pursuant to clause 3.4 of the Share Sale Agreement that the Actual Combined Brokerage Income (ACBI), as defined, for the year 26 October 1999 to 25 October 2000 was less than the Initial Combined Brokerage Income (ICBI), as defined, and that the Second Instalment is to be reduced by the shortfall multiplied by 1.25. It is also alleged that as at 25 October 2001 the ACBI was less than the ICBI so that the Third Instalment is to be reduced by the shortfall multiplied by 1.25. The plaintiff particularises a report of Cutcher & Neale dated 12 April 2001 in support of the claim that the ACBI for the year to 25 October 2000 was $2,982,264.47 and for the year to 25 October 2001 was $248,351.07.

18 The plaintiffs claim that in the result the Second Instalment was reduced from $1,595,985 to $3,685.04. It is alleged that the Third Instalment reduction was greater than the Third Instalment and in those circumstances Cooper is obliged to pay to the plaintiffs the amount by which the reduction exceeds the Third Instalment. The plaintiffs claimed in the Summons that Cooper is obliged to pay to the plaintiff $3,413,525.93 less $3,865.04 resulting in the amount $3,409,660.89. This claim was amended during the trial.

Negligent Misstatement 19 The plaintiffs also alleged that Cooper owed Blanch a duty of care to take reasonable care to ensure that the Zurich representations and the warranty Representations were true and reliable. It was alleged that Cooper breached that duty of care thereby causing Blanch loss and damage of approximately $2,631,533.30 (C53 - C58). 20 The Negligent Misstatement claim was abandoned at the trial. Defences and Cross-Claims 21 The defendants deny the plaintiffs' claims and allege that by reason of the failure by Blanch and Mahoney to obtain alternative underwriting after Zurich terminated its Agency Agreement, the formula in the Share Sale Agreement is unable to be triggered. The defendants also claim that there was an implied term in the Share Sale Agreement that the plaintiffs would act in good faith and that they failed to do so. Cooper cross-claims for the payment of the Second and Third Instalments and various other amounts under the Share Sale Agreement, alternatively for damages for breach of contract.

22 Maco cross-claims for the payment of unpaid rent under the Lease. The plaintiffs claim that Cooper was the "guiding mind" of Maco and that his representations inducing Blanch to enter into the Share Sale Agreement must be taken to have been made by Maco in orderto induce Blanch to procure Mahoney to enter into the Lease. Mahoney ceased making rental payments under the Lease in August 2000 and the plaintiffs claim that orders should be made that the Lease be terminated as at 1 August 2000 and that the amount of any damages to be paid to Maco be equal to any amount due to the plaintiffs. The Facts 23 In 1993 Zurich became Mahoney's underwriter for TPPD and CTP offered to the taxi industry in New South Wales. The arrangement appears to have been an informal one, not governed by a written contract and one in which there was a degree of flexibility in relation to the time within which premiums were passed on to Zurich. 24 During 1999 Blanch entered into an underwriting agency agreement with Suncorp Metway Insurance Ltd (Suncorp) entitled "Taxi Choice - Queensland & Northern Territory Agreement. That agreement was dated 24 June 1999 but commenced on 1 April 1999. Blanch provided insurance for clients of BIB but could not underwrite policies outside Queensland or the Northern Territory without the authorisation from Suncorp. Paul Reid (Reid), the Vice-President Marketing and Operations, of Blanch, was the person with whom BIB dealt.

25 Priest, a director of the plaintiffs, holds a Bachelor of Laws degree from Sydney University and practised as a solicitor in Sydney for two years and in London for two years between 1986 and 1990. Subsequently she worked for Sedgwick Limited as the Director and Manager Legal, Financial and Professional Division between 1991 and 1994: for Swire Fraser Limited as Legal Counsel and Director, Financial and Professional Divisions in London and Australia between 1994 and 1997; for Swire Blanch Limited as Executive Vice-President, Australasia Region and Legal Counsel between 1997 an 1998; and for EW Blanch (HK) as President and Chief Operating Officer, Australasia Region and Legal Counsel from March 1998 to March 2002.

26 Between March 1997 and March 2002 Priest was a director of a number of companies in the Group and was "the Chief Operating Officer" and a director of Blanch and from 24 December 1999 the Chief Operating Officer and director of Mahoney and BIB. Priest gave evidence that for the purpose of fulfilling these roles she travelled to Australia "when necessary", spending approximately 1 week per month in Australia and otherwise managing the companies from Hong Kong by "telephone, email and other means of communication".

March 1999 to 14 October 1999 27 In March or April 1999 Reid advised Priest that he had been investigating the possibility of the Blanch Group expanding its business operations into Australia by acquiring an interest in Mahoney's business. Reid had been having discussions with Mahoney's since January 1999 and had received some detailed information about its business from Mr Lindsay Norton, the general manager of Mahoney. That information referred to the Taxi CTP business as 55.95% of Mahoney's business and the taxi and motor vehicle TPPD as 33.03%. 28 Priest gave evidence that it was her responsibility as Chief Operating Officer of EW Blanch (HK) to identify attractive businesses for acquisition by the Group. Where a company within the Group within Priest's responsibility entered into an agreement to buy a business, or shares in a company, Priest said she had the "initial authority to ensure that all of the conditions that had to be satisfied before the agreement was completed were in fact satisfied". She also gave evidence that if she decided that the conditions for completion had not been satisfied then completion would not take place.

29 In April or May 1999 Priest and Reid attended Mahoney's Newcastle premises to "have a look at the physical layout of the office and to get a feel for the running of the business". On this visit Priest was informed that the bulk of the taxi business was placed with Zurich and that Zurich had been the underwriter on the taxi portfolio for a number of years. When Priest asked whether it was a broker arrangement or an agency arrangement she was informed that the clients were the taxis and Zurich was the underwriter. Priest gave evidence that at that time she understood that CTP Insurance was compulsory and that in New South Wales it could only be provided by a licensed CTP insurer, such as Zurich. It was also her understanding that no other licensed CTP insurer in New South Wales wrote any significant CTP policies in favour of taxi operators. Her evidence was that she regarded Mahoney's capacity to obtain insurance cover for its taxi operator clients from Zurich, particularly in relation to CTP cover, as very important to the viability and continuing success of Mahoney's insurance broking business.

30 On 13 May 1999 Reid, on behalf of Blanch, wrote to Cooper advising him of the arrangements put in place with Suncorp dealing with the business of BIB. The letter also included the following: 6. Taxi Portfolio - New South Wales & Other States. We are pleased to report that we have also been able to arrange placing facilities for New South Wales, Victoria and South Australia. Arrangements still have to be completed as far as the NSW CTP requirements are concerned and I will report to you as soon as this has been completed. An added bonus is that as part of the Risk Management Agreement that we have with the Insurer I am in the position of being able to increase the brokerage on this portfolio by between 2.5% and 4%. Whilst the increase will always be subject to the overall claims results, as our risk management strategies take effect, and claims results are reported on a pure incurred basis, the benefits accruing to your company should be quite substantial. … Further, subject to the NSW CTP placement confirmation, and/or satisfactory alternate arrangements being presented, confirmation that support for the NSW, Victorian and South Australian business will follow. 31 In an internal Blanch presentation prepared by Reid in about June 1999 to seek approval to purchase Mahoney, reference was made to Mahoney's "excellent reputation" in the taxi industry that had resulted in the major Victorian co-operative contacting Blanch proposing that "we undertake to place their business as well". Reid continued, "Whilst I have obtained Underwriter's approval to write this business we are currently undertaking an analysis of the co-operative's premium/claims information". Reid identified, as a weakness, the heavy concentration on the taxi industry resulting in an imbalance in the overall spread of insurance business generated by both Mahoney and BIB. He suggested that if the situation "was not redressed" it could place the company in a potentially vulnerable position. His solution was: Whilst there appears to be no major alternate player - broker or insurer - in the current market, the steps necessary to 'lock in' the income (Mahoney) receives is relatively simple. The New South Wales taxi business is ready - and as a result of a recent meeting with the Executive Council - they are currently awaiting our advice on the procedural requirements to convert their business/co-operatives into a "Captive" based operation. I have already met with the owners of the major co-operatives and they are extremely keen to undertake the necessary steps to make this happen. This would result in a number of benefits to (Blanch) if we were to purchase the (Mahoney/BIB) business. Most importantly we would be able to negotiate a five by five management contract as well as obtaining an additional revenue source by placing the reinsurance portion of the book as well as picking up significantly increased brokerage from the Section 1 insurance which is not currently being underwritten within the Sydney, Newcastle and Wollongong metropolitan areas. Additionally, by utilising the resources and income base that the purchase of (Mahoney/BIB) would provide, Swire Blanch will be well placed to further extend our service throughout the Eastern Seaboard of Australia. On reading the attached Mahoney Portfolio Analysis you will see a number of areas where substantial additional income would be attained from their existing book. The only apparent management shortcoming that I have been able to detect within the Group is the lack of knowledge/understanding of the nationally and internationally available rates of returns on facilities that (Mahoney), in particular, place. With just a cursory understanding of their portfolio and without the addition of our own input, where I believe additional brokerage of $800,000 would be attainable, I could increase the annual income by a minimum of $1,000,000 (one million dollars). 32 Priest gave evidence that she understood that the notion of a "captive" insurance arrangement was where the operators in a particular industry, such as the taxi operators, self-insure a portion of their collective risk, and then obtain reinsurance in relation to the amount of cover not self-insured. As it was compulsory for taxi operators to have CTP insurance, a captive insurance arrangement could not be put into effect unless a licensed CTP insurer could be found who would agree to provide directly to taxi operators the necessary CTP component of their insurance requirements. 33 It is apparent that Reid was at least exploring placing TPPD with an insurer other than Zurich and that he was concerned that if that occurred Zurich "may just throw the lot out". On 16 June 1999 he wrote to Priest in Hong Kong informing her that he had spoken to a representative of SGIO who was "still interested in writing the book" but that he needed to obtain a further report from Zurich. After informing Priest of his concerns that Zurich may not tolerate splitting their book, he advised that even if the purchase of the Mahoney business proceeded, Blanch should hold off until at least 1 September in writing the NSW business. Priest responded the following day advising Reid to discuss his "worries" with David Burdis of the Hong Kong company when he was in Sydney shortly thereafter and also said "I think we are best off advising that we will not get the NSW business and then if we do, it will be a bonus. At the moment London has an expectation that we need to dispel". 34 By this time and indeed since at least late 1998, Zurich had itself been exploring better ways to do business with the taxi industry. More recently it had been negotiating with the two largest taxi co-operatives, Cumberland Cabs company (Cumberland) and the Deluxe Cab Company (Deluxe) to deal with Zurich direct, thus cutting Mahoney out. 35 On 29 June 1999 Zurich wrote to Mahoney in terms which included the following: As you know Zurich has been reviewing the insurance arrangements for the taxi industry in New South Wales, in particular in the Sydney Metropolitan Area. In the course of our review it has become apparent that there are deficiencies in the documentation of the arrangements between Zurich and Mahoney, the taxi Co-operatives and the insureds (the taxi operators). Zurich has been proceeding on the basis that Mahoney has been the appointed insurance broker of the taxi Co-operatives acting as representatives of the taxi operators for the purposes of acquiring insurance services from Zurich. It now appears that Mahoneys have not been appointed by the Co-operatives or the insureds (the taxi operators) as insurance broker. We wish to clarify the relationship in the interests of all parties. Accordingly, the purpose of this letter is to advise you that Zurich requires the relationship between the relevant parties to be properly documented in accordance with the Insurance (Agents and Brokers) Act. As this matter involves some Co-operatives in New South Wales we have written to those with whom we do business (copy attached). The inadequacy of the documentation has only come to Zurich's attention in the past two weeks, and the steps we are now taking are as a result of us ascertaining this unsatisfactory state of affairs. Zurich wishes to continue to do business with Mahoney's where it can be demonstrated that you have been properly appointed as the broker of taxi operators. Accordingly we write to invite you to provide to us evidence that Mahoney's have properly been appointed as broker of the insureds (the taxi operators) so that we can continue to provide insurance services in accordance with the Insurance (Agents and Brokers) Act. 36 Zurich suggested that it would be prudent to finalise the matter within 30 days so that the insurance services provided to the taxi operators were in accordance with the Act. It also advised Mahoney it was putting in place steps to issue renewal notices to all insured operators until matters were "rectified". 37 On 2 July 1999 EW Blanch Holdings Inc executed Heads of Agreement with Mahoney in which it was recorded that the parties anticipated entering into an agreement whereby Blanch would purchase the shares in Mahoney from Cooper. But for some conditions in relation to costs, disclosure, non-publication and the like, the Heads of Agreement were not intended to be a binding agreement but an expression of present intentions. Both parties agreed to negotiate in good faith with a view towards executing a definitive agreement by no later than 31 August 1999. The Heads of Agreement provided for the sale price to be paid as to 40% on completion, as to 30% on the first anniversary of completion and to the balance on the second anniversary. There was also a clause for a "downward" adjustment to "reflect any loss of business" such that any "shortfall of revenues in the first two years" would reduce the subsequent payments. 38 One of the plaintiffs' internal documents entitled "M&A/Investment Report" included: A number of meetings have been held between (Mahoney) and the major New South Wales Taxi Co-ops, wherein the parties discussed the formation of a Taxi Captive Insurance Co. All have expressed considerable interest in this taking place as it would also fit into their (the Co-ops) own thinking in being able to provide a full range of services to the industry such as Workers Compensation Insurance, PA etc. In the event that Swire Blanch (Australia) Pty Limited ("SBA") pursued this project it would "lock" the industry into one major insurer to which SBA/(Mahoney) would be contracted with a five by five management agreement. The income generated from this agreement would be in excess of the current returns of (Mahoney). Further SBA would be able to place the reinsurance for the venture therein gaining additional brokerage. Additionally, it would have the flow-on effect of removing any long-term instability problem from the current narrow base of the (Mahoney) business. 39 On 5 July 1999 Zurich wrote to Mahoney advising that it had received a phone call from Reid on 2 July 1999 requesting a meeting to discuss the "compliance issues". The letter stated that Reid had informed Zurich that "his Company has now signed legal documents to progress the Mahoney purchase and has been given full authority by you to discuss these issues with Zurich". Zurich asked for confirmation that Reid had been given such authority and also requested him to "outline any other authorities" given to Reid before Zurich had its meeting with Reid because "it may be appropriate to widen the discussion, rather than restrict it to just compliance issues". 40 On 5 July 1999 Mahoney wrote to Zurich in the following terms: Paul Reid of Swire Blanch has been given full authority by our Board of Directors to discuss all issues about insurances that this brokerage places with Zurich. The Board has not restricted Mr Reid's authority in any way. 41 On 6 July 1999 a meeting occurred between Reid and two representatives of Zurich, Wayne Vincent and Rohan Stewart. The "key items" discussed at that meeting included "CTP in NSW and associated processes" and "NSW relationship and associated processes". A minute of the meeting items included the following in relation to those items: CTP in NSW and associated processes. Paul Reid advised that he had been told from an informed industry source that Zurich was working with other risk carrier to restrict access to Taxi coverage. Wayne Vincent advised Paul Reid that this was an illegal practice and in breach of legislation. Wayne Vincent stated that Zurich would never undertake such practices. Paul Reid accepted the explanation. NSW relationship and associated processes. Wayne Vincent advised that the letter sent to Mahoney insurance brokers dated 29 June 1999 was sent to draw to their attention compliance issues. These issues surrounded the appointment of the broker by the insureds and the relationship between Zurich and Mahoney's. Appointments and the relationship must be made compliant in accordance with the appropriate legislation. Agreed that letters of appointment would be produced for Zurich to prove that Mahoney's were the authorised broker of the insured. Paul Reid stated that he had copies of appointments and agreed to deliver these appointments to Wayne Vincent by close of business on the 13th July 1999. Wayne Vincent agreed not to activate the renewal system to send notices to insureds on 10th July 1999 subject to receipt of the appointment letters. All present agreed that a compliant relationship must be established as soon as possible. Wayne Vincent agreed to write to Mahoney's and outline the steps required to make the relationship compliant once appointment letters were produced to verify respective relationships. 42 The minutes also record that Reid agreed to prepare a full submission to Zurich on an Underwriting Agency for Zurich's consideration and that he said that he would consider placing all Queensland business with Zurich if both companies reached agreement on an Underwriting Agency arrangement. 43 On 9 July 1999 Cooper on behalf of Mahoney wrote to Zurich in response to its letter of 29 June 1999. That letter included the following: As you will be aware, we have been acting as broker for a number of taxi co-operatives for a period of 10 years. Under our arrangements Zurich has agreed to provide insurance to taxi co-operatives and taxi operators. Numerous policies have been issued utilising a procedure agreed between us. It comes as a surprise that you have recently discovered an alleged irregularity which threatens our arrangement. We would appreciate it if you would provide us with the precise details of the irregularity and explain to us why this irregularity means that you cannot continue to provide insurance services to taxi operators under our arrangement. You have asked us to demonstrate that we have been properly appointed as the broker of taxi operators. As we informed you, we are currently investigating this matter and seeking advice from our lawyers. We have agreed to meet you on 13 July as originally requested. In the absence of receiving our response to this request you have written to at least one insured (ABC) and informed them that " Mahoney's have not been properly appointed by the co-operatives or the insureds (the taxi operators) as insurance broker". We take exception to this suggestion. You have dealt with us as brokers of the insured throughout the operation of the arrangement and policies have been issued to insureds on that basis. At no stage during that process have you suggested there may be an irregularity. 44 Cooper requested that Zurich cease making the statements to the co-operatives and to provide an assurance that no further publications of that kind would be made. Mahoney sought a response by 16 July 1999 and reserved its rights to take further action.

