Supreme Court of WA|2001-06-11|Before: Mr J, Crabtree Vickers P, Addressing Co P, Park Properties P, Murray J

Expectation Pty Ltd v Pinnacle Vrb Ltd [2001] WASC 144 (11 June 2001)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : EXPECTATION PTY LTD -v- PINNACLE VRB LTD [2001] WASC 144

HEARD : 15, 16, 19-23 FEBRUARY, 2-4, 7 & 9 MAY 2001

BETWEEN : EXPECTATION PTY LTD (ACN 009 030 102)

Contract - Contingent condition for performance - Whether failure constitutes breach of contract - Termination - Turns on own facts

Defendant : Mr H Jolson QC, Mr G S Clarke & Mr J L Evans

Acorn Consolidated Pty Ltd v Hawkslate Investments (1999) 21 WAR 425

Alghussein Establishment v Eton College [1991] 1 All ER 267

Amber Holdings (Aust) Pty Ltd v Polonia Pty Ltd [1982] 2 NSWLR 420

Austotel Pty Ltd v Franklins Self Serve (1989) 16 NSWLR 582

Australian Broadcasting Commission v Australasian Performing Right Ass Ltd [1973] HCA 36; (1972-73) 129 CLR 99

Australian Growth Resources Corp Pty Ltd v Van Reesma (1988) 13 ACLR 261

Baulkham Hills Private Hospital Pty Ltd v GR Securities Pty Ltd (1986) 40 NSWLR 622

Baytrust Holdings Ltd v IRC [1971] 3 All ER 76

Bolton Partners v Lambert (1888) 41 Ch D 295

Boranga v Fintoff (1997) 19 WAR 1

Celthene Pty Ltd v WKJ Hauliers [1981] 1 NSWLR 606

Cheall v Association of Professional Executive Clerical & Computer Staff [1983] 2 AC 180

Citicorp NZ Inc v Power New Zealand Ltd (1997) 8 NZCLC 261

CLC Corporation v Cambridge Gulf Holdings NL (1997) 25 ACSR 296

Codelfa Construction v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337

Commercial Union v Ferrcom (1991) 22 NSWLR 389

Commonwealth v Clark [1994] VicRp 66; [1994] 2 VR 333

Crabtree Vickers P/L v Australian Direct Mail Advertising & Addressing Co P/L [1975] HCA 49; (1975) 133 CLR 72

El Ajou v Dollar Holdings PLC [1994] 2 All ER 682

Equiticorp Finance Ltd v Bank of New Zealand (1993) 32 NSWLR 50

Farrow Finance Co Limited (In Liq) v Farrow Properties Pty Ltd (In Liq) [1999] 1 VR 584

Foran & Anor v Wight & Anor [1989] HCA 51; (1989) 168 CLR 385

Freeman & Lockyer v Buckhurst Park Properties P/L [1964] 2 QB 480

G Scammell & Nephew Ltd v Ouston [1941] AC 251

GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631

Harenbash Pty Ltd v Butterfield (1974) 3 ACLC 347

Hely-Hutchinson v Brayhead [1968] 1 QB 549

Henthorn v Fraser [1892] 2 Ch 27

Hick v Raymond [1893] AC 22

Hide 'n Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310

Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653

International Harvester Co of Australia Pty Ltd v Carrigan's Hazeldene Pastoral Co (1958) 100 CLR 645

Kilpatrick Green Pty Ltd v Leading Synthetics Pty Ltd, unreported; SC Vic (Dillard J); 5/6/98

Mackay v Dick (1881) 6 App Cas 251

Magnacrete Ltd v Douglas-Hill (1988) 48 SASR 565

McRae v Coulton (1986) 7 NSWLR 644

Niesmann v Collingridge [1921] HCA 19; (1921) 29 CLR 177

Northside Development Pty Ltd v Registrar General [1990] HCA 32; (1990) 170 CLR 146

Paringa Mining & Exploration Co PLC v North Flinders Mines Ltd (1988) 14 ACLR 587

Re Australian Federation of Construction Contractors; Ex parte Billing [1986] HCA 74; (1986) 68 ALR 416

Re Burns; Ex parte National Mutual Life Association of Australasia Ltd (1992) 117 ALR 174

Re Hapytoz Pty Ltd (In Liq) [1937] VicLawRp 13; [1937] VLR 40

Richard Brady Franks Ltd v Price [1937] HCA 42; (1937) 58 CLR 112

Royal British Bank v Turquand [1856] EngR 470; (1856) 119 ER 886

Rymark Australia Pty Ltd v Draper [1977] Qd R 366

Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634

Smith v Mansi [1962] 3 All ER 857

Southern Foundries v Shirlaw [1940] AC 701

Tern Minerals NL v Kalbara Mining NL (1990) 3 WAR 486

The Commercial Bank of Australia Ltd v Amadio & Anor [1983] HCA 14; (1982-83) 151 CLR 447