45 On 13 July 1999 Reid reported to his superiors in a document entitled "Monthly Report - Australian Operations". That report included the taxi scheme arrangement in Queensland and the Northern Territory and it also referred to Mahoney in the following terms: I have not included any of the general insurance figures from this company into the revised budget. I was asked to place it (away from Zurich) last week but have requested that they stay where they are at least until I speak with Wayne Vincent and Rohen Stewart again this week. I accept the instructions that I am not to discuss the acquisition of Mahoney Insurance Brokers with anyone from Mahoney's or indeed anyone else as I am "Production" and not "Acquisition". I would mention though that because they are not only business associates but friends of many years standing they will ask me questions. Particularly as it was I that broached the whole question of their company being purchased by Swire Blanch and negotiated the purchase price. Because of our relationship I was also supplied a tremendous amount of confidential company information that we would normally not have been privy to until we had signed the Heads of Agreement etc. 46 On 15 July 1999 Priest reported to her superiors in relation to the proposed acquisition of Mahoney and advised that the acquisition would give the Australian operation a "back office" situated in a low cost centre of Newcastle for high volume transactions. Priest referred to the fact that Mahoney had recently won the National Insurance Brokers Regional Broker of the Year Award and identified the flow-on benefit of incorporating the underwriting and risk management requirements of the taxi portfolio into one operation as a reduction in the costs of managing that portfolio. The report also included the detail of the discussions about the formation of a taxi captive insurance company that were referred to in the "M&A/Investment Report" referred to earlier. 47 Reid had discussions with Mr Burdis of Blanch (HK) when Mr Burdis visited Sydney on 13 July 1999. Reid sent an email to Mr Burdis on 14 July 1999 referring to their discussions and informing him that they had left Reid a little "disturbed/worried regarding the operational aspects and administrative capabilities that proceeding in the direction you envisage Sydney/NSW will present". Reid referred to the various concerns that included the following: The Taxi business provides a constant stream of claim payments that will increase in direct proportion to the increase in premium volume. As we cannot afford to adopt a make do attitude in the area without the proper remedies we will/are leaving ourselves open to the possibility of bad faith claims. Without the additional administrative support to attempt to further increase our workload through increasing the business input would jeopardise our existing income base. The pressure being generated directly impacts on our current relationship with Mahoney. Zurich are playing hardball because of the Underwriting facilities I have been able to obtain outside of their office. If we are unable to write the NSW business and Mahoney have to make a new agreement with Zurich then it may not be in our best interest. I certainly do not believe that Zurich would offer Mahoney the Risk Management fee that I have acquired which would have the flow on effect of possibly reducing our combined revenue over the next 12 months. 48 On 15 July 1999 Mr Burdis responded to Reid with a copy to Priest in terms that included the following: Re Zurich and NSW. If they do not agree to go with us then what can we do if there are no other underwriters willing to do the CTP even on a fronting basis. What we cannot understand is why Suncorp is not able to do this for a fronting fee. It makes us wonder whether there is some other story as it just doesn't make sense. You keep saying when we write this but it doesn't look as if we will. 49 On 16 July 1999 Reid responded to Mr Burdis and a copy was ultimately sent to Priest, in terms that included the following: Re Zurich and NSW and CTP etc. There are a number of CTP licensed insurers in NSW and Suncorp would be, as I understand it, quite simply breaking the law (to pay some one else a fronting fee and then write the business inhouse). I must be getting old as the more I read this David the more frustrated I am feeling. As a matter of interest irrespective what anyone thinks other for than the CTP portion of the book I could have written the NSW business some 2 months ago and within reason if I say WHEN I do actually mean when. I could write the NSW business today but I'm not going to jeopardise Mahoney, Swire Blanch or what I have been able to put together so far by what would be no more than an act of commercial suicide. As a further matter of interest I am meeting with Zurich again next week and they are sending me boxes of information re the claims this afternoon which I was going to work on over the weekend. I have a meeting with HIH next week to promote a full facility for the industry with workers comp, CTP, section 1 and 2 etc. so I am actually trying to do something about the full book. I am not in the habit of misleading people and have never intentionally passed on to Hong Kong information that I did not believe. 50 On 20 July 1999 Priest wrote to Mr Norton requesting that he provide the "Due Diligence material" to Mr Caulfield in Dallas, Texas in the USA. That request included that Mr Norton provide to Priest in Hong Kong all material "relating to general business matters including captive and taxi associated matters". Annexed to that request was a lengthy document entitled "Due Diligence Check List". Mr Norton responded by fax dated 22 July 1999 observing that the amount of information that had been requested was "immense" and that it was most unlikely that Mahoney could provide it prior to a scheduled visit to Australia by Mr Ian Packer of the US Blanch company on 5 August 1999. In those circumstances Mr Norton requested Priest to advise him whether she still wanted the information supplied. 51 By this time Zurich had been successful in its negotiations with Cumberland and on 22 July 1999 signed an Agency Agreement with Cumberland. There is no evidence that Mahoney was aware of this Agency Agreement at this time. 52 On 23 July 1999 Priest instructed Ernst & Young to review the financial information provided to them as part of the Due Diligence program. That letter of instruction observed that it was "a relatively small transaction" and that Blanch was trying to keep the "Due Diligence exercise costs to a minimum." Priest advised Ernst & Young that she would provide a copy of the Heads of Agreement and the "Due Diligence Check List" that day and that Blanch was operating under a "fairly tight deadline" as the Heads of Agreement required a definitive agreement by 31 August 1999. 53 On 27 July 1999 Zurich wrote to Cooper requiring "proper documentation" to be put in place and advising that otherwise it would not transact taxi insurances with Mahoney. The letter also advised that it had been brought to Zurich's attention that Mahoney had recently written to taxi co-operatives and taxi operators asking them to sign letters appointing Mahoney as their broker. Zurich claimed that such action was inconsistent with Cooper's previous claim and demonstrated that Mahoney was not the appointed broker of the insured. The letter continued: Unless Zurich can be satisfied that you are the legally appointed broker we will have no option but to regularise all our taxi business dealings. As from the 6/08/99 all renewal notices will be forwarded to insured operators unless you can substantiate Mahoney's appointment as broker of the insured …… As discussed verbally with you on 7/7/99 and on 23/7/99 I confirm, once again, that Zurich have been approached by intermediaries to underwrite taxi insurances. We have been considering these requests and I would like to formally advise you that we have decided to underwrite taxi insurances through any duly appointed agent or broker who has been given proper authority by the insured (taxi operators) to transact insurances on their behalf. This decision has been taken in the interests of all parties, taxi operators, co-operatives and intermediaries. 54 On 28 July 1999 Mr Norton wrote to Priest in the following terms: I believe that Bob Cooper has informed you by telephone of a recent development in our Taxi Insurance portfolio, which is causing us some concern. It is important that you are aware of the facts, as we know them at present, as it seems on face value that Zurich Australian Insurance is attempting to establish Agencies with the two major Sydney based Taxi Co-operatives. This would force us to seek an alternative underwriter and to market our product direct to individual clients utilising a planned advertising campaign. It is most likely that these events would cause a reduction in premium and a subsequent reduction in commission income and possibly a loss of clients, although the extent of the reduction and/or loss is difficult to accurately gauge. 55 Mr Norton provided copies of recent correspondence with Zurich and requested Priest to advise what impact, if any, it had on the proposed sale of Mahoney to Blanch. 56 This development was obviously important enough for one of the members of Swire Blanch in London to write on 14 August 1999 to Zurich reminding the recipient, Malcolm Jones, of their "pleasant lunch in Manhattan some 3 years ago" and advising: Swire Blanch is at present investigating a more formal relationship with Mahoney's Insurance Brokers in Sydney. As you will be aware, Mahoney's have placed a large part of the Commercial Taxi Programme with Zurich for the last several years. It has come to my attention that problems have recently arisen between Mahoney's and Zurich with respect to the CTP in NSW. Obviously this segment of the business is quite important for the ongoing viability of Mahoney's and we would therefore wish to offer our assistance in resolving the problem and preserving what has been a profitable relationship for both companies. 57 The letter went on to suggest that a meeting should take place between Zurich and Priest on her visit to Sydney. That meeting was later confirmed and occurred on 6 August 1999 when Priest and Mr Maunder of Blanch, met with Messrs Jones and Day of Zurich. Priest's evidence was that this meeting was on "a chief executive to chief executive basis" and that she said: We're thinking of buying Mahoneys. We understand there are some problems between Mahoneys and Zurich. We are seeking some comfort that Zurich is not attacking Mahoneys business and that you are not going direct to clients. 58 Notwithstanding the obvious importance of this meeting, Priest's evidence was that she could not remember in any detail the substance of the response to this request for "comfort". However Priest did recall that Mr Day "referred principally to 2 taxi co-operatives with whom Zurich had had some direct discussions". Day advised Priest that Zurich was not causing the problem and that the problem was between Mahoney and the co-operatives. He suggested she take the issue up with Mahoney. 59 If this was the advice that Zurich gave Priest it was obviously less than frank. To suggest that Zurich "had had some direct discussions" with 2 taxi co-operatives when it had already signed Cumberland as an Agent and was but two weeks from signing Deluxe Red & Yellow Cabs as an Agent is hardly the true commercial position. In any event it seems that Blanch and Zurich were behaving similarly in what appears to have been a race to capture the taxi co-operatives for themselves. 60 On 6 August 1999 Zurich wrote to Reid by email confirming the discussions in relation to the meeting that morning including that notices would continue to be sent to Mahoney's "for the current book of business and not to the operators" as detailed in Zurich's letter to Cooper on 27 July 1999. The email also stated that Zurich would transact business "on an offer and acceptance basis as with any broker relationship". Zurich also advised that with regard to CTP, it had not been able to "confirm at this stage the agency etc". It suggested a further discussion when Reid presented his "strategy". 61 On 12 August 1999 Cooper wrote to Priest enclosing a document entitled "Deluxe Red &Yellow Cabs Private and Confidential Report - Captive Feasibility Study" that had been presented to Mr Reg Kermode of Deluxe Red & Yellow Cabs that morning. Cooper advised that the reaction was "quite positive" and that Mr Kermode had requested a second meeting to discuss it with their company lawyer. Cooper also advised that Mr Kermode was willing to meet Priest on her next visit to Australia. 62 The feasibility report was jointly prepared by Mahoney and International Risk Management Group (IRMG), the largest manager of captive insurance companies in Australia. The report included the following: 3.1 Access to reinsurance market The establishment of a captive will give Deluxe direct access to the reinsurance market which is a more stable, less cyclical market. This is a more sophisticated market and a multi class reinsurance product that would include first party (section 1) third party (section 2) green slip and workers compensation as one policy is feasible. A structure may be that a captive insurance company accepts the major risks of Deluxe Red & Yellow Cabs (above appropriate deductibles) and then purchases one reinsurance policy above an annual aggregate limit. This structure caps the captive's exposure and allows the reinsurer to assume a portfolio of risks which are widely spread. There are now a number of large professional reinsurers in the market place who offer this type of product.

This type of structure cannot be achieved without the establishment of a captive insurance company. 3.2 Control The simplest and most flexible way for the group to control risk acceptance and risk transfer decisions is through a captive insurance company. If the market hardens then the captive can retain more of the risk if premiums become cheaper through increased competition, then more of the risk can be transferred. Having control over this risk retention and risk transfer process is likely to have a significant affect on the long term premium rates for Deluxe Red & Yellow Cabs. 63 On 13 August 1999 in a meeting that included Zurich representatives, Reid and Cooper, Zurich became more open about its strategy. It advised that a number of Taxi Co-operatives had applied to it for agencies and that it had signed one agency and was in the process of negotiating with other co-operatives. After further discussion and Cooper's and Reid's expression of disappointment, a further meeting was planned towards the end of August when Reid would inform Zurich of Blanch's plans for the future. That further meeting was held on 24 August 1999 at which both Cooper and Reid expressed continued disappointment with Zurich's approach. The minutes of that meeting note that Reid questioned Zurich's approach "given the international relationship between Zurich" and Blanch. Cooper advised that Mahoney was still placing business with Zurich "at this stage" but had "sourced" another underwriter. He also advised that if Zurich informed Mahoney that it was definitely not removing the agency with Combined Cabs, Mahoney would plan to place all business elsewhere. 64 On 28 August 1999 in an e-mail to Priest, Reid advised: I expect an all out war with Zurich will commence - if it hasn't already - within the next few days. One of the co-ops is already on line with Zurich and I would expect that unless we can produce a better product than that of Zurich others will follow within the next few days.

The concerns expressed in this e-mail were well founded because by this time Zurich had signed an Agency Agreement with Deluxe on 20 August 1999. 65 On 8 September 1999 Zurich wrote to Cooper in terms that included the following: In relation to CTP we are unable to continue the current arrangement without a formal agreement in place between our two companies. In future all CTP renewal notices will be forwarded direct to the client as required by current legislation. I understand you have made alternative arrangements in regards to CTP business & if this is correct it is not practical for us to execute the required agreement. Could you please confirm in writing your intentions regarding the placement of CTP business within 7 days. 66 On 13 September 1999 Priest received Ernst & Young's draft report regarding Mahoney which included the following: Note 16 to the Accounts of (Mahoney) refers to a subsequent event whereby business is being passed directly from one underwriter to the insured and by-passing (Mahoney) as broker. This may have significant impact on the ongoing future income stream of (Mahoney). We have not attempted to verify the status of this situation nor have we attempted to place a monetary value on the impact of this event on the future income stream of (Mahoney). 67 On 17 September 1999 Priest wrote to Mr Kermode referring to a recent meeting with him in terms that included the following: We were most encouraged to hear your vision for insurance of the taxi industry. We at EW Blanch believe the future for insurance of such affinity groups lies with the creation of virtual insurance companies where risk improvements are rewarded with reduced premiums benefits. We are assisting such groups to access the international reinsurance market currently utilised by traditional insurance companies for protection of catastrophe exposures. … Over the last couple of weeks we have met with a number of individual cab owners from various cooperatives and they have all without exception, endorsed our approach of establishing an industry insurance and financial services scheme for the benefit of the industry. Interestingly people have been vocal about their desire to have ownership and responsibility for the "captive". Quite often they have made the suggestion that a seminar be held to explain the concept and how it has been successful in other industries and companies. With the foregoing in mind we are pursuing the acquisition of the Mahoney group. We believe this will provide us with the critical mass to develop the above approach. We would welcome your thoughts with respect to our approach, the proposed seminar and the potential involvement of the taxi industry and Cabcharge in the development of a taxi industry insurance and financial products scheme. 68 In the light of the fact that Deluxe had already signed its Agency Agreement with Zurich, this communication appears to have been somewhat futile. 69 In mid September 1999 Mahoney had sent a "flyer" to taxi operators and co-operatives. On 17 September 1999 Zurich wrote to Mahoney referring to its letter of 8 September 1999 and to the flyer and noting, apparently from its contents, that: We are now of the understanding that Mahoney Insurance Brokers have made alternative arrangements for the transaction of CTP business. … Given this it is not practical for Zurich to execute the required agreements to formalise any arrangements that were previously in place. Any arrangements between Zurich & Mahoney insurance brokers for the purpose of transacting CTP business are now cancelled. Cancellation is effective from 4.00pm 17th day of September 1999. Under no circumstances is CTP business to be transacted after this time. 70 The letter also requested Cooper to arrange for all CTP material, greenslip books etc, to be made available for collection. Zurich also advised that other business between Zurich and Mahoney would be operated on an Underwriter & Broker basis with full offer & acceptance criteria. This process was suspended pending further discussion between Mahoney and Zurich that resulted in the execution of an Agency Agreement. The Agency Agreement - 14 October 1999 71 Mahoney and Zurich signed an Agency Agreement on 14 October 1999. The Agreement commenced on that day and was agreed to "continue until terminated by either party giving to the other written notice of termination in accordance with the provisions of article 3.2 or until terminated in accordance with article 18" (3.1). Article 18 dealt with termination for breach, "malpractice or wilful misconduct", loss of licence, insolvency and the like. Article 3.2 provided: Either party may at any time terminate this Agreement by giving to the other thirty (30) days written notice of termination. 72 The Agency Agreement was limited to the provision of CTP Insurance (11.4; Sch 3) and Zurich reserved the right not to accept any proposal except "where cover is effective upon the Insurer issuing a validated certificate and receiving payment of premium" (11.6). Mahoney was prohibited from issuing a validated green slip to the customer unless "prior payment" had been received (11.3(2)). 73 Zurich agreed to pay Mahoney commission, fees and other amounts on insurance policies transacted by Mahoney on behalf of Zurich "on the issue and renewal of policies" at 5% of the Net Premium, being the gross premium excluding stamp duty and other taxes fees or levies and GST (14.1; Sch 6). Mahoney was only entitled to the commission, fees and other amounts after Zurich accepted both the proposal lodged by Mahoney and the payment of the appropriate premium and when the "actual premium payment is made to" Zurich (14.2 & 14.3). 74 Mahoney was required to pay to Zurich within 37 days after the day on which the contract of insurance was "incepted" money paid to it as premium without deductions or off sets (16.1; Sch 7). Zurich was entitled to set-off all or any part of the commissions or other remuneration due, or which became due, to Mahoney "to cover any debts owed" to Zurich by Mahoney (16.2). However "any existing debts" between Zurich and Mahoney were "not affected by" the Agreement (17.3). The Agreement listed fifty two sub-agents consisting of taxi co-operatives and individual taxi owners. 14 October 1999 to 23 December 1999 75 On 20 October 1999 Cooper telephoned Priest and advised "we have signed up an Agency Agreement with Zurich and our relationship with them is back on track. Everything is fixed up. Let's start the negotiations again." It is apparent from the documents in evidence that Cooper also advised Priest that he had received an offer from another party. Subsequently Priest advised her superiors and colleagues, including Bill Farmer, head of the International Operations of the Blanch group, that Blanch still wished to proceed but needed to revise its offer. Blanch had apparently received a revised profit forecast which improved the profit from $960,000 to $2.2 million. Priest proposed a counter offer of 3 times profit before tax, payable in 3 instalments. In an email to her colleagues she advised: This offer reduces our exposure to expense blowouts as we would have a fall clause and provides Cooper with an incentive to obtain more business. It is also competitive with the other offer. In terms of the earnings multiple it is a better deal than the original one i.e. 3 times earnings as opposed to 4.7 times.

76 In a return email Priest was asked what was the reason for the improvement of profit. In response to that email Priest wrote that Mahoney had picked up business in other states and "also now that the Zurich matter is fixed they have an agency agreement in place which means they are writing CTP again. This was taking off the revised figures when the trouble with Zurich started. They are also writing more covers on NSW business than before". 77 In late October a further Heads of Agreement was executed between EW Blanch Holdings Inc and Mahoney. That agreement anticipated execution of an agreement prior to 15 November 1999 subject to and conditional upon the fulfilment of certain conditions precedent which included that Blanch would be satisfied, at its sole discretion, with the results of its due diligence investigation and that Mahoney would provide Blanch with "complete access to its facilities, books and records" and full co-operation with Blanch's "due diligence efforts".

78 On 4 November 1999 Tim Marchand, from the internal audit department of the Blanch parent company in Dallas, wrote by email to Priest prior to leaving the United States of America for a trip to Australia and a visit to Mahoney. In that email Mr Marchand advised: My Primary Goal is to perform an operational review of the Mahoney's operations. Is this all to be done at the Newcastle Site? That is, are any of the other sites to be visited? Is there any need to? I want to validate insurance activities flowing through the Trust Ledger. Basically, I want to perform "walkthroughs" of their commercial and fiduciary activities - so how we co-ordinate with the appropriate personnel I will look to you for assistance. 79 Mr Marchand asked Priest to organise the availability of general ledgers, aged receivables, discussion/reports on Mahoneys funding advancing activities, discussion on follow-up activities for late reports/remittances, client (insured) agreements, and various other documents including Mahoney's policy/fee structure. In this latter regard, his email stated that he wanted "to ensure that a reasonable return is being made on a transaction." He also requested any report that would reflect an analysis of commission and broker fees by the underwriter so that he could compare/validate the analysis to the underwriter contracts. 80 On 5 November 1999 Priest wrote to Mr Norton advising of Mr Marchand's primary goal on the visit to Newcastle. Priest advised that Mr Marchand wanted to validate insurance activities and that he wanted to perform "walkthroughs" of their commercial and fiduciary activities. Priest then repeated the list that had been provided to her by Mr Marchand. On 8 November Priest provided an "update" of the list already provided in relation to the visit on 9 November 1999 to the Mahoney premises in Newcastle. 81 Priest and Mr Marchand visited the Newcastle premises over a two day period on Tuesday 9 November and Wednesday 10 November 1999. Priest's notes of the meeting on 10 November 1999 included the following: Cutcher and Neale - Zurich problem - referred to fixing the problem - NOW have a Zurich Agency Agreement for the business - CTP business and is a standard broker agreement in place as well. CAP TO REVIEW THE AGENCY AGREEMENTS. 82 A due diligence report completed after the visit included the following: There can be several arguments made against the purchase of (Mahoney). These would include: (1) Taxi Business is not an area (Blanch) wishes to be involved in due to the nature of the business; (2) (Mahoney) are vulnerable due to the strong focus on the Taxi industry; and (3) Longevity of client base - perception of saturation of Taxi Business in the Australian Market The analysis and purchase decision, however, must be made on the basis of the strategic fit with (Blanch) going forward. We would make the following points: ….. 2. The Taxi industry has indicated a strong desire to establish a Captive to provide a full range of insurance and financial products to its members. It is, therefore, our intention to use (Mahoney's) connections to establish the Captive with (Blanch) obtaining Reinsurance and Captive management fees. (Mahoney) have had preliminary discussions with the Taxi Industry and commissioned a feasibility study that supported the concept i.e. prepared by International Risk Management Group (part of Swiss Re). In terms of a Captive, we would expect the capital base to be relatively small so a substantial portion of the total premiums will be reinsured out generating good levels of reinsurance brokerage. Currently, we do not place any domestic reinsurance business (other than on Monde Re). Also note that the Australian Taxi Industry operates off shore in the UK, US, Singapore and New Zealand, so this concept may be able to be exported in due course. … 6. (Mahoney) is not the "end play". It is hoped to be the first of many acquisitions of strong, niche and profitable businesses in Australia. 7. There has been some question of client loyalty to (Mahoney). The recent attack by Zurich in NSW has demonstrated that (Mahoney) have, in fact, a stronghold on their client bases. Zurich has succeeded in working with only one co-operative, and this is tenuous. (Mahoney) are competing with Zurich on CTP business. In the event there was a shortfall in income, we are protected by a "fall" clause. 8. (Mahoney) will give us the foundation we need to establish a viable presence in the Australian market. If we do not pursue this acquisition, it is the view that our Australian operations are no longer economically attractive, or provide an adequate base for future development. The (Mahoney) purchase is, therefore, considered to be an important step in the future direction and strategy for Australia. 83 To suggest that Zurich had succeeded in working tenuously with only one taxi co-operative by this time was hardly reflective of the true commercial position. Priest had been informed by Reid of the "all out war" and by this time she was well aware that Zurich had a "direct relationship" with two taxi co-operatives. 84 Priest said this due diligence report was written by Mr Marchand for the Board to consider prior to a decision being made to acquire Mahoney. She agreed however that she did read it but that at the time it did not represent her understanding of Zurich's direct relationships with the taxi co-operatives.

The Share Sale Agreement - 24 December 1999 85 The Share Sale Agreement was executed on 24 December 1999. Under the Share Sale Agreement, Cooper agreed to sell to Blanch the Sale Shares, as defined, for the Purchase Price, defined as the aggregate of the First Instalment ($1,407,026), the Second Instalment ($1,595,985) and the Third Instalment ($1,595,985) "as adjusted pursuant to clause 3.4" (3.1 & 1.1). Blanch was required to pay the First Instalment to Cooper on or before the Completion Date, 24 December 1999, subject to the conditions precedent in clause 2.1 (1.1; 2.1; 3.2(a)(i)).

86 The conditions precedent included: the provision to Blanch, its agents, advisers and representatives of access to "all of" Mahoney's and BIB's "books, records and facilities"; co-operating in enabling Blanch to complete its due diligence investigations (2.1(a)); the provision of a legal opinion to Blanch (2.1(b)); the provision of various approvals and consents (2.1(c), (d), (e), (m) & (n)); the procurement of a letter from ASIC advising that it would not take any action in respect of the combining of BIB's trust account with that of Mahoney in July 1999 without ASIC's approval (2.1 (h)); Mahoney's payment of certain liabilities to Cooper (2.1(j)); the signing of Mahoney's June 1999 Accounts (2.1(k)); arrangements in relation to former and future employees (2.1(i) & (l)); Blanch procuring the consent of the Board of its ultimate parent company for its entry into the Share Sale Agreement (2.1(e)); Blanch's satisfaction that there had been no material adverse change between the date of the agreement and the Completion Date (curiously they seem to be the same date) (2.1(f)); and Blanch's satisfaction that Mahoney had obtained appropriate run-off insurance for claims prior to Completion (2.1(g)). 87 The Second and the Third Instalments were required to be paid respectively on the first and second anniversary of the Completion Date, subject to clause 3.4 entitled, "Downward Adjustment of Purchase Price". Clause 3.4 referred to two concepts, the "Initial Combined Brokerage Income" (ICBI) and the "Actual Combined Brokerage Income" (ACBI). The ICBI was defined as the aggregate of the actual commissions and brokerage fees for Mahoney and BIB for the year ended 25 October 1999, reflected in Schedule 4 to the Agreement less $250,000, being $4,255,960.44, subject to adjustment under clause 3.4. The ACBI was the aggregate of the actual commissions and brokerage fees for Mahoney and BIB shown in the "Specified Accounts". The Specified Accounts were defined as the audited financial statements of Mahoney and BIB on a cash, as opposed to an accruals, basis comprising the profit and loss account, a statement of source and allocation of funds and the Balance Sheet "in respect of each 12 month period ending 25 October in the 2 years following Completion (1.1). 88 In respect of the Second Instalment, Clause 3.4 provided that if at 25 October 2000 the ACBI was less than the ICBI, the Second Instalment was to be reduced by the amount reached by multiplying the "shortfall" by 1.25, referred to as the "Second Instalment Reduction". If the ICBI was subject to any reduction that may have occurred post completion "for any reason", the Second Instalment was to be reduced by the amount reached by multiplying the "shortfall", or difference, by 1.25, also referred to as the "Second Instalment Reduction" (3.4 (a) (b) & (c)). If the Second Instalment Reduction was greater than the Second Instalment, Cooper was obliged to "immediately" pay Blanch the difference (3.4(c)). In respect of the Third Instalment, clause 3.4 provided that if at 25 October 2001 the ACBI was less than the ICBI the Third Instalment would be reduced by the amount reached by multiplying the "shortfall" by 1.25, referred to as the "Third Instalment Reduction". If the Third Instalment Reduction was greater than the Third Instalment, Cooper was required to "immediately" pay Blanch the difference. 89 Cooper represented to Blanch that "each Sale Warranty" contained in the Share Sale Agreement "is accurate" as at the Completion Date "in relation to facts subsisting at that date" (5.1). The parties agreed that Blanch had "entered and will effect Completion under the Agreement in reliance on each Sale Warranty" (5.2). Each Sale Warranty was a separate representation and the content of each representation extended to and included "any fact" whether or not Cooper had actual notice of that fact (5.3). 90 The Sale Warranties contained in Schedule 2 to the Share Sale Agreement included warranties that all facts relating to Mahoney and BIB and their business activities were accurate and also included the following: 7. BUSINESS ACTIVITY 7.1 Since the date of this Agreement, both (Mahoney and BIB) have managed and conducted their business activities in the ordinary and usual course with a view to maintaining their competitive position and have not undertaken any material actions or transactions which would negatively impact (Mahoney's or BIB's) business. 7.2 Each of (Mahoney and BIB) has from the date of the June 1999 Accounts until the Completion Date conducted its business only in the ordinary course and there has been no: … (h) other matter in which (Blanch) would be reasonably interested which contains any onerous or unusual provisions material for disclosure to an intending buyer. … 19 CONTRACTS ... 19.2 No contract to which either (Mahoney or BIB) is a party: (a) is outside the ordinary and usual course of business or is otherwise unusual; or (b) is incapable of being fulfilled or performed on time, or only with undue or unusual expenditure of money or effort. 19.3 Neither (Mahoney or BIB), as a party to any contract, is: (a) in default of any material term; or (b) but for the requirements of notice or lapse of time or both, would be in default of any material term of any contract. The transaction contemplated under this Agreement will not lead to a breach of any contract to which (Mahoney or BIB) is a party which is material to the operation of (Mahoney or BIB) business.