Top of the Cross Pty Ltd v Federal Commissioner of Taxation (1980) 50 FLR 19

United Australia Ltd v Barclays Bank Ltd [1941] AC 1

Walton's Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387

White Industries (Qld) Pty Ltd v Flower & Hart [1998] FCA 806; (1998) 156 ALR 169

Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285

Willoughby v Barrett-Lennard [1979] WAR 167

Woonda Nominees Pty Ltd v Ching [2000] WASC 173; 34 ACSR 558

York Air Conditioning & Refrigeration (A'sia) v Commonwealth [1949] HCA 23; (1949) 80 CLR 11

1 The plaintiff ("Expectation") is a company of which a Mr McLernon is the Managing Director and Chairman. He is legally qualified but has not practised for a number of years. He is experienced in matters of commerce. For a number of years Mr McLernon has been an associate of a Mr Hill who is also a director of Expectation. Expectation is the trustee of the Hill Family Trust and it is one of a number of companies within the Hill Group. I accept that the Group has or controls substantial assets. Mr McLernon controls and has sole authority to make contracts on behalf of Expectation.

2 An associated company called McLernon Group Ltd is licensed under the Security and Related Activities (Control) Act 1996 to undertake investigations into corporate matters, including into the conduct of individuals. A Mr Rainford is an ex-police officer with extensive experience in the police forces of the UK and WA including, most recently, in company fraud matters. Upon his resignation from the WA Police Force, Mr Rainford was employed by the Hill Group. He is of course a trained investigator, undertaking work of this kind for McLernon Group Ltd under the direction of Mr McLernon. He is also a secretary of Expectation.

3 A company called Westgold Resources NL, of which Mr McLernon is the Chairman and Mr Hill a director, the two of them effectively controlling Westgold Resources, has a shareholding in Precious Metals Australia Ltd ("PMA"). Until late February 2001 the Chairman of the Board of PMA was a Mr Smith. Apart from Mr Hill, the persons to whom I have referred were the principal witnesses for Expectation.

4 PMA was, until October 2000, the holder of a 40% interest in the vanadium mine at Windimurra here in WA. The mine produces vanadium pentoxide. As I understand it, the mineral as such is of no great value, there being a world oversupply of it. As I understand it, PMA was the operator of the mine which was run as a joint venture with a Swiss company called Xstrata AG. Expectation had no interest directly in the Windimurra project nor did it have any beneficial interest in Westgold Resources NL, but there were links of an informal kind in the way that I have described. In addition, Mr Smith was appointed on 8 May 2000 to the office of Chairman of the Board of a number of companies, including Westgold Resources. He was not, however, formally an officer of Expectation and could not commit it to any contractual obligation.

5 Since 1989 PMA, being actively interested in markets for the sale of vanadium, has been interested in the development and exploitation of a product called the vanadium redox battery. The technology for the battery was initially developed by Prof Skyllas-Kazacos at the University of NSW. The University has a company called Unisearch Ltd which as I understand it has as its main function the pursuit of avenues for the commercial exploitation of inventions of this kind for the mutual benefit of the University and the member or members of the academic staff who own the intellectual property. Fortunately, the decision of this case does not require me to understand the technology or the processes involved but, properly developed, the battery is apparently capable of a variety of applications, particularly in stationary locations, and it has a potential, with further development, to be applied in mobile situations.

6 In 1998 the rights to the technology were acquired by the defendant ("Pinnacle"). That transfer was achieved by a contract termed a "technology transfer agreement" entered into by Unisearch Ltd and Pinnacle Mining NL. The Managing Director of Pinnacle between July 1997 and 15 August 2000 was a Dr Jacques. Dr Jacques described himself as a chemical engineer. He has a distinguished background in the practice of his profession but he has also since 1984 been involved in commercial activities, particularly on the technical side of company operations, including, for a time, with BHP with whom he was employed before taking the position with Pinnacle. I digress to note that while with BHP Dr Jacques met a Mr Kennedy, a lawyer employed by that company who also became a director of Pinnacle from about the end of 1999 until 15 August 2000. He and Dr Jacques operated effectively as the executive of Pinnacle, controlling its day to day operations.