91 The Lease between Maco and Mahoney, registered Lease No. 6817896R, for 5 years commencing on 24 December 1999 was executed by Mr Burdis and Priest on behalf of Mahoney and by Mr Norton and Cooper on behalf of Maco. 92 After completion of the Share Sale Agreement and the execution of the lease, Mr Norton was retained to run and manage Mahoneys and Cooper was retained as a consultant. Priest gave evidence that her involvement with the management of the company was by way of overview. Indeed she said that one of the reasons why Mahoney was an attractive acquisition was that the running of the business would not require a lot of management time on her part.

December 1999 to October 2001 93 Zurich had been taking advice from Clayton Utz throughout 1999 as it approached and signed up the 2 major taxi co-operatives, Cumberland and Deluxe. As early as 20 April 1999 Zurich noted that it, Cumberland and Deluxe "want to form a joint venture" and that the "effect will be to take Mahoneys out of the picture". On 27 May 1999 Clayton Utz had written to Zurich advising that the firm was awaiting "full details" of Zurich's relationship with Mahoney "so that we can properly advise on the termination of that arrangement". Zurich received advice in relation to whether it could terminate the relationship with Mahoney within the confines of the Trade Practices Act 1974 (Cth) and deal directly with the co-operatives. 94 Zurich was readying itself with Cumberland and Deluxe to establish its "joint venture" under the then proposed name "Transure" to market taxi insurance. It received further advice from Clayton Utz on 20 December 1999 in relation to the implications of "cancelling" the Agency Agreement with Mahoney. That advice expressed the concern that if Zurich terminated the relationship "so soon" after the Agency Agreement was entered into Mahoney may complain that it had acted unconscionably or that it had engaged in misleading and deceptive conduct. Clayton Utz advised that they needed to "examine very carefully" Zurich's dealings with Mahoney in the period 1 August 1999 to 14 October 1999 and advised Zurich to look at other commercial methods to achieve its objectives "unless of course there is some basis to terminate the Agency Agreement immediately pursuant to Article 18.1". 95 Clayton Utz noted that Zurich would: (a) in the following 6 weeks focus on establishing "new distribution channels for taxi insurances"; (b) not terminate the Agency Agreement with Mahoney "at this point in time" but would revisit the issue at the end of January; and (c) in the event that Mahoney entered into an Agency Agreement with another insurer, Zurich would notify Clayton Utz and consideration would be given as to whether Zurich would be entitled to terminate the Agency Agreement. 96 On 29 February 2000 Zurich wrote to Mahoney in the following terms: I am writing to amend your agency agreement, in accordance with Article 10 (Changes to Procedures and Documentation) and to clarify our position with regard to outstanding debtors and sub-agents. Commissions Zurich Australian Insurance Ltd (Zurich) will no longer pay any commission to Mahoneys for the issue or renewal of policies under this agency, we revoke Schedule 6 of the Agency Agreement. 30 days written notice is hereby given that commission will not longer be paid from Friday 31st March and that payment of greenslip policies must be forwarded for the full gross premium from that date onwards.

Outstanding Debtors Mahoney Insurance Brokers (Mahoney) have continually failed to meet the criteria set out under Article 16 (Handling of monies) and the credit terms stated in Schedule 7, being 37 days. All debts outside of the 37 day credit terms will be referred to a third party for collection unless payment is received in full within 7 days (being Wednesday 8th March). An enclosed spreadsheet states all the policies with money owing. We note that at present more than $1,000,000 is overdue from last year. Sub-agents Finally, it has recently come to our attention that there may be some parties operating as a sub-agent for Mahoney. Under Article 2 (Relationship between the Insurer and the Agent), clause 2.4 states that no sub-agent shall be appointed without the written consent of the insurer. We have not given our consent for any party to act as your sub-agent under the agreement. Any greenslip pads that have been provided by you to any third parties must be collected and returned to Zurich by Friday 31st March 97 On 16 March 2000 Zurich again wrote to Mahoney referring to previous discussions with Mahoney in relation to a "number of concerns with the manner in which Mahoneys is conducting its agency to issue CTP insurance on behalf of Zurich". That letter claimed that Mahoney was not following the accepted procedure in relation to payment of premiums. In this regard, Zurich claimed that Mahoney had forwarded "part only" of a particular insurance premium to Zurich and that it had been done without Zurich's consent. Zurich claimed that it was clear that it was not in accordance with the established procedure for CTP insurance which was "cash for cover". Zurich also claimed that it was clearly outside the terms of credit agreed between Zurich and Mahoney and that the practice must cease immediately. 98 In its letter of 16 March 2000 Zurich also complained that Mahoney had not followed the correct procedure for cancellation of insurance. It referred to previous advice in November 1999 that Zurich must receive a letter from the RTA for a cancellation to proceed, due to the nature of CTP insurance. Zurich claimed that it was agreed that from 1 November 1999 all cancellations were to be processed by Zurich and that Zurich would forward any refund of monies to the insured. However Zurich claimed that Mahoney had "processed a cancellation, calculated the refund due to the insured and forwarded part only of the premium to Zurich". Zurich claimed that that had only been possible because of Mahoney's unacceptable late payment of premiums and that that practice must also cease immediately. Finally the letter dealt with outstanding debtors. Zurich expressed its serious concern at Mahoney's continual failure to meet its terms of credit and that: For policies issued or renewed after 14 October 1999, this is the period of 37 days specified under the Agency Agreement. For policies issued before the Agency Agreement was effective, the understood credit period was 90 days. 99 After referring to previous communications between the two companies, the letter continued: There has been no improvement, despite discussion and a number of conversations to you from Zurich about this unsatisfactory situation. Rather than the requested improvement in your payment of premiums, there has been a further deterioration. We attach a spreadsheet showing the policies where premiums are currently outstanding. At present $927,813.55 in premiums remains overdue from last year. All of these amounts exceed the agreed terms of credit, and some amounts have been outstanding for very substantial periods. We remind you of the following provisions of the Agency Agreement dated 14 October 2000 (sic): (1) Article 11.3(2) provides that in relation to the Compulsory Third Party insurance, you may only issue a validated greenslip on receipt of payment of premium. The CTP insurance is "cash for cover". The cover is effected when the greenslip is issued. (2) Article 16.1 (together with Schedule 7) requires that you pay premium monies to Zurich not more than 37 days after the greenslip has issued. Clearly, you are in default of your obligations to Zurich under the agreement. Unless this default is remedied and payment in full is received within 14 days, Zurich puts you on notice that it will be entitled to terminate the Agency Agreement under clause 18.1. Zurich also reserves all its rights to take further action including referring all debt outside of the credit terms to a third party for collection. 100 On 30 March 2000 Bob Cook, the senior account executive of Mahoney, wrote to Zurich in response to the letter dated 16 March 2000. That letter included the following: Please be assured that we are also extremely concerned with the problem we are jointly experiencing, and confirm that we have been working, over the past weeks, on procedures to eliminate these ongoing concerns. Unfortunately we have no excuse that we can offer in relation to your comments. The introduction of new procedures hopefully will quickly clear the backlog and stop the matter getting further out of control. We understand your frustration and concern, but please be assured we will give this matter top priority and I will personally remain involved until Zurich are satisfied that the new procedures are working. 101 On 10 April 2000 Zurich wrote two letters to Mahoney, one in relation to the Agency Agreement for CTP insurance and the other in relation to general insurance for Zurich taxi products. In the letter referring to CTP insurance Zurich referred back to the recent correspondence noting that there was still in excess of $600,000 in premiums outstanding from 1999 and continued: Pursuant to clause 18.1 Mahoney's failure to remedy this default within the 14-day period entitles Zurich to terminate the Agency Agreement for breach. As a result Zurich hereby terminates the Agency Agreement dated 14 October 1999, effective immediately on receipt of this letter. Mahoneys must immediately cease issuing or renewing greenslips. Please have all greenslip pads available for collection by Zurich no later than 7 days after termination. 102 In the letter relating to general insurance for taxi products, Zurich referred to the fact that there was no written broker agreement between Zurich and Mahoneys and that either party had the ability to terminate the current relationship. The letter stated: We are aware that Mahoneys already has in place alternative arrangements with another underwriter for general insurance for taxis. Zurich hereby gives Mahoneys notice that Zurich will no longer consider proposals for Zurich Taxi Products from Mahoneys. This notice is effective immediately. 103 By this stage Zurich, Cumberland and Deluxe had obtained authorization to use the Business Name "TransGuard" and had authorized Zurich to use the name as a business or trading name or "badge" for "insurance designed, developed and packaged for the taxi industry". 104 On 14 April a meeting took place with Royal Sun Alliance and representatives of Mahoneys to discuss the "taxi portfolio". The Royal Sun Alliance representative advised Mahoney that he was not prepared to look at any new proposals until "a strategy was in place to fix the Sydney Taxi Scheme". Once this negative reaction was understood Mahoney then sought to arrange a meeting with Suncorp-Metway. 105 In the meantime Mr Norton advised Priest in mid April there was a problem with Zurich wanting to cancel the Agency Agreement. Priest claimed in evidence that she did not see any of the correspondence between Mahoney and Zurich until "about mid April". Mr Norton forwarded the correspondence to Priest who then provided it to Cutler Hughes & Harris solicitors.

106 On 23 May 2000 Cutler Hughes & Harris wrote to Zurich in respect of its purported termination of the Agency Agreement and the arrangement for general insurance. That letter included the following: 4. At the beginning of this year Zurich established with 2 taxi cooperatives a specialist insurance broking/agency business known as Transguard to market and sell CTP and TPPD insurance to the New South Wales taxi industry. This business was launched at the Australian Taxi Industry Conference in March this year. We note that the start date of Zurich Financial Services Australia Ltd becoming one of the registered proprietors of the business named Transguard is 10 March 2000. 107 The letter went on to claim that since at least 10 March 2000 Zurich had been a competitor of Mahoney in the broking/agency business of arranging CTP and TPPD insurance for the NSW taxi industries. It suggested that the timing of the 16 March letter to Mahoney with Zurich's establishment of Transguard was not a coincidence. The letter suggested that Zurich's conduct was in breach of Section 46 of the Trade Practices Act and "given the long-standing relationship between the 2 organisations, our client does not wish to resort to litigation to enforce its rights" and that Mahoney "asks that Zurich reconsider and withdraw its refusal to accept insurance business from Mahoney's for taxi operators". 108 By letter dated 8 June 2000 Zurich referred to the recent history between it and Mahoney in relation to the CTP agency and suggested that it was "self-evident" that the default on credit terms was not caused by the change in those terms in the Agency Agreement in October 1999. It also noted that despite many invitations and opportunities Mahoney had never attempted to enter into any detailed discussion with Zurich "to deal with the management problems surrounding the payment of CTP premiums". Zurich rejected any suggestion that it had breached Section 46 of the Trade Practices Act and rejected any claim that Mahoney had a valid cause of action against it.

109 The outstanding premiums owed to Zurich were paid in full by about 3 November 2000. Mr Norton advised Priest that the loss of the Zurich CTP agency would reduce monthly cash income by approximately $50,000. He also advised that the loss of the Zurich taxi damage scheme would reduce monthly cash income by approximately $35,000 and that if the income could not be replaced, Mahoney would be in a net loss position by 31 December 2000 with a forecast deficit of $53,791. 110 For the purpose of trying to arrange alternative insurance, a document headed "Taxi Fleet Proposal" was prepared in which the following was stated: (Blanch) arrange a facility with (Blanch Sydney) using Suncorp-Metway as the carrier, which was recognised as a threat to Zurich's business. Since then, Zurich quitted (sic) the arrangement with Mahoney and went direct to the taxi market. 111 The Proposal included, once again, the suggestion of the establishment of a captive, but on this occasion on a rental basis. The document included: This is a proposal for the taxi fleet in Australia in co-operatives form. It is suggested to set up cells of individual co-operatives through the rent-a-captive facility or the protected cell captive. Insured will have a shareholder agreement with the rental captive. Since rental captives cannot be admitted carriers, a front company is needed. The taxi business is insured by the rental captive via the fronting company. Each cell can purchase their own reinsurance needs base on their portfolio. Reinsurance facility such as excess of loss or stop loss can then be arranged to protect against excess losses.

112 On 19 June MMI declined to quote on the taxi business, however HIH quoted on the CTP aspect and such quote was referred to as "reasonably competitive". Further attempts to obtain a replacement for Zurich in the CTP insurance continued. 113 It was not until July 2000 that Priest reviewed the Agency Agreement. It appears to have been sent to her by Mr Norton at her request. Indeed on 15 August 2000 Mr Farmer sent Priest an e-mail advising that he had gone back through his file and found a series of e-mails including one dated 20 October 1999 from Priest in which she had claimed that the "Zurich matter is fixed" and "they have an agency agreement in place which means they are writing CTP again". Mr Farmer wrote "who told you they had an agency agreement in place? Did we ever see it? When did Zurich pull the plug?". 114 On 23 August 2000 the directors of Mahoney met and in attendance were representatives of Cutler Hughes & Harris and a representative from Ernst & Young. At that meeting a search for an alternative insurer was noted with two insurers showing interest but at higher pricing. Mr Hutchinson from Ernst & Young addressed the meeting to provide "basic comments on the points that needed to be considered having already provided a general information paper to each Director". It was noted that there were concerns about the Balance Sheet "however it may break even". It was also noted that an informal procedure is to take adequate cost cutting to preserve cash flow. 115 In early September 2000 a further effort was made to persuade Zurich to reinstate the agency arrangements with Mahoney. Zurich declined such an approach. The directors decided to sell Mahoney to OAMPS. The sale agreements in respect of both Mahoney and BIB were effective from 1 December 2000 and provided for the payment by OAMPS of $500,000.

116 It was not until 29 October 2001 that Blanch commenced these proceedings against Cooper seeking an order that he pay to the plaintiff the sum of $3,591,995.85 as monies payable under the share sale agreement, damages for breach of sale warranties, damages for misleading and deceptive conduct and damages for negligent misstatement.

The Zurich Representations 117 The plaintiff claims that the Zurich representations that (a) Mahoney had entered into an Agency Agreement with Zurich; and (b) that the relationship between Zurich and Mahoney was "back on track" were misleading and deceptive because, as put in final written submissions, they created the "false impression that the relationship was in good order when in fact for a considerable period Mahoney had failed to meet Zurich's terms of payment". 118 The claims made in the pleadings in relation to this allegation were limited to the Agency Agreement entered into on 14 October 1999 rather than to the general claim made in final written submissions referred to above. It is important, for the reasons stated earlier in this judgment, to focus upon the claims as pleaded. This claim made by the plaintiffs must be confined to the allegations that are pleaded with which I will now deal. 119 The statement relied upon in Priest's evidence was that of Cooper in the October 1999 telephone conversation that "we have signed up an Agency Agreement with Zurich and our relationship with them is back on track. Everything is fixed up". There was also evidence that Mr Norton said in a telephone call with Priest on the same day, "we now have an agency agreement signed up with Zurich, everything is back on track". 120 It is alleged that Mahoney and BIB were in default in making payments to Zurich, were not financially able to remedy the default and were not able to comply with the obligations of payment within 37 days as required by the Agency Agreement (C 47). The terms of the Agency Agreement are therefore important to this aspect of the plaintiffs' claims. Mahoney was required to pay Zurich within 37 days after the day on which the contract was "incepted", money paid to it as premium without deductions or offset (cl.16.1: Sch 7). 121 The defendants claim that this clause limited Mahoney's liability to pay money to Zurich that was "paid" to it, rather than money that was "payable" to it. The plaintiffs emphasised that CTP insurance was "cash for cover" and placed reliance upon provisions of the Motor Accidents Compensation Act 1999 (NSW) (the MAC Act) in support of the submission that Mahoney's obligation was to pay the premium to Zurich within 37 days of the date of inception of the contract irrespective of whether the premium had been received by Mahoney. 122 Section 11 of the MAC Act at the relevant time provided: 11 Issue of certificate of insurance ( 1) If a licensed insurer accepts a premium for the insurance under a third-party policy of a motor vehicle, the licensed insurer must immediately issue a certificate of insurance to the owner of the vehicle. (2) If a licensed insurer accepts a premium for the insurance under a third-party policy of motor vehicles to which a trader's plate is or is to be fixed, the licensed insurer must immediately issue a certificate of insurance to the trader. (3) A licensed insurer who issues such a certificate is taken to have issued a third-party policy for the motor vehicle or motor vehicles to which the certificate relates. (4) If 2 or more licensed insurers issue certificates of insurance which (but for this subsection) would be capable of having effect at the same time in respect of the same motor vehicle, a third-party policy is taken to have been issued only by the licensed insurer recorded by the RTA in connection with the registration or renewal of registration of the motor vehicle or issue of a trader's plate as being the insurer. 123 This section does not proscribe the issuing of a certificate without the payment of the premium in whole or in part. Indeed section 17 of the MAC Act provided: 17 Liability of licensed insurers and insured persons where correct insurance premiums not paid (1) The fact that the correct insurance premium has not been paid in respect of a third-party policy does not affect the validity or operation of the policy. (2) A licensed insurer to whom an incorrect insurance premium has been paid may recover any balance outstanding of the premium from the person liable to pay it as a debt in a court of competent jurisdiction. (3) If: (a) an insured person under a third-party policy incurs a liability against which he or she is insured under the policy, and (b) the insured person deliberately avoided paying the correct premium for the third-party policy by making a statement in connection with the issue of the policy that the insured person knew was false, the licensed insurer may recover from the insured person as a debt in a court of competent jurisdiction: (c ) where the money paid and the costs incurred by the licensed insurer in respect of the liability do not exceed $2000 - the amount of the money paid and costs incurred, and (d) where the money paid and costs incurred by the licensed insurer exceed $2000 - $2000. (4) The licensed insurer is not entitled to recover an amount under subsection (3) if the licensed insurer has recovered that amount in the exercise of any other right of recovery under this Part. 124 The MAC Act contemplates circumstances in which a certificate of insurance may issue notwithstanding the correct premium has not been paid. The position under the Act at the time was probably that some amount by way of premium had to be paid before the certificate was issued, however these sections do not, in my view, support the construction of the Agency Agreement for which the plaintiffs contend. The Agency Agreement required Mahoney to pay to Zurich within 37 days of the inception of the Policy money paid to it by way of premium. If, as envisaged by section 17 of the MAC Act, Mahoney had not received the correct premium, the obligation Mahoney had under the Agency Agreement was to pay to Zurich only those monies "paid" to it, not money that had not been paid to it but should have been paid to it. The parties to the Agency Agreement are taken to have been aware of the provisions of the MAC Act, yet they chose to agree to require only the amount "paid" by way of premium to be paid to Zurich within 37 days of the inception of the Policy. 125 The Agency Agreement required that Mahoney would not issue a "validated" green slip to an insured unless prior payment had been received (cl 11.3(2)) and in those circumstances the money "paid" to Mahoney had to be paid to Zurich within 37 days. If Mahoney issued a "validated" green slip without receiving payment then it would have been in breach of clause 11.3(2) of the Agency Agreement. There has been no evidence establishing such breaches. No witness has detailed the validation process for green slips or the nature of particular green slips that were issued - validated or otherwise. There is a Schedule containing amounts outstanding to Zurich for the period post the Agency Agreement but there has been no evidence called in relation to the specific transaction to which the schedule relates other than the name of the entity. 126 Mahoney had a premium funder in place prior to the Share Sale Agreement and Priest agreed that she was aware of that fact prior to Blanch's acquisition of Mahoney. Priest also agreed that post-acquisition she did not put a stop to the premium funding arrangements. Priest also agreed that it was important to know the basis upon which Mahoney was required to remit premiums to Zurich but admitted that she had not reviewed the terms of the Agency Agreement prior to acquisition. She agreed in cross-examination that this was "an omission" and that "in hindsight it was a ridiculous thing". Priest said that it was her responsibility to review the Agency Agreement but that it "fell between the cracks". She said that she was only "confessing" her "own carelessness" and was not suggesting that other Blanch representatives would have been so careless as to not review the terms of the Agency Agreement prior to acquisition. She described her failure to review it as a "gross error". 127 The first particular relied upon by the plaintiffs in respect of the Zurich representations was that "Mahoney and BIB were in default of making payments to Zurich as required by the Agency Agreement" (C 47(a)). The period of alleged default ran from 14 October 1999 when the Agency Agreement was entered into between Mahoney and Zurich. The evidence as to the particular amounts that were alleged to be outstanding under the Agency Agreement was outlined in schedules that were far from clear. However these alleged amounts were dealt with in Priest's evidence. 128 Priest was cross-examined about the amounts alleged to be outstanding under the Agency Agreement with rather devastating effect on the plaintiff's reliance case. She gave the following evidence: Q: But it was your understanding wasn't it, that before you caused your company to buy this company that Mahoneys had about 5,000 - odd transactions every year? A: Mmm - hmm, that's correct. Q: It wouldn't surprise you, on the strength of your experience, if there were a small number of aberrant transactions? A: No, that wouldn't have surprised me. Q: And an item such as that $2,400 item wouldn't have affected in any way, shape or form your decision to go ahead with this acquisition? A: No, that's right. Q: Even if there were a dozen or more of such similar transactions, that wouldn't have affected your decision to go ahead with this transaction either? A: No. Q: The simple fact of the matter is that from the point of view of this acquisition what was important to EW Blanch was that it got a foothold in the New South Wales Insurance marketplace? A: Yes. 129 The next claim was that Mahoney and BIB were not financially able to remedy the default under the Agency Agreement and were not able to comply with the 37 days requirement to remit premiums to Zurich. 130 It seems to me that the plaintiffs' claims in this regard are flawed. Firstly, the requirement was to pay to Zurich the money "paid" rather than "payable" to it as premium within 37 days of inception. Secondly, Priest agreed in cross-examination that there could have been no difficulty in "turning over" a cheque within that timeframe. Thirdly, the fact that a 60 days premium funding arrangement was in place does not demonstrate or prove that Mahoney was, as claimed, not financially able to pay premiums even if one assumes in the plaintiff's favour that Mahoney was required to pay money payable rather than paid. There is no evidence that, as at the date of acquisition, Mahoney was not able to "carry" such payments for the 23 day period between the 37 days requirement under the Agency Agreement and any 60 days period under a funding arrangement. 131 The case pleaded restricted to the Agency Agreement of 14 October 1999 in relation to the Zurich Representations suffered a number of fatal blows in Priest's evidence. Although Priest gave evidence that the continued relationship with Zurich was an essential feature to the acquisition of Mahoney, such evidence is difficult to accept in the light of Priest's conduct at the time. To fail as she did to even review the Agency Agreement during the due diligence process is indicative of a lack of concern as to what the arrangements with Zurich were. This is understandable having regard to the plans Blanch had in respect of the creation of a "Captive" in conjunction with the taxi co-operatives. 132 Reid was given open and free access to Zurich and was able to explore the detail of Mahoney's relationship with Zurich during 1999 without any restrictions whatsoever. He was provided with, as he put it, "boxes" of material for his review such that it is difficult to accept that he would not have known the detailed history between the two companies. However Reid was not called as a witness and his apparent knowledge must be gleaned from the documentary material in evidence. 133 Priest's admission of the gross error in failing to review the Agency Agreement prior to acquisition is relevant as to whether any causal connection between contravention of s 52 of the Trade Practices Act 1974 (Cth) and loss or damage has been destroyed: Henville v Walker (2001) 206 CLR 459. The notes made by Priest at the due diligence inspection in Newcastle in November 1999 are important. They included the following: Cutcher and Neale - Zurich problem - referred to fixing the problem - NOW have a Zurich Agency Agreement for the business - CTP business and is a standard broker agreement in place as well. CAP TO REVIEW THE AGENCY AGREEMENTS. 134 These notes establish that Priest was informed at the meeting with Cutcher & Neale that Mahoney had an Agency Agreement "now" and that there was a "standard broker agreement in place as well". The note does not suggest that the Agency Agreement was a "standard agreement" but does suggest that the broker agreement was a "standard agreement". There is nothing in the whole of the notes taken at the due diligence inspection meetings that records the nature of the Agency Agreement. Priest made the note in capital letters, no doubt, as a reminder to herself, "CAP", that she had to "review" what she referred to as the "Agency Agreements". 135 Priest gave some evidence that she assumed that the Agency Agreement would have been what she referred to as the "usual" or "industry standard" of 90 days, rather than the 37 days as was the case. It has not been suggested in evidence that anyone on the defendant's side of the record suggested to Priest that there was any specific number of days specified in the Agency Agreement within which Mahoney had to pass on the premiums to Zurich. Indeed Priest had decided it was her responsibility to "review" the Agency Agreement whereby she could ascertain that very matter but did not do so, something she agreed was "grossly" erroneous.

136 The Due Diligence Report included a statement that: (Mahoney) is afforded the opportunity to hold on to the premiums for 90 days following the effective date of the policy. Therefore, (Mahoney) transfers premium between the Trust and short-term deposit accounts in an effort to maximize interest rate returns. Five years ago, virtually all of the profits of (Mahoney) emanated from interest income out of Trust account activity. Today, the proportion of profits attributable to interest income is approximately 40%, and could become slightly less as (Mahoney) is expecting to get more out of their core commercial activities. 137 This aspect of the matter was finally rendered irrelevant when Mr Robb QC advised in the final submissions that it had "never been any part of the plaintiffs' case that in any particular way they were worried about 37 days as opposed to 90 days because the plaintiff believed that Mahoney would earn interest for a greater period".

138 The statements of Cooper and Mr Norton, upon which reliance is alleged, were made in mid-October 1999. Subsequent to that date Priest obtained the knowledge that Zurich had been successful in going direct to not one, but two, of the largest co-ops in New South Wales and were thus openly competing with Mahoney. Priest herself had met with the head of Deluxe in an effort to win the race that Zurich ultimately won. There was then the due diligence process in which both Priest and Mr Marchand were involved in addition to the unrestricted access Reid was given to Zurich. The efforts made by Reid to secure an alternative CTP insurer are indicative of the plan Blanch was pursuing to create a "Captive", with limited life left in the relationship with Zurich, in any event. 139 Mr Burdis was also involved in the due diligence process and Mr Marchand gave evidence that he was not informed by Priest or Mr Burdis that Mahoney had entered into a new Agency Agreement with Zurich in October 1999. Indeed Mr Marchand gave evidence that the first time he had heard that Mahoney had entered into such an Agency Agreement was as he was being cross-examined and it came as a "total surprise" to him. Mr Marchand said that his role was primarily an "operational review perspective" and that Priest's role was a "business sense perspective". 140 The authorship of the due diligence report was far from clear. Mr Marchand suggested the Report was a joint effort between himself, Priest and Mr Burdis. Priest did not mention Mr Burdis having any input but rather suggested it was Mr Marchand who was the author of the report, the contents of which were "gone through" with her. 141 Mr Marchand was cross-examined about the Agency Agreement and gave the following evidence: Q: What I'd like to suggest to you is you really couldn't care less about the detailed terms of these Agency Agreements because it was EW Blanch's intention to move into a new and different mode of business, namely leave the existing underwriters out of it, put into position a captive and earn your brokerage income through reinsurance offshore? A: Again, this is not my area. Q: You see, the only other alternative, I suggest Mr Marchand, is one of gross neglect of duty. That is to say, of failure on your part to sight all of these agreements in the course of your due diligence? A: I don't believe I failed. Q: So it is therefore really more likely that you did get a copy of any agreement that you needed to see before signing off on your due diligence? A: No. I do not recall getting any agreement during the course of the due diligence. 142 Mr Marchand was also cross-examined about the content of the due diligence report which recorded that budgeting for more than 12 months would involve too many "WAGs", which he translated to mean "wild ass guesses". The report also referred to the "Zurich Issue where commission has gone from 22 per cent to 17 to 10 and their more recent attempts to try and take it all away by going direct". Although Mr Marchand gave evidence that Priest did not inform him that Zurich had already successfully set up direct relationships with two major taxi co-operatives, the content of the report recounts in more than one place Zurich's conduct, referring to it at least once as "an attack". 143 In these circumstances, I do not accept that Blanch could firstly have thought by the time of acquisition that the relationship with Zurich was "back on track" or secondly if the relationship had been restored in some respects by the entry into a new Agency Agreement, that such restoration was secure. The reference in the due diligence report to the existence of the "fall clause" for Blanch's protection in the context of the "attack" by Zurich and the fact that it was now "competing" with Mahoney, in my view, puts that matter beyond doubt. 144 It seems to me that the plaintiffs were very well aware of the difficulties that faced Mahoney with Zurich now in competition with it. It is extraordinary to think that Priest would have failed to "review", as she put it, the Agency Agreement if the relationship between Zurich and Mahoney was so pivotal. Priest made the note reminding herself to review the agreements on 8 November 1999. The completion date was nearly six weeks later. It is not as though there was not enough time or opportunity for a review of the Agency Agreement. I am satisfied that the reason Priest overlooked it was because the focus was on winning the race to the taxi cooperatives and thus removing the need for the Zurich relationship. I am not satisfied that Priest relied upon what was said by Cooper and Mr Norton in mid-October 1999 constituting the Zurich Representations. 145 The plaintiff's claims in respect of the Zurich Representations fail. Sale Warranties/Warranty Representations 146 The allegations in relation to breaches of the sale warranty provisions of the Share Sale Agreement contained in paragraph C44 are referred to earlier in this judgment (see paragraph 9). The plaintiffs allege breaches of clause 7.2(h), clause 19.2 and clause 19.3. It is also alleged that the sale warranties upon which the plaintiffs relied were misleading and deceptive, causing loss and damage to the plaintiffs. 147 The first alleged breach is that of clause 7.2(h). That was a warranty that since the June 1999 accounts there had been no other matter in which Blanch would be reasonably interested that contained "any onerous or unusual provisions material for disclosure to" Blanch. The particulars of the breach are repeated here for ease of reference: As to clause 7.2 (h) of the Sale Warranties - Clause 11.3 (2) of the Agency Agreement required the second plaintiff to only issue a CTP green slip to customers after receipt of the payment of premium and Clause 16.1 and Schedule 7 of the Agency Agreement had the effect that the second plaintiff would pay to Zurich, monies paid to the second plaintiff as a premium not more than 37 days after the day of inception of the Contract of Insurance. At all times from the date of the Agency Agreement the second plaintiff was substantially in default of these terms and was not financially able to make good the default. Further, on 8 November 1999 and 23 December 1999 the second plaintiff had received facsimiles from Zurich containing Zurich's complaints about the default of the second plaintiff. 148 It is important to focus upon the words "other matters in which (Blanch) would be reasonably interested". The warranty related specifically to other matters that may have come into existence " from the date of the June 1999 Accounts". On the assumption that the accounts were dated before 14 October 1999, it is clear that Cooper and Mr Norton informed the plaintiffs that there was a new Agency Agreement with Zurich and that Priest took the responsibility of reviewing that Agreement. Assuming for the moment that the Agency Agreement contained "onerous or unusual provisions material for disclosure", it seems to me in the circumstances of this case that once the disclosure was made of the existence of the Agency Agreement, "the other matter", and Priest had taken on the responsibility to review the Agreement, there had been compliance with the clause. 149 In any event the plaintiffs did not put their cases in respect of the alleged breach of clause 7.2(h) on the basis that they should have been told about the 37 days period in the Agreement per se. It was rather that, as particularised and confirmed in final oral submissions, there were breaches of that Agreement in that premiums had been received that were subject to a requirement that they be paid to Zurich within 37 days (between 14 October 1999 and 23 December 1999) and that this had not occurred; together with the allegation that Mahoney was not able to comply with that requirement. The basis upon which this claim is made is found in a Schedule produced by the plaintiffs containing what purported to be a list of premiums that had not been paid to Zurich within 37 days (Ex A; 848). There are 13 items in the Schedule totalling $42,517.07. It is very difficult to see how this could amount to an "other matter" that contained unusual or onerous provisions material for disclosure. I am satisfied that this claim is misconceived and fails. 150 As I have already said, there was no evidence that Mahoney was unable to comply with its contractual obligations simply because there was a funder in place. Its responsibility was to pass on the premiums "paid" to it. The plaintiff has not proved that Mahoney received the premiums in respect of those 13 items and indeed it appears from some handwriting on the schedule that some of those were "funded" and the premium may not have been received. It was incumbent upon the plaintiff to prove the receipt of the premiums to establish breach. This was not done.