7 Before Pinnacle came into the picture, Unisearch had already entered into a licence agreement with Mitsubishi Petrochemical Company Ltd ("Mitsubishi") and another company with respect to particular types of stationary applications of the technology, essentially in Japan and every other country of the world except certain nominated Asian countries, New Zealand, China and Australia. The licence so granted was exclusive with respect to the particular applications of the technology covered. The interest of Unisearch Ltd in this licence agreement was transferred to Pinnacle by the agreement made in 1998.

8 In February 1999 Pinnacle itself entered into a licence agreement with a company called Federation Resources NL ("Federation"). The licence related to all applications of the technology and was exclusive in nominated countries in the continent of Africa, apparently subject to any interest granted to Mitsubishi under its licence, but with provision for Pinnacle to remit to Federation, revenue received by way of payments under the Mitsubishi licence.

9 In August 1999 Pinnacle made an agreement with Sumitomo Electric Industries Ltd ("Sumitomo") which was replaced in February 2000 by a licence agreement and an associated technical support and business collaboration agreement. Under this arrangement, Sumitomo was granted non-exclusive rights to all stationary applications of the technology in Japan. This agreement notes that the rights conferred upon Mitsubishi had become non-exclusive under the terms of the agreement with Mitsubishi and that, of course, would have a relationship also, if correct, to the agreement with Federation for the continent of Africa and the 47 countries therein, nominated in the agreement. The position was therefore that, although that group of agreements was in place, Pinnacle remained interested in issuing licences to those who might remunerate it for the right to exploit the technology in its various applications.

10 On 20 May 2000 Smith telephoned Jacques and asked him to come to Perth to discuss the making of an agreement with PMA in respect of the production of vanadium electrolyte for use in the batteries using vanadium ore mined at Windimurra. Jacques agreed to come. A day or so later Smith put to McLernon that he should meet Jacques. I think at that time Smith had in mind that Westgold might make the investment to acquire the rights to the production of the battery and electrolyte. Smith took the view that PMA had not the resources to invest directly in the acquisition of the technology but it would benefit as a result of its interest with Xstrata in the Windimurra joint venture.

11 Jacques came to Perth on 23 May. On 24 May Smith took him to meet McLernon and Hill. They were interested in obtaining a licence or licences for the technology and of course Jacques was interested in granting such a licence and entering into a collaborative venture to assist the process of developing the technology, with particular reference to an Australian market and using ore mined at Windimurra, which it was thought might enable the electrolyte to be produced at a much lower cost than was possible in Japan. It was suggested that the venture might be funded by the licensee company taking a placement of shares in Pinnacle and underwriting a rights issue of options to go to existing shareholders. The discussion seems to have been quite detailed.

12 Expectation was introduced as a proposed licensee and Jacques was assured that it commanded very considerable worth. There was reference to the fact that Pinnacle had already placed shares within the last 12 months and the proposed placement to Expectation would take it over the 15% limit imposed by the ASX Listing Rules, thus requiring shareholder approval of the placement. I shall return to this aspect in due course. Smith was deputed to complete the negotiations for Expectation but it was pointed out that formal agreements would need to be executed by others on behalf of Expectation. It was made clear on Jacques' part that any agreement made would need to be approved by the Board of Pinnacle.

13 A solicitor, Mr Bowen, of the firm Clayton Utz was asked to assist with the drafting process. Negotiations continued, principally between Jacques and Smith, on 25 May. Bowen was involved and McLernon also. Drafts were produced, changes were made and Jacques consulted by telephone with Kennedy in Melbourne.

14 Ultimately, those involved arrived at a concluded agreement which has come to be called the "letter agreement" as it is in the form of a letter on Expectation letterhead addressed to Dr Jacques as Managing Director of Pinnacle. The letter agreement was signed by Jacques on behalf of Pinnacle and signed by a Mr Spiers, a secretary of Expectation. Both parties regard the document as binding upon them and in my view it was accepted that that would be so upon the approval of the agreement by the Board of Pinnacle.

15 That approval was given on 29 May 2000 at a meeting of the Board. The meeting was chaired by Dr Jacques. Mr Kennedy was present, as was another director, Dr Sharp, an academic member of the University of NSW, director of technology commercialisation with Unisearch Ltd, and by reason of that association, appointed to the Board of Pinnacle. He had been a director since 19 January 1999. He attended the meeting by a telephone hookup from his office at the University in Sydney.