151 It was also submitted that the measure of damages in the contractual warranty claim is misconceived. A claim of $2,631,533.30 is made. It is submitted that the plaintiffs do not claim that any part of that amount consisted of a premium payment which had not been remitted to Zurich, which Mahoney subsequently had to pay from its own funds. The amount claimed includes the first instalment of the purchase price and an array of other expenses. The usual measure of damages of breach of contract is to place the plaintiff in the same position it would have been in if the contract had been performed: Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 at 80. It was submitted that if that measure is applied it produces a nil result because no such loss occurred or has been proved. I agree. 152 The claim that the warranty representation in clause 7.2(h) was misleading and deceptive also fails. Even if it were accepted that the warranty representation was proved, the claim is doomed by reason of Priest's evidence, extracted earlier, that these outstanding amounts would not have influenced Blanch in its acquisition of Mahoney. 153 The next alleged breach is of clause 19.2 which is repeated here for ease of reference: 19.2 No contract to which either the Sale Company or the Subsidiary is a party: (a) is outside the ordinary and usual course of business or is otherwise unusual; or (b) is incapable of being fulfilled or performed on time, or only with undue or unusual expenditure of money or effort. 154 The alleged breach was that Mahoney was incapable of operating the businesses in a way that met its obligations to pay the premium within 37 days. As I have said already in relation to the case on the Zurich Representations and the alleged breach of clause 7.2(h), the plaintiffs have not established that they were unable to operate the business to meet the requirement of paying the premium within 37 days of its receipt. Indeed Priest's evidence was that the business was well able to "turn over" a cheque to Zurich within 37 days of its receipt. 155 The last allegation relating to the breach of warranty claim is an alleged breach of clause 19.3, the terms of which are repeated here for ease of reference: 19.3 Neither the Sale Company or the Subsidiary, as party to any contract, is: (a) in default of any material term; or (b) but for the requirements of notice or lapse of time or both, would be in default of any material term of any contract. 156 The claim made in respect of this warranty is that as at 24 December 1999 Mahoney was in default of the Agency Agreement in respect of those matters in the Schedule to which reference is made above. The plaintiff once again fails for the reasons set out above. The plaintiff has not proved the receipt of the premiums on the days within the relevant time period and thus has not established breach. In any event in respect of the alleged misleading and deceptive Warranty representations, Priest's evidence to which reference has already been made to the effect that Blanch did not rely upon them puts an end to the plaintiffs' claims on this aspect of the matter. 157 The Sale Warranty and Warranty Representations claims fail.

Claims under the Share Sale Agreement - cl 3.4 158 The plaintiffs claim they are entitled to the repayment from Cooper of the amount of the first instalment being $1,407,026.00 plus $600,000, a total of $2,007,026. The claim is based on clause 3.4 which provides: 3.4 Downward Adjustment of Purchase Price The Purchase Price has been calculated by reference to the Actual Combined Brokerage Income less certain adjustments. Therefore: (a) If, at 25 October 2000, the Actual Combined Brokerage Income for that period, is less than the Initial Combined Brokerage Income, the Second Instalment will be reduced by an amount calculated by multiplying any such shortfall by a multiplier of 1.25. (b) If after Completion, the Initial Combined Brokerage Income is reduced for any reason whatsoever (for example, due to debt write off or cancellation of premiums etc.) the Second Instalment will be reduced by an amount calculated by multiplying any such shortfall by a multiplier of 1.25. (c ) If the amount by which the Second Instalment is to be reduced under clause 3.4(a) and/or (b) (the " Second Instalment Reduction" ) is greater than the Second Instalment: (i) the Buyer is not required to pay the Second Instalment to the Seller; and (ii) the Seller must immediately pay to the Buyer the amount by which the Second Instalment Reduction exceeds the Second Instalment. (d) If, at 25 October 2001, the Actual Combined Brokerage Income for that year is less than the Initial Combined Brokerage Income, the Third Instalment will be reduced by an amount calculated by multiplying any such shortfall by a multiplier of 1.25. (e) If the amount by which the Third Instalment is to be reduced (the (" Third Instalment Reduction" ) is greater than the Third Instalment: (i) the Buyer is not required to pay the Third Instalment to the Seller; and (ii) the Seller must immediately pay to the Buyer the amount the Third Instalment Reduction exceeds the Third Instalment. 159 The ACBI is defined in clause 1.1 as "the aggregate of any actual commissions and brokerage fees for each of the Sale Company (Mahoney) and the Subsidiary (BIB) in the Specified Accounts". The term "Specified Accounts" was also defined in clause 1.1 as follows: Specified Accounts means in respect of each period of 12 months ending 25 October in the 2 years following Completion the audited financial statements of the Sale Company and the Subsidiary comprising the profit and loss account and statement of source and application of funds, and the balance sheet for that period. Any such profit and loss accounts are to be prepared on the same basis as the June 1999 Accounts (ie, on a cash basis, rather than on an accruals basis) notwithstanding that the Sale Company and its Subsidiary will change their accounting practices after completion (ie, from a cash basis to an accruals basis). 160 Thus the ACBI was required to be ascertained from the Specified Accounts to which there were a number of features. Specified Accounts were not prepared for either the period ending 25 October 2000 or 25 October 2001. Covenant 7.1, Buyer Covenants, included the following: ( c) (Preparation of Specified Accounts): The Buyer will procure that the Sale Company will procure the preparation of the Specified Accounts within 60 days after 25 October for the 2 years following Completion. 161 In reliance upon a letter from Cutcher & Neale dated 12 April 2001 the plaintiffs claim that the ACBI referrable to the Second Instalment was $2,982,264.47, being the commission and brokerage fees for both Mahoney and BIB to 25 October 2000. The Initial Combined Brokerage Income (ICBI) was defined as $4,255,960.44. That figure less the ACBI of $2,982,264.47 results in a total shortfall of $1,273,695.97. Applying cl 3.4 of the Share Sale Agreement and multiplying the shortfall by 1.25 results in a figure of $1,592,119.96. The Second Instalment of $1,595,985 less $1,592,119.96 results in a figure of $3,865.04. The Second Instalment would therefore be reduced from $1,595,985 to $3,865.04. 162 The ACBI relevant to the Third Instalment was, according to the Cutcher & Neale letter, $248,351.70, being the commission and brokerage fees to 25 October 2001 for Mahoney and BIB. The ICBI of $4,255,960.44 less the ACBI of $248,351.70 results in a shortfall of $4,007,608.74. Applying the multiplier of 1.25 to the shortfall results in a figure of $5,009,510.92. This adjusted amount was greater than the Third Instalment ($1,595,985) by $3,413,525.92. 163 According to the terms of the Share Sale Agreement, without any implied terms, Cooper would be obliged to pay to Blanch $3,413,525.92 less $3,865.04 being $3,409,660.88. However in final submissions the plaintiffs "accepted" that the Share Sale Agreement must be subject to an implied term which limits the amount which Cooper is required to pay Blanch under cl 3.4(e) to such sum as may be necessary to reimburse Blanch for all amounts paid out by Blanch for the benefit of Cooper as part of the price for the shares in Mahoney. It was submitted that it must be implied that the parties agreed that Blanch would not receive any more than it paid out. The defendants took issue with this implication. 164 The defendants defend this claim on two bases. The first basis is that there is no ACBI relevant to the Second or the Third Instalments because no Specified Accounts were prepared. The second basis is that the Share Sale Agreement contained implied terms by which Blanch was required to cause Mahoney to continue to trade until 25 October 2001 so that ACBI could continue to be earned over that period.

No Specified Accounts 165 In March 2001, two months after the sale of Mahoney and BIB to OAMPS, Mr Burdis spoke with John Wayne McLennan, who was at that time a partner of Cutcher & Neale and the audit partner for Mahoney and BIB. Mr McLennan's affidavit evidence was that he received instructions from Mr Burdis on behalf of Blanch "to check the calculations of the ACBI" of Mahoney and BIB. He understood that he had to determine "on a cash basis the total brokerage income within the meaning of the ACBI for the year to 25 October 2000 and the year to 25 October 2001". 166 Mr McLennan described the process he undertook in calculating the ACBI. He received from Mahoney a "summary sheet" which "summarised the commission and fees on a monthly basis for the period 26 October 1999 to March 2001 for Mahoney and BIB". He then instructed a senior staff member, Mr Mowbray, to attend Mahoney's premises in Newcastle and "agreed the summary sheet figures with the general ledgers" and "the fee and commission report (monthly reports)" for Mahoney and BIB. That involved "matching" the summary sheet figures to those in the ledgers and the fee and commission reports. Mr Mowbray reported to Mr McLennan that "he had agreed 100% of the figures on the summary sheet".

167 Mr McLennan then instructed Mr Mowbray to prepare the letter dated 12 April 2001 from Cutcher & Neale to Blanch that included the following in relation to Mahoney and BIB: We have conducted our audit of the brokerage and commission fee income for the abovenamed and submit the following: Michael v Mahoney Insurance Brokers Commission Brokerage Fees 26/10/99 - 25/10/00 $1,568,850.68 $241,432.69 26/10/00 - 31/3/01 $112,769.12 $25,711.99

Mahoney Insurance Brokers (Qld) 26/10/99 - 25/10/00 $967,230.39 $204,750.71 26/10/00 - 31/3/01 $88,841.59 $21,029.00 We note that no debtors existed at 31/3/01. 168 Mr McLennan gave evidence that at no stage was he requested to prepare Specified Accounts. In cross-examination he gave evidence that the task of the preparation of such accounts "is an awkward one because it does involve preparing some financial statements of a slightly abnormal variety". His evidence included the following: Q: It is quite a difficult professional exercise because of these odd dates, October and what have you? A: Correct Q: And is this right, in putting forward what you have said in your affidavit, including your material (in the summary sheet and the Cutcher & Neale letter of 12 April 2001) you would not suggest for one minute that the exercise that you have done is the equivalent of the preparation of the (Specified Accounts)? A: No Q: And the preparation of Specified Accounts for each of the 12 month periods is simply a complex accounting process which you have never been asked to do? A: Correct Q: And you, unless and until you have done it, of course, you would not know what the result would be? A: Correct. Yeah. 169 Although the ACBI was defined as that "shown in the Specified Accounts" and although no such accounts as defined were prepared, the plaintiffs submitted that, in any event, "the ACBI is properly determined if it is calculated on the basis of an account verified by the auditor which complies with that part of the definition of Specified Accounts which is actually relevant to the determination of the ACBI". It was submitted that the object of the definition was to ensure that the ACBI figures "were accurate to an audit standard for the purposes of cl 3.4". 170 The plaintiffs submitted that "it cannot be the proper construction of the Share Sale Agreement" that Blanch would lose a right - either a reduction of an instalment or a repayment by Cooper - on the basis that the auditor made some mistake or undertook some process which did not affect the validity of the calculation performed and the accuracy of the result. It was submitted that it would be "quite extraordinary" if Cooper could defeat Blanch's rights under the Share Sale Agreement, particularly where the auditor's view was that the result was accurate and reconciled 100% to underlying documents. It was further submitted that the parties could not have intended that the substantive provisions of the Share Sale Agreement (cl 3.1 and 3.4) would be affected by what the plaintiffs referred to as "immaterial shortcomings". 171 On the third day of the trial, 26 May 2004, Senior Counsel for Blanch, Mr Robb QC, in accepting that Specified Accounts were not produced, submitted that if the proper construction of the Share Sale Agreement was that such a document had to be prepared "literally and in specie" then the quantification of the ACBI "would not have occurred yet". Mr Robb QC also recognised that the failure to produce the Specified Accounts within 60 days of 25 October of each of 2000 and 2001 was in breach of the Buyer's Covenant, cl 7.1(c). 172 On 26 May 2004 Mr Robb QC sought an adjournment of the proceeding on two bases. The first was so that Mr McLennan could be conferred with for the purpose of (a) preparing evidence to explain how the figures in the Cutcher & Neale letter were reached and (b) arranging for him to be made available for cross-examination (the shorter adjournment). The second basis was so that Specified Accounts could be prepared (the longer adjournment). I did not allow the longer adjournment at that time but I granted leave to the plaintiffs to seek the longer adjournment if they regarded it as necessary. I allowed the shorter adjournment and Mr McLennan was subsequently called as a witness. The plaintiffs did not take up the leave granted to make application for the longer adjournment but contented themselves with reliance upon Mr McLennan's evidence to submit that although it was not "the complete Specified Accounts" it was "enough of that exercise to determine reliably what the ACBI was". 173 The defendant submitted that absent "Specified Accounts", no ACBI can be "shown" in those accounts. It was submitted that the breach of covenant 7.1(c) prevented the operation of the Downward Adjustment of the Purchase Price provisions contained in cl 3.4, with the consequence that cl 3.3 (a) and (b) took effect without reduction. That clause provided: Following the Completion Date, the Buyer shall, subject to clause 3.4, pay the balance of the Purchase Price as follows: (a) the Second Instalment on or by the first anniversary of the Completion Date; and (b) the Third Instalment on or by the second anniversary of the Completion Date. 174 The defendants relied upon a number of authorities in support of this submission. The first of those was Hunter Resources Ltd v Melville & Anor (1987) 164 CLR 234. In that case the High Court was considering the provisions of the Mining Act 1978 (W.A.) under which prospecting licences were granted to applicants. Section 105(1) of that Act provided that, prior to making an application, the applicant was required to mark out "in the prescribed manner and in the prescribed shape the land in respect of which the mining tenement" was sought. Section 105A provided that when two or more applications were made for a prospecting licence in respect of the same land, the applicant who first marked out the land in the prescribed manner had priority over the other applicants. Regulation 59 of the Mining Regulations 1981 (W.A.) required a mining tenement to be marked out by fixing pegs in the ground "at intervals not exceeding 300 metres along each of the boundary lines". 175 An applicant for a prospecting licence had marked out the tenement with pegs at intervals which in 3 places exceeded 300 metres by between 1 and 3 metres. The mining warden refused the application because of non-compliance with Regulation 59. The majority (Wilson, Dawson & Toohey JJ) held that the warden had acted according to law in refusing the application. In dealing with whether "substantial compliance" was sufficient observance of the statutory requirement, Wilson J held that the case was one in which substantial compliance with the relevant statutory requirement was not possible. His Honour said "either there was compliance or there was not". 176 The defendants relied upon the following portion of the dissenting judgment of Mason CJ and Gaudron J (at 241) to submit that the Court should approach the construction of the Share Sale Agreement in a like manner: It is a matter then of construing the relevant provisions of the Act in their context which of course includes the scope and purpose of the statute. We begin with the command in s.105 that, before applying for a mining tenement, an applicant shall mark out the land applied for in the prescribed manner. The statute thereby imposes an obligation on an intending applicant to comply with the requirements of the regulations as to marking out. Neither s.105 nor any other provision in the Act gives any indication that anything less than exact compliance with these requirements is a sufficient satisfaction of the statutory obligation. And, when we look beyond the statute to reg.59 we find that it prescribes that pegs shall be placed at a distance " not exceeding 300 metres", the distance so prescribed being the maximum permitted distance. 177 The defendants submitted that the question for the High Court was in effect one of substantial compliance, or put another way, was near enough good enough? The debate in the High Court focussed in part upon the dichotomy between mandatory and directory enactments. That dichotomy was said to be based upon a distinction between the performance of a public duty and the acquisition or exercise of a private right. Dawson J said at 251: If the concept of a directory enactment is extended to private rights, the question whether a provision is mandatory or directory must nevertheless be one of intent to be gleaned from the scope and object of a statute: Caldow v Pixell (1877) 2 C.P.D. 562 at 566. It is a question of what consequences, if any, were intended to flow from the failure to comply with the statutory requirement and even if the difference between the performance of a public duty and the acquisition or exercise of a private right is not conclusive, that distinction does at least provide some guidance in distinguishing those provisions with which strict compliance was intended from those with which it was not.