16 Also present in Melbourne was a Mr Revelins, a director who functioned as the secretary of the Board on the occasion of the meeting, but whose appointment as such was "terminated with immediate effect" at that meeting, upon which occasion a Mr Loganathan was appointed company secretary with effect from the following day. Mr Revelins was clearly a disaffected director. He described the meeting as a hostile one, notably because he had been informed by Dr Jacques only just before the meeting that he was to be removed as company secretary. It seems, however, that he had been at odds with other members of the Board for some time. He said in evidence that he had raised various matters previously with the Board and had obtained no response, by which he said he meant that he had either been ignored or fobbed off. Mr Revelins gave evidence only in respect of the Board meeting of 29 May and I shall return to his evidence shortly. He resigned his position on the Board on 28 July 2000.

17 Also present was a Mr Wantrup. He was a solicitor in practice heading his own firm as a specialist in corporate and commercial matters. He was appointed to the Board at this meeting as an alternate director for the then Chairman of the Board, a Prof Logan, again a member of the Board by reason of his association with Unisearch Ltd and the University of NSW. Prof Logan was apparently away on holidays overseas. He took no part in the events the subject matter of the litigation.

18 There is a copy of the minutes of the meeting in evidence which is signed by Dr Jacques. The evidence was that the minutes were apparently prepared by Loganathan and circulated by him on 27 July 2000. They were settled by Dr Jacques and in that form he signed them. The evidence does not show whether or not the minutes were presented to any subsequent Board meeting to be confirmed as accurate but, upon all the evidence, I am prepared to accept that they are.

19 There is an item dealing with the agreement with Expectation. Dr Jacques is said to have spoken to a report and there is a note that Mr Revelins raised a question of conflict of interest. This arose in the following way. When in Perth Jacques had raised with McLernon and the others his concerns about the terms and the manner of making the licence agreement with Federation. He had asked McLernon to look into it and McLernon had accepted that brief which was provided by a letter dated 24 May 2000 in which the McLernon Group Ltd was asked to undertake an investigation. This was reported to the Board on 29 May. Revelins' point in effect was that that investigation should not be undertaken by the McLernon Group if Expectation was to be competing with Federation as licensees of Pinnacle in respect to the development and marketing of the battery. I note that ultimately that point was put to McLernon and the investigation did not proceed.

"The directors, [having] discussed the arrangements with Expectation Pty Limited, resolved that the Letter Agreement signed between the Company and Expectation Pty Limited be accepted, subject to formal binding agreements being drafted and executed."

Thereupon I think it is clear that an agreement in terms of the letter agreement was made and bound both parties.

21 It is convenient before turning to questions of construction of that agreement to look briefly at the evidence of those present.

22 I commence with Dr Jacques who had typewritten notes of what he proposed to say to the meeting, which I note took just under 2-1/2 hours. Having regard to the other matters on the agenda, in my view a substantial portion of the time would have been taken up with discussion about the Federation licence and the investigation which the McLernon Group Ltd had been instructed to undertake and the licence agreement with Expectation.

23 Jacques' evidence was that the Board members were provided with papers prior to the meeting and included in them was a copy of the letter agreement dated 25 May 2000. In addition, there was available to the directors some information provided to Dr Jacques by Mr McLernon by facsimile on 29 May, a type of due diligence document, explaining something about Expectation and its place in the Hill Group and the worth and interests of Expectation and the Group. There was a balance sheet for Expectation as at 30 April. In my view, discussion of the proposal was opened by Dr Jacques by presenting that material and his argument for accepting the proposed letter agreement. He had proposed to move a resolution in the terms:

"That the Letter Agreement signed between Pinnacle VRB Ltd and Expectation Pty Ltd be accepted, subject to formal binding agreements. Also that an announcement be made immediately to the ASX to fully inform the market of the general terms of this Agreement."

24 It will be noted that the resolution as passed, as recorded in the minutes, added to the acceptance of the letter agreement that it was to be "subject to formal binding agreements being drafted and executed." There is no reference in that resolution to the announcement to the ASX, but such an announcement had already been drafted, as I understand it, and it was faxed to the ASX by Mr Kennedy shortly after the meeting of the Board had concluded. That announcement went out under the hand of Dr Jacques as Managing Director and I need say no more about it I think than that it seems to me to have been expressed in terms which were consistent with those of the letter agreement, to which I shall come in due course.

25 Following Dr Jacques' report to the Board, I accept that there was general discussion. The persons present at the Board meeting on 29 May 2000 gave rather different accounts of what occurred. In some cases they had notes which they had made at the time to aid their recollection of the events. That was the position so far as Dr Jacques was concerned and to my mind his evidence was generally acceptable. He had negotiated the letter agreement, he thought it to be to Pinnacles' advantage that it be performed and he needed to secure Board approval to advance the process. He moved the motion for the final resolution. His account of what preceded that is to my mind consistent with the contemporary documentation to which I have referred and with his notes.

26 Mr Kennedy also had notes to aid his recollection and he was acting as the Board secretary upon Revelins' dismissal from that post and prior to Loganathan taking up the office. I do not think there is material inconsistency between the evidence of Kennedy and that of Jacques. Clearly Kennedy thought that shareholder approval was required only for the share transaction, pursuant to the ASX Listing Rules.

27 Dr Sharp's evidence rather troubled me. It seemed to me that matters raised with this witness in cross-examination revealed an element of reconstruction although he also made notes at the time of this meeting which, it will be recalled, he attended by a telephone hookup to his office in Sydney. I think it is clear that in his own mind Dr Sharp thought that all the elements of the agreement were interdependent and linked. As the share placement required shareholder approval, I think it followed in Dr Sharp's mind that all the composite parts of the total package of agreements would require that approval. A necessary prerequisite to seeking that approval in Dr Sharp's mind was that the Board itself would approve the agreements as they were made and be in a position to recommend them to the shareholders.

28 There would be a need for a prospectus to go to shareholders explaining the total transaction and there would be a need for what is commonly called a "due diligence" enquiry into Expectation and the merits of the transaction prior to the final approval being sought. It was upon that basis I think that Dr Sharp gave his approval to the letter agreement and he voted in favour of the resolution. But I do not think that he believed that it really was part of that resolution that the individual agreements envisaged by the letter agreement would again individually be brought before the Board, approved by it and then individually or collectively taken to the shareholders for their approval in general meeting.

29 Mr Revelins was, as I have mentioned, a disaffected director under some considerable pressure. He had been replaced as secretary to the Board by Loganathan. It was I think clear to him that his position as a director was becoming untenable and indeed, as I have mentioned, within a relatively short time he tendered his resignation. He did not agree with the transaction or that it was of merit so far as Pinnacle was concerned. Later, when the minutes were circulated and he responded in writing to what he perceived to be inaccuracies, it was by means of a document which would have left Dr Jacques, its recipient, with no clear view what changes Mr Revelins wished to see made to the minutes. There was a rather rambling account of Mr Revelins' views but there was no suggestion that the resolution as set forth in the minutes was inaccurately expressed and in my view I will not be assisted by further considering his evidence.

30 Finally, Mr Wantrup gave no evidence to suggest that the resolution of the Board set out in the minutes was inaccurately expressed. He said only that the letter agreement was presented as introducing a package of agreements and it was approved on that basis. I accept therefore that the letter agreement was accepted or in effect made at that point by Pinnacle, its implementation being noted as requiring the drafting and execution of formal binding agreements. At least that is my interpretation, upon the evidence, of what occurred at the Board meeting on 29 May 2000.

31 I accept Dr Jacques' evidence that it would then have been expected that he and Kennedy would effectively function as the executive of Pinnacle to draft and execute the formal agreements to put the letter agreement into effect, subject only to shareholder approval being required for the share placement. That, Dr Jacques said in evidence, was Pinnacle's normal practice, a statement which appears to be supported by the evidence with respect to the execution of each of the licensing transactions into which Pinnacle had entered. Dr Sharp gave evidence to that effect also. That is what had been done with the agreements made with Mitsubishi, Sumitomo and Federation and that I think is what the members of the Board would have anticipated would occur and what was conveyed by the terms of their approval of the letter agreement, "subject to formal binding agreements being drafted and executed", I would add by Jacques and Kennedy, provided only that all was done consistently with the provisions of the letter agreement.

32 I have mentioned briefly that the company made an announcement to the Stock Exchange on 29 May 2000 immediately following the Board meeting and I have said that the terms of that announcement, in the settlement of which Expectation had been involved, were consistent with the nature of the approval of the letter agreement by Pinnacle being as I have found it to be. It was effectively in that way that Pinnacle's acceptance of the letter agreement was communicated to Expectation. It became binding in its terms without qualification.

33 If it was the case that, contrary to the view that I have expressed, the proper conclusion that there was a further condition or conditions imposed by the directors of Pinnacle in conferring their approval of the letter agreement, I can find no evidence that any such conditions were communicated to Expectation. Pinnacle never put to Expectation the proposition that an agreement had been made subject to the formal agreements, which it was to produce, themselves receiving further Board approval which might or might not be given and subject to shareholder approval which might or might not be given. As will be seen, the parties did not deal with each other in that way. Before going to that history, I should look at the terms of the letter agreement itself.