178 The next case relied upon by the defendants was Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689. That case concerned an agreement whereby a surety agreed to underpin the risk of making a multi million dollar credit facility available to a third party expressed to be "upon the terms and conditions and at the time and in the manner herein provided". That agreement included provisions as to the giving of notice of default and notice of demand before any liability arose under the agreement. An issue in the case was whether oral notice was sufficient compliance. After referring to Ankar Pty Ltd & Anor v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549, Samuels JA said at 705: It seems to me to follow from Ankar that it is meaningless to speak of the substantial performance of a condition precedent. Either it has been performed, or it has not. If it has, performance enlivens the obligation to which the stipulation is a condition precedent. If it has not, the obligation does not arise. 179 Waddell A-JA said at 718: It is said that the requirement that such notices be in writing is not a matter of substance and that Tricontinental should be held to have performed the provisions if oral notices were given which satisfied the commercial purpose. In my opinion, this is not correct. The clear commercial purpose of the provisions is to provide a mechanism whereby the liability on the part of HDFI can be established in a way which is unambiguous and certain. It is essential in commercial dealings that provisions of this kind should be applied strictly so that parties know exactly where they stand. 180 The defendants also relied upon Arcos Ltd v E.A. Ronaasen & Son [1933] AC 470 in which the House of Lords was dealing with a contract relating to the sale of certain Russian timber which stipulated length, breadth and thickness, allowing some variation in the length and the breadth of the staves, but none in the thickness, which in all cases were specified as half an inch. When the goods arrived in London the buyers claimed to reject them on the ground that they did not conform to the description in the contract in that they were not of the thickness of half an inch.

181 Lord Atkin said at 479-480: It was contended that in all commercial contracts the question was whether there was a "substantial" compliance with the contract: there always must be some margin: and it is for the tribunal of fact to determine whether the margin is exceeded or not. I cannot agree. If the written contract specifies conditions of weight, measurement and the like, those conditions must be complied with. A ton does not mean about a ton, or a yard about a yard. Still less when you descend to minute measurements does ½ inch mean about ½ inch. If the seller wants a margin he must and in my experience does stipulate for it. Of course by recognised trade usage particular figures may be given a different meaning, as in a baker's dozen; or there may be even incorporated a definite margin more or less: but there is no evidence or finding of such a usage in the present case. No doubt there may be microscopic deviations which business men and therefore lawyers will ignore. And in this respect it is necessary to remember that description and quantity are not necessarily the same: and that the legal rights in respect of them are regulated by different sections of the code, description by s.13 quantity by s.30. It will be found that most of the cases that admit any deviation from a contract are cases where there has been an excess or deficiency in quantity which the Court has considered negligible. But apart from this consideration the right view is that the conditions of the contract must be strictly performed. If a condition is not performed the buyer has a right to reject. I do not myself think that there is any difference between business men and lawyers on this matter. No doubt, in business, men often find it unnecessary or inexpedient to insist on their strict legal rights. In a normal market if they get something substantially like the specified goods they may take them with or without grumbling and a claim for an allowance. But in a falling market I find that buyers are often as eager to insist on their legal rights as courts of law are ready to maintain them. No doubt at all times sellers are prepared to take a liberal view as to the rigidity of their own obligations, and possibly buyers who are in turn sellers may also dislike too much precision. But buyers are not, as far as my experience goes, inclined to think that the rights defined in the code are in excess of business needs. 182 The defendants submitted that the regime provided for by clauses 7.1(c) and the definitions of "Specified Accounts" and ACBI, has the clear commercial purpose of providing a mechanism whereby any downward price adjustment is to be established in a way that is unambiguous and certain and that those provisions have either been fulfilled or they have not. It was also submitted that it is beside the point entirely that Mr Burdis, Mr McLennan or anybody else may have done some arithmetic and put together some other document on some other occasion which suits Blanch. It was submitted that the exercise bears no relationship to the requirements of the Share Sale Agreement. It was submitted that, "near enough is not good enough". 183 The defendants also submitted that this is not a case in which there is some minor technical defect in compliance with the contractual regime which may attract some form of sympathetic consideration: Pan Foods Company Importers & Distributors v Australia and New Zealand Bank (2000) 170 ALR 579 per Kirby J at 582. It was submitted that in this case Blanch expressly covenanted to procure the production of the Specified Accounts; it failed to take any steps at all to fulfil its covenant and in those circumstances it should not be permitted to rely upon its own breach in order to secure a benefit at Cooper's expense. 184 This commercial contract provided for payment of the purchase price in three instalments. It was only in circumstances provided for in the contract that the amount of the Second and Third Instalments could vary from those agreed and defined ($1,595,985 in each case). The clause governing the possible downward adjustment of the purchase price was in my view significant and fundamental to the Agreement between the parties. Subparagraphs (c) and (e) of clause 3.4 gave Blanch significant and fundamental protection against a reduction in income in the years to 25 October 2000 and 2001. They also exposed Cooper to a significant and fundamental risk of having to pay Blanch for that loss of income. Although the First Instalment was not subject to the formula in clause 3.4, the operation of subparagraphs (c) and (e) meant that if the income reduction was significantly greater than the amount of the Second and Third Instalments Cooper was at risk of having to pay to Blanch the whole of the money paid to him by Blanch by way of the First Instalment and indeed more, depending on the amount by which the Reductions were greater than the Instalments. 185 The plaintiffs sought to dilute the significance of the protections and risks inherent in clause 3.4 by their so-called "acceptance" of an implied term that notwithstanding the provisions of subparagraphs (c) and (e), the amount Cooper would be required to pay Blanch was capped at the amount Blanch had paid Cooper by way of First Instalment. With what perhaps may be seen as a touch of irony, Cooper submitted that the suggested term does not satisfy the pre-requisites for the implication of such a term: BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 180 CLR 266 at 282-3; Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 405. It was submitted that the term propounded by Blanch contradicts the express terms of the contract in clause 3.4 and should therefore not be implied. I agree. 186 In my view these fundamental protections and risks were so significant that strict compliance with the provisions pursuant to which they could be realised was essential. It was only in the circumstances of such strict compliance that clause 3.4 could be triggered. Specified Accounts were not prepared and thus the ACBI could not be identified within the unambiguous and certain terms of the Agreement. Mr McLennan's evidence that until the Specified Accounts were created the "result" could not be known supports that finding. There is the further matter that Blanch now seeks to pursue contractual rights it might have had, if it had complied with the Buyers Covenant in clause 7.1(c). It chose not to comply and has given no reasonable explanation for its non-compliance. I am not satisfied that the provisions of the Share Sale Agreement permit the "near enough is good enough" approach adopted by the plaintiffs. Clause 3.4 is not triggered and the plaintiffs' cases in this regard fail. The Implied Term 187 The defendants submitted that it was an implied term of the Share Sale Agreement that Blanch would not sell or otherwise dispose of the businesses during the period when the price adjustment formula was in operation. It was submitted that it was duty bound not to take any step that would make it materially more difficult for ACBI to be earned, or for Cooper to receive his entitlements under the agreement, including the Third Instalments of the Purchase Price, the businesses having been sold after the Second Instalment was due but before the Third Instalment was due. 188 The terms of the Share Sale Agreement allow for the circumstance in which Blanch may not have wished to avail itself of the terms of clause 3.4, for instance, it may not have wished to go to the trouble and expense of procuring the preparation of Specified Accounts where it was of the belief that the Reduction may have been insignificant. However, it is submitted that if Blanch wished to avail itself of the downward adjustment of the purchase price in clause 3.4, it was obliged to operate the business for the relevant period to 25 October 2001 to provide the proper basis upon which the formula in clause 3.4 could apply. This suggested implied term is really in the nature of a condition precedent to the operation of clause 3.4.

189 The basis for the implied term is submitted to be the principle expressed in Mackay v Dick (1881) 6 App Cas 251 stated by Griffith CJ in Butt v M'Donald (1896) 7 QLJ 68 at 70-71 and approved by Mason J in Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596 at 607. In Mackay v Dick Lord Blackburn said at 263: I think I may safely say, as a general rule, that 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. 190 In Butt v M'Donald Griffith CJ said at 70-71: 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. 191 In Secured Income Mason J referred to Mackay v Dick and said, at 607: It is not to be thought that this rule of construction is confined to the imposition of 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. 192 Mason J went on to refer to what Griffith CJ said in Butt v M'Donald extracted above and said, at 607-608: 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. 193 The defendants submitted that the implied term is necessary to enable Cooper to have the benefit of the payment provisions of the Share Sale Agreement in accordance with its terms and to avoid Blanch engineering its own unjust enrichment. In the same way, the term is necessary to give business efficacy to the Share Sale Agreement: Codelfa Constructions Pty Ltd v State Rail Authority of NSW at 405. 194 It was submitted that the implied term is to the same effect as the term implied by Young J, (as the Chief Judge in Equity then was) in RDJ International Pty Limited v Preformed Line Products (Australia) Pty Ltd (1996) 39 NSWLR 417 (cited with approval in South Sydney Council v Royal Botanic Gardens & Anor (1999) 10 BPR 18,961 at par 127: not disturbed on appeal (2002) 76 ALJR 436). In that case a contract for the sale of a business included terms entitling the vendor to a payment "additional" to the purchase price, equivalent to 5% of what was referred to as the "Dinpak Turnover", being the amount of all revenue on the sale of the product manufactured by the business for the period of 3 years commencing on the completion date (cls 3.1, 4.1 & 4.2). The additional payment was to be made by quarterly instalments calculated in arrears from the completion date and paid within 14 days of the end of each quarter. When making each payment, the purchaser was obliged to provide "reasonable evidence" of the value of the sales in the preceding quarter and the method of calculation of the instalment. The purchaser ceased to manufacture the product after 18 months.

195 Young J found that "neither party turned its mind to the question as to whether the business would be continued for three years and neither party turned its mind to what might happen if it was not commercially feasible for the defendant to continue to operate the business" (at 420). His Honour said at 421: … there are circumstances where the law will insist that parties co-operate to bring about the substantial requirement of the contract as shown by their common intention. This principle may operate in two ways. First, it may mean that a person is excused performance if the duty of co-operation falls down. Secondly, the person affected may sue for damages for breach of the implied term as to co-operation. It is also clear that this duty is not limited to cases where there is an absolute failure to co-operate because of a capricious decision. It may operate to sound in damages to the other party, even where the person who is not co-operating has made a decision based on that person's legitimate economic interests. 196 At 422-423 Young J said: If one can see from the contract, including its factual matrix, that the parties have made a common assumption that a certain state of affairs needs to continue in order for the contractual purposes to be achieved, one does not merely act on the strict literal construction of the contract. Rather one looks to see what other provisions should be implied which, had the parties turned their minds to it (or had an impartial bystander turned his or her mind to it), they (or he or she) would have said "yes, of course, that is necessary as a provision in this contract in order to make it work". … The various cases usually fall into three categories. First there are cases where a builder is either excused from performance or can get damages or the contract price if he is impeded by the non-co-operation of the proprietor. An example is Roberts v Bury Improvement Commissioners (1870) LR 5 CP 310. A second class of case is where an estate agent is prevented from earning his commission because the owner sells the property himself. A well-known case Luxor (Eastbourne) Ltd v Cooper [1941] AC 108 is a fine example of this sort of case. The third main class is a situation where a person is employed for a set period of time and then the company goes out of business. A prime example is Stirling v Maitland (1864) 5 B&S 341; 122 ER 1043. In all three classes of cases it is held almost without exception that the claimant is entitled to succeed because there is an implied term that the circumstance from which the person is to get their remuneration will not by the voluntary act of the other party be terminated. … It seems to me that both parties, or an innocent but alert bystander, if asked at the time would have said that there was an obligation on the defendant not voluntarily to do anything which would make it materially more difficult for the royalty stream to flow. 197 His Honour granted a declaration that there was an implied term "that the defendant will not do any voluntary act which will make it materially more difficult for the royalty stream to continue" for the specified period of 3 years (at 423). 198 The defendants submitted that the implied term fulfils all the general requirements for the implication of the term stated in BP Refinery (Westernport) Pty Limited v Shire of Hastings at 282-3 and Codelfa at 347. It was submitted that it was reasonable and equitable; otherwise Blanch would enjoy a windfall. It was also submitted the term is clear and consistent with the terms of the agreement and that a relevant bystander would react "of course", otherwise the downwards price adjustment provisions would work an obvious injustice: BP Refinery at 282-3. It is also capable of a clear expression: Ansett Transport Industries (Operations) Pty Ltd v Commonwealth of Australia (1977) 139 CLR 54. 199 The defendants submitted that it is no answer that the fortunes of the businesses went into decline after Zurich decided to cut Mahoney out of the picture and deal directly with the taxi co-operatives. This was known to Blanch before it entered into the agreement and was one of the risks accommodated by the introduction of the downward price adjustment formula. It was submitted that in any event the implied term will be breached even where the person who is not co-operating made its decision on the basis of legitimate economic self-interest: RDJ International at 421. The defendants claim that the remedy for the breach of the implied term in selling the business prior to the end of the period of 2 years is an estoppel that prevents Blanch from asserting any right to a downward adjustment. In Newmont Pty Ltd & Ors v Laverton Nickel NL & Ors (1983) 1 NSWLR 181 (PC) Sir Harry Gibbs said at 188: In argument counsel for the appellants cited cases such as Mackay v Dick (1881) 6 App Cas 251 in support of the submission that where one party makes it impossible for a condition of a contract to be fulfilled, the condition is to be taken as satisfied. That is true in some cases, but not in all; whether the performance of a condition precedent is excused where a party has prevented its performance must depend on the nature of the condition and the circumstances of the case. In some cases the nature and purposes of the condition will themselves be sufficient to indicate that the parties must have intended that the obligations which are expressed to be dependent on the fulfilment of the condition will come into existence only if the condition is fulfilled, and that it will not be enough that performance of the condition has been prevented by the wrongful act of one of the parties. 200 The defendants also submitted that another approach with the same result is to treat the matter as a question of construction. In this case the conduct of Blanch in cutting short the period during which the ACBI could be calculated, meant that no ACBI, as defined in the Share Sale Agreement, could ever be calculated. It was for a period of 12 months, not a shorter period. Indeed, no "Specified Accounts" within the meaning of the agreement were brought into existence, in time or at all, nor could they be, because those Accounts relate to a different period, and one that had not been seen out by reason of the sale of the businesses ten months before the expiration of the period. 201 There is no evidence that the parties turned their minds as to what was to happen in relation to the operation of clause 3.4 if the business became commercially unviable within the period up to 25 October 2001. Certainly there was evidence of consideration of the prospect that the income of the business may decline which was the very reason clause 3.4 was inserted, referred to by Mr Marchand as the "fall clause". From a review of the whole of the terms of the Share Sale Agreement and the conduct of the parties, it seems to me that there was a common assumption that the business would continue to be operated for at least the period up to 25 October 2001, notwithstanding that there may be a decline and indeed a rather large decline in the income of the business. 202 Cooper was obliged to pay to Blanch the difference between the Reduction and the Instalments in both periods up to 25 October 2000 and 25 October 2001. I have rejected the plaintiffs' contention that there was an implied term that such obligation was capped at the amount of the First Instalment. Blanch was concerned prior to acquisition that there might be a decline, even a significant decline, in income if Zurich won the race to the taxi-co-operatives. It made provision for that decline by the inclusion of clause 3.4. Blanch secured this advantage to Cooper's significant risk. Blanch was obliged to ensure that it co-operated in ensuring that it did not voluntarily do anything that would impede Cooper's capacity to enjoy his entitlements under the Share Sale Agreement, including the payment of the purchase price or the restriction of his risk to the result of the application of the formula in clause 3.4. 203 I am satisfied that the relevant bystander would say, "of course", Blanch could not voluntarily sell the business very soon after purchase, procure the creation of Specified Accounts and then claim that because there was no income for the relevant periods it was entitled to receive the amount of the ICBI for both periods. The fact that is was actually later in time but still within the relevant two year period does not change the analysis. I am satisfied that having regard to the significant and fundamental advantages and risks provided for in clause 3.4, that for Blanch to take advantage of the formula within it and for Cooper to be exposed to the risks within it, there is the implication of the term that Blanch would operate the business for the period to 25 October 2001, or put another way would not voluntarily abandon or sell the business in that period. 204 The plaintiffs claim that even if the term propounded by the defendants is implied, it cannot be the case that the plaintiffs were required to continue to allow Mahoney and BIB to trade while insolvent. The plaintiffs claim that there was no choice but to sell the businesses in January 2001 and that such decision was not in a relevant sense "voluntary" and was not a decision merely based upon Mahoney's view of its "legitimate economic interests". In this regard the plaintiffs relied upon the evidence of Keiran William Hutchison, a partner of Ernst & Young who attended two of the Mahoney Board meetings in August 2000. 205 It was in July 2000 that Mr Hutchison met with Priest and Mr Burdis at a time when Ernst & Young were the auditors for the parent company of Blanch and also the auditor of the ultimate parent company. Mr Hutchison's affidavit evidence was that he was requested to provide a report to the Boards of Mahoney and BIB on the company's current financial position and to outline options that may be available in the event that Blanch "determined not to or was unable to continue to fund" Mahoney. The retainer letter dated 24 August 2000 to the directors of Mahoney recorded that Ernst & Young had been requested to provide comments not only on the current financial position but also on the "options available with respect to restructuring of the companies". 206 Mr Hutchison only had one week to conduct his initial review and the material to which he had access was quite limited. It was an enquiry into the raw financial data and did not touch upon shareholder involvements or obligations. He did not have a copy of the Share Sale Agreement nor of the Lease between Maco and Mahoney. Mr Hutchison provided a copy of a report, in draft for discussion, to the directors of Mahoney on 29 August 2000 and attended the Board meeting on 30 August 2000. That report included an Executive Summary that included the following:

• In respect of Mahoney Reliant on cash injections to continue trading. Balance sheet solvent; however liquidity impacts on going concern. Cash flow injection of $421 (Net) through 31 December 2000 required to fund the business. Likely that further funds will be required due to worsening income projections to period end 31 December 2000.
  • In respect of BIB Uncertainty as to ongoing taxi business beyond 6 months. Balance sheet solvent, however worsening income projections will strain cash flows. Cash flow positive (after reversal of $367K management fees). 207 The options available listed in the Executive Summary were: voluntary administration; liquidation; managed wind-down and members voluntary liquidation. The conclusion was as follows: Directors of Mahoney must obtain immediate source of capital or cease to trade or appoint an external administrator. Significant funding required to preserve business to sell or seek new underwriter. Ongoing funding provides best prospect to maximise value of portfolio for creditors but difficult to identify ongoing funding value to shareholder or any other investor. 208 In cross-examination Mr Hutchison gave the following evidence: Q: You're not suggesting, Mr Hutchison, that this company didn't have alternatives, are you? A: Every company has alternatives. Q: You've set some alternatives out in your report? A: That's correct and there are alternatives, yes. Q: If the company was relevantly insolvent, you would have said so and there would be no alternative, would there? A: That's correct. 209 Mr Hutchison agreed that he did not conduct any form of review of business opportunities for the future of the company because it was not part of the scope of services to be provided by Ernst & Young. One of the options, a managed wind-down, was a "real option" in respect of which Mr Hutchison gave the following evidence: Q: With the managed wind down, you envisaged the company carrying on its income-earning activities and winding down some of the costs that might be incurred, perhaps, at a marginal level, not making any real contribution to the optimum return from that business, correct? A: That's correct. Though, one needs to consider the timeframe in which this company was - the renewal season for this company, for its insurance premium business, was primarily focussed at the beginning of each calendar year. So this company was in a period, I recollect, where it was experiencing, as it would normally experience, lower levels of renewals but it still had a very high cost structure. That was something that had to be addressed and at that time it needed to be addressed through assistance from its parent. 210 Priest gave evidence in relation to the decision to sell the businesses that included the following: Q: Is this right, that you participated in the making of this sales decision in your capacity as an officer of EW Blanch? A: In my capacity as an officer of EW Blanch and Mahoneys: as a director of Mahoneys yes. Q: You referred the subject matter of this report to your superiors in the United States? A: Yes. Q: Is it fair to say that the ultimate decision to sell was a decision made by them? A: They had indicated that they didn't want to keep putting money into the company, but the decision was made at the Mahoney's board meeting that we had no other option. Q: Is this right - after you sent a copy of the report which is open in front of you, dated 30 August 2000, to America, you had various communications with the Americans? A; Yes. Q: In the course of those communications, did you discuss with them the contents, for example, of the executive summary which appears on page 2 of that report? A: I wouldn't have gone into the financial details. Q: You did discuss with them, however, that the effect of what Ernst & Young were saying in this report was that Mahoneys was balance sheet solvent? A; Yes. Q: However, liquidity impacted adversely on its quality as a going concern? A: I would have said that more funds were required … Q: Yes A: … to be put in by Blanch. Q: Did you put a particular figure to them? A: No, I don't recall mentioning… Q: The clear instruction you got from them was they weren't prepared to inject any further capital into this business? A: They did not wish to keep putting money into it, that's correct.

… Q: But you in your own mind, in your capacity as an officer of EW Blanch and as a director of Mahoneys, had an understanding that the effect of an injection of capital would provide the best prospect to maximise value of the insurance portfolio for creditors of Mahoney? A: Yes, I appreciate that. Q: Yes. On the other hand, if the ultimate owners of the holding company put more capital into it they, themselves, would not necessarily be getting value, that is to say, the shareholder, EW Blanch, would not necessarily be getting any commensurate value out of any such further injection of capital? A: No, they would have just been keeping it afloat

… Q: Just moving on a little bit. In this climate, what I'd like to suggest to you is that there came a point at or about the time that the Ernst & Young report of 30 August came through when EW Blanch made a commercial decision that it would not support Mahoneys any further and that it would cause Mahoneys to sell off the two residual insurance businesses to OAMPS. A: That was Blanch's desire and Mahoney's board agreed with that. Q: It was a commercial decision made at a time because the other alternatives - ongoing funding, managed wind down, the appointment of an administrator or what have you - didn't have the same commercial appeal. A: We did not wish to keep putting money in to that company that was clearly dying. Q: It hadn't died yet? A: It was only kept alive by us continuing as EW Blanch to fund. 211 I am not satisfied that the evidence establishes that the sales of the businesses were not "voluntary" in the relevant sense. The parent company was well aware of the possible dangers of this purchase if Zurich won the race to the taxi co-operatives and Blanch/Mahoney was unable to establish the "captive" into which so much effort was being put. It had "approved" the purchase pursuant to the terms of the Share Sale Agreement and was funding the business to facilitate the establishment of the captive in the circumstances where it knew that Zurich was in competition with Mahoney. I am satisfied that when Blanch and its parent formed the view that it could not compete in the CTP area with Zurich by finding an alternative CTP insurer it decided to leave the field altogether rather than fight on to make income from the sale of insurance generally.

212 There was no analysis by Ernst & Young of the alternative funding arrangements or capital injections that may have been available to Mahoney nor was there any analysis of the business opportunities generally that may have been available to the brokerage. I am satisfied that it was a decision made for its and its parent's economic interests not to put any further money into the business because it was, as Priest saw it, in the process of "dying". It was in my view a voluntary sale. 213 The plaintiffs' claims under clause 3.4 of the Share Sale Agreement fail. Cross Claim for the balance of the purchase price. 214 Cooper seeks payment of the balance of the Purchase Price pursuant to clause 3.3 of the Share Sale Agreement. That claim is for the Second and Third Instalment, as defined, without any adjustment under clause 3.4 because the clause has not been triggered in the circumstances outlined earlier. The total of those two instalments is $3,191,970. Cooper also seeks interest on those amounts pursuant to clause 3.5(a) of the Share Sale Agreement from 24 December 2001. Clause 3.5(a) provided: The Buyer shall pay to the Seller interest on any unpaid amount of the Purchase Price other than any amounts withheld by the Buyer in accordance with clauses 4.2,4.3 and 4.4 or other deductions or withholdings referable to the Seller's default. That interest will be paid monthly and will be calculated: (i) at the rate being the aggregate of the published base rate of the NAB and a margin of 1.5%; and (ii) on a daily basis and on a year 365 days. 215 The Share Sale Agreement required Blanch to deposit $3,191,970 (being the estimated balance of the Purchase Price) into an interest-bearing account with an Australian trading bank and to retain that deposit "for the purpose of paying the Second Instalment and the Third Instalment in accordance with the terms" of the Share Sale Agreement. Blanch was entitled to all interest accrued on that account (cl 3.2(a)(ii)). 216 During the trial the defendants' solicitor asked the plaintiffs' solicitor if the deposit was held in a bank account in Australia. The plaintiffs' solicitor informed the defendants' solicitor that he was unable to tell him whether that was so. In response to the defendants' solicitor's question as to whether the plaintiffs had sent the $3 million overseas, the plaintiffs' solicitor advised that he did not have any instructions. The defendants then moved for interlocutory relief in the form of an order requiring the plaintiffs to "forthwith restore" the deposit to an interest-bearing account with an Australian bank and to retain the deposit until further order of the Court. 217 The documents produced in answer to a Notice to Produce (Ex 2 & 3) established that $3,191,970 was invested with the National Australia Bank as at February 2000 but that withdrawals from time to time had reduced it to $250,000 at the time of the trial. Blanch had the benefit of the use of the difference and the interest earned thereon during that time. It became unnecessary for me to rule on the interlocutory application because the plaintiffs undertook to restore the deposit. 218 The defence to the Cross Claim for the balance of the Purchase Price mirrored the claims made in the Further Amended Summons. Having regard to the findings I have made in respect of those claims there is no available defence to the plaintiff in respect of this claim. In those circumstances the plaintiff is to pay Cooper the balance of the Purchase Price of $3,191,970 with interest as claimed.

The Cross-Claim in relation to the Lease 219 The plaintiffs have admitted that Mahoney ceased paying rent under the Lease between it and Maco for the premises at 103 Beaumont Street, Hamilton in August 2000. The rent under the Lease was $94,000 per annum plus GST. 220 Maco sold the premises by Contract dated 20 June 2002 and completed the sale on 21 August 2002 without any adjustment of rent in its favour. The amount of rent to which Maco claims to be entitled is $109,623.33 calculated on the basis of 387 days at $283.29 per day inclusive of GST.

221 There is no defence to this claim other than one that is reliant upon the claim that Mahoney was induced to enter into the Lease based on the alleged misleading and deceptive representations made to Blanch by Cooper (the Zurich Representations and the Warranty Representations). As those claims have failed there is no defence to the claim made by Maco for the outstanding rental. Maco is entitled to an order that the second plaintiff pay to it the amount claimed.

OAMPS Claim Adjustment 222 The Share Sale Agreement included provisions relating to an OAMPS claim adjustment in the following terms: 4.3 OAMPS Claim Adjustment (a) The parties acknowledge that the Subsidiary has a potential liability in relation to the dispute with OAMPS referred to in paragraph 9.1(c) of Schedule 2 ( the "OAMPS Claim") . An amount of $227,000 has been provided for this liability (the " Provision "). (b) If the Subsidiary (and or the Sale Company) has to pay any amount in respect of the OAMPS Claim in excess of the Provision, the Company may deduct that excess amount from the Second Instalment or the Third Instalment as appropriate. If the OAMPS Claim has not been resolved by the date on which the Third Instalment is due the buyer is entitled to retain such amount as the Buyer reasonably believes it is likely to be payable in relation to the OAMPS Claim in excess of the Provision (if any) including a provision for legal and other expenses from the Third Instalment until the OAMPS Claim is resolved, at which time the Buyer will set off against the amount retained any amount payable by the subsidiary and/or the Sale Company. To the extent that there is a positive balance of the amount retained after that set off, the Buyer shall pay the balance to the Seller. To the extent that there is a shortfall between the amount so payable and the amount retained, the Seller shall immediately pay that shortfall to the Buyer. To the extent that the amount payable to discharge the OAMPS Claim is less than the Provision, the Buyer will cause the Sale Company to pay the Seller an amount equal to that difference. The Seller will use its best endeavours to settle the OAMPS Claim as soon as practical at his own cost and cause to be delivered to the Sale Company an executed Deed of Release and ASIC Notification of Discharge of Charge in relation to the OAMPS Charge and a duly executed Deed of Release of the Guarantee. 223 Paragraph 9.1(c) of Schedule 2 of the Share Sale Agreement provided: "there is a dispute between the Sale Company and OAMPS with a potential liability of $227,000". 224 There does not appear to be any issue about the OAMPS claim adjustment. The only question was whether interest should be awarded and the bases for resiting such a payment were the claims made by the plaintiff in the Further Amended Summons, which have failed. Following the settlement of the OAMPS Claim, the amount payable by Blanch to Cooper was $142,000. That amount should be paid to Cooper together with interest from 10 January 2001 to the date of judgment. 225 There was also a claim by Cooper for unpaid consultancy fees. That claim was abandoned by Notice from Senior Counsel dated 4 June 2004. Conclusion 226 The claims made by the plaintiffs in the Further Amended Summons are dismissed. The first plaintiff (Blanch) is to pay to the first defendant/first cross claimant $3,191,970 plus interest as claimed and the amount of $142,000 for the OAMPS adjustment plus interest as claimed. The second plaintiff is to pay to the second defendant/second cross claimant (Maco) $109,623.33 for outstanding rental for the Newcastle premises. 227 The parties are to prepare Short Minutes of Order to reflect these findings together with any agreed costs order, to be filed when the matter is listed at 9.30 on 5 August 2004. If the parties are unable to agree on a costs order I will hear argument on 5 August 2004.

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