34 It is of some importance in the context of the litigation that I determine what the proper construction of the letter agreement is and understand what objectively the parties intended to be the terms of their agreement as opposed to what, without objection, individuals on both sides of the case were permitted to tell me they thought the agreement meant.

35 It will be convenient before discussing the document that I should set out what appear to be its material terms.

"LICENCE AGREEMENT

This letter of agreement ('Letter Agreement') sets out the terms and conditions pursuant to which Pinnacle VRB Limited (ACN 060 111 784) ('Pinnacle') will licence Expectation Pty Ltd ACN 009 030 102 ('Expectation') to use the full suit [sic] of intellectual property to make and sell electrolyte and VRB's.

Upon execution of this Letter Agreement Pinnacle and Expectation eaach intend to be bound to the performance of the terms of this Letter Agreement but, at the same time, propose to have the terms restated in a formal licence agreements (as stated in paragraph 2) in a form which will be fuller or more precise (but not different in effect) to this Letter Agreement.

This Letter Agreement shall be binding on and enforceable against the Pinnacle and Expectation upon the acceptance of this offer by Pinnacle pursuant to this Letter Agreement as if executed by the parties as a deed.

1. Conditions Precedent

The obligations herein shall be subject to and conditional upon the following conditions precedent:

(a) the parties entering into a mutually satisfactory formal licence agreements ('Licence Agreements') and Collaborative Venture as soon as practicable but no later than 30 June 2000 (or such later date as agreed) which formalises and sets out more fully the terms and conditions of the licence and Collaborative Venture and includes in substance those terms set out in paragraphs 2 and 3; and

(b) satisfaction of all necessary approvals applicable to Pinnacle and Expectation including, without limitation, the Boards of Pinnacle and Expectation, compliance with the Corporations Law, ASX Listing Rules, the Constitutions of Pinnacle and Expectation and any agreements or understandings entered into by Pinnacle or Expectation.

2. Licence Agreements

Pinnacle hereby grants to Expectation the following:

(a) a non exclusive licence for the full suit [sic] of intellectual property owned by Pinnacle to make and sell electrolyte and VRB's world wide in territories where there are already in existence non exclusive licences on terms and conditions no less favourable than those existing non exclusive licences;

(b) first right of refusable [sic] to take up exclusive licences that have been granted by Pinnacle over territories (including Africa) that are currently covered by exclusive licences if they become available, on the same terms and conditions as those licences; and

(c) exclusive licence to use VRB technology in Korea and Taiwan and the first right of refusal for exclusive licences to use VRB technology in other regions within Asia on the basis that Expectation will be offered the licences on terms and conditions no less favourable than those being negotiated with a third party.

The parties agree to enter into the Licence Agreements to evidence the licences referred to herein.

3. Collaborative Venture

Expectation and Pinnacle enter into a collaborative venture ('Collaborative Venture') to research and develop a cost effective means of producing vanadium electrolyte and to establish a research and development activity.

Pursuant to this Collaborative Venture:

(a) Pinnacle will exclusively licence Expectation to use the intellectual property currently owned by Pinnacle for electrolyte production in Australia with the right to export product;

(b) Pinnacle will provide technical assistance, know how and expertise available to Pinnacle at a cost to be agreed;

(c) Expectation will provide the vanadium electrolyte as required for Pinnacle projects at a cost to be agreed; and

(d) intellectual property developed by the Collaborative Venture will be jointly owned by Pinnacle and Expectation.

4. Consideration

In consideration for the grant of the licences referred to herein and the entering into the Collaborative Venture Expectation:

(a) will underwrite a pro-rata non-renounceable issue by Pinnacle of 3 Options for every 10 securities held by all shareholders and participating optionholders which Options will each be issued for a consideration at 5 cents; and

(b) or its nominees will take a placement of 2,000,000 shares each at 40 cents with 2,000,000 attaching Options.

Expectation will be paid an underwriting fee of 5%.

For purposes of this Letter Agreement 'Option' means a 5 year option over an unissued fully paid ordinary share in Pinnacle exercisable at 50 cents which option will be officially quoted on the ASX.

4.2 Warranties

...

4.3 Other Terms

The Licence Agreements and Collaborative Venture will contain such other terms as would normally be included in such types of agreements provided that the effect of the terms is not inconsistent with those terms set out in this Letter Agreement.

5. Assignment

...

6. Obligation of Good Faith

The parties agree that they will negotiate in good faith to close the transactions contemplated in this Letter Agreement in an expeditious manner and as soon as practicable.

7. Expenses

The parties will each bear their own costs in connection with the negotiation of the Licence Agreements, Collaborative Venture and other matters contemplated by this Letter Agreement.

8. Preparation of Documentation

...

9. Counterparts

...

10. Governing law

...

If Pinnacle agrees to the terms and conditions of this Letter Agreement, please sign the Letter Agreement as indicated below in acceptance of this Letter Agreement and return a signed copy to us by facsimile and the original to us by post."

As I have said, the letter agreement was signed for Expectation by Mr Spiers, a secretary of the company, and for Pinnacle by Dr Jacques.

36 Both parties accept that the letter agreement was not simply an unenforceable agreement to agree but, certainly upon its acceptance by the Board of Pinnacle and the communication of that acceptance on 29 May 2000, a binding agreement was created. As to the content of that agreement I think the following may be said:

(1) It was an agreement to licence Expectation to use all the rights and interest of Pinnacle in the vanadium redox battery techology. In effect, Pinnacle agreed to licence Expectation to use all that it had acquired from Unisearch Ltd. I shall return later to the significance of that.

(2) The letter agreement was not itself such a licence. It was, as the first paragraph says, an agreement as to the terms and conditions pursuant to which Pinnacle "will licence" Expectation "to use the full suit [sic: suite] of intellectual property to make and sell electrolyte and VRB's." That is also made clear in the second paragraph which refers to the future making of formal licence agreements.

(3) Clause 2 sets out the proposed licence agreements. Although it starts with the words "Pinnacle hereby grants to Expectation the following:", it is abundantly clear that the letter agreement did not itself constitute one or more licences to use any of the technology. The grant of any licence would occur on the making of the relevant licence agreement. Self-evidently those which might arise under cl 2(b) could only arise at some time in the future.

(4) That paragraph (3) above expresses the correct interpretation of the letter agreement is made clear by cl 1 of the letter agreement itself. There were conditions precedent to the performance of the letter agreement which expressly included entering into formal licence agreements in a "mutually satisfactory" form. Their form remained to be agreed although they were to set out more fully the terms and conditions to be derived from cl 2 of the letter agreement, ie, on terms and conditions no less favourable than those applicable in other licence agreements made by Pinnacle or being negotiated by it. Further, the opening paragraph makes it clear that the letter agreement sets out the terms and conditions upon which Pinnacle "will licence" Expectation to use the technology.

(5) The licences to be granted under cl 2 of the letter agreement were only part of those agreed upon. Under cl 3 a collaborative venture was to be entered into by way of agreement in respect of the matters generally described in subpars (a) to (d). It will be noted that, by that agreement, under subpar (a) Pinnacle "will exclusively licence" Expectation to use the currently owned intellectual property in Australia but the main purpose of the collaborative venture was clearly to further research and develop the technology and the intellectual property in it, to be jointly owned by Pinnacle and Expectation.

(6) The entry into or making of the collaborative venture agreement was the second precondition upon which the performance of the letter agreement was to depend. At least that is my interpretation of the meaning of cl 1 and its provision that, "The obligations herein shall be subject to and conditional upon" the following conditions precedent. I shall return ultimately to discuss the nature of the "conditions precedent" provided by cl 1.

(7) Those two preconditions, the entry into mutually satisfactory formal licence agreements and the collaborative venture agreement, were required to be completed by no later than 30 June 2000 if no later date was agreed. Otherwise, the only reference to the time for performance of elements of the letter agreement is cl 6 and the obligation to negotiate, not only in good faith to close the transactions contemplated by the letter agreement, but also to do so "in an expeditious manner and as soon as practicable."

(8) In my view the obligation contained in cl 6 to negotiate in good faith was effective to require both parties to use their best endeavours to ensure the making of the agreements contemplated by the letter agreement within the time framework provided so as to ensure that each had the benefit of the agreement. I do not think therefore that it is necessary to imply a term to that effect, but if it is so necessary, then there appears to be no issue on the pleadings that that should be done: cf Gregory v MAB Pty Ltd (1989) 1 WAR 1 at 15 and the cases there cited.

(9) The point remains that pursuant to the second paragraph of the letter agreement, cl 1(a), cl 2 and for completeness cl 4.3, the licence agreements and collaborative venture agreement would obviously contain terms and conditions which, subject to the requirement of consistency with the letter agreement, required negotiation and agreement. The terms of the letter agreement left much unsaid about the terms of any licence agreement, particularly the exclusive licence for Australia and the terms of the collaborative venture. It is not open to the view in my opinion that the letter agreement itself constituted the effective expression of any such licence agreement or the terms of the collaborative venture.

(10) Clause 4 of the letter agreement is in my opinion in clear terms. It expresses the consideration for the letter agreement involving the grant of the licences once their terms were agreed and the commitment to enter into the collaborative venture. Clause 4 is expressed in terms of an obligation by Expectation but in my view it imports not only the obligation of Expectation to underwrite the pro rata non-renounceable issue of options to take up shares and its obligation by itself or nominees to take the share placement, but there was an obligation by Pinnacle to issue the options and the shares.

That these events were expressed to be the consideration for the grant of licences and entry into the collaborative venture reinforces the conclusion to which I would otherwise come having regard to the whole of the terms of the letter agreement that its product was to be a package of at least four, and possibly more, agreements, depending upon how many licence agreements proved to be desirable. They would be independent binding agreements but linked in their efficacy and operation by the terms of the letter agreement.

(11) The obligation to make and underwrite respectively the rights issue and to make and take the share placement did not arise until the making or entry into licence agreements and the collaborative venture agreement which were conditions precedent, but the rights issue and share placement remained the consideration for the grant of the licences and the entry into the collaborative venture and also the means by which Pinnacle would be placed in funds (I was told $1.8M) to perform the obligations which it anticipated would arise under the collaborative venture agreement.

There is a computer printout of the prices at which shares in Pinnacle were traded on the market at the relevant period. Around 1 June 2000 they appear to have been traded at about 46 cents. There are the usual peaks and troughs. The low point in their trading appears to have been on 21 June when they were priced at 42 cents. Thereafter the shares rose steadily in value, reaching a high of 63 cents on 24 July 2000. The evidence does not deal with the question of the potential impact upon those values of the issue of the options and a further 2 million shares, with attaching options, the shares having a nominal value of 50 cents as I understand it, but being issued at a discounted price of 40 cents a share.

What can be said is that when the letter agreement was negotiated, the value of the shares was falling, from about 54 cents on 22 May to about 44 cents by 8 June and they were valued at below 50 cents for the whole of the month of June 2000. In any event, it matters not whether the payment of the consideration would result in net benefit to Expectation or not. It would clearly involve the expenditure of at least $900,000 even if entry into the underwriting agreement involved no further outlay.

(12) Nor in my view is the conclusion to which I have come about the effect of the letter agreement affected by noting that the 30 June 2000 time limit, unless extended, applied only to entry into the licence agreements and collaborative venture agreement and not to the underwriting agreement and share placement, which were only to be performed as soon as practicable. It seems abundantly clear that the financial aspects of the transaction could not be completed by 30 June 2000, if for no other reason than that the share placement required shareholder approval and by the Corporations Law, s 249HA, 28 days notice of a shareholders' meeting was required. Dr Jacques seems to have thought it might be done without an extension of time but I think that was hopelessly optimistic and prefer the view of Mr Kennedy that the whole process might, having regard to the need to issue a prospectus and perform what is described as "due diligence" in relation to the transaction, have taken perhaps three and indeed up to four months.

(13) I accept that the share placement required shareholder approval under Chapter 7 of the ASX Listing Rules because, as calculated under r 7.1, the placement would have the effect that Pinnacle would issue within a period of 12 months (presumably whenever the placement was made, if made as soon as practicable within the terms of the letter agreement) more than 15% of its issued capital. Under r 7.1 that is only permissible with the approval of the holders of ordinary shares in the company. No exception to the rule operated in respect of the share placement agreed upon, but the first exception under r 7.2 would create an exception so that shareholder approval was not required in respect of the pro rata rights issue. There is no direct evidence to this effect but the parties are ad idem upon the view that this shareholder approval was required.

37 Under cl 8 of the letter agreement Pinnacle was responsible for preparing "the Licence Agreements, Collaborative Venture and any other documentation contemplated herein". In fact, by agreement, Mr Bowen of Clayton Utz, Expectation's solicitors who had been involved in the drawing of the letter agreement, was asked to prepare drafts of the four agreements which were perceived to be required. This was done and the documents were in the hands of Mr Smith for Expectation, and probably Messrs Jacques and Kennedy of Pinnacle, by sometime shortly before 13 June 2000.

38 By 9 June the solicitors had prepared a draft licence agreement, which appears not to have been the first such draft, but which recited not only the entry into the letter agreement but that Pinnacle and Expectation had agreed to enter into the collaboration agreement, that Pinnacle had agreed, subject to the approval of its shareholders, to make the placement and Expectation had agreed to subscribe for the securities the subject of the placement, and that Pinnacle had agreed to make the rights issue and Expectation had agreed to underwrite the rights issue. The operative part of the document was effectively to grant the licences and the rights of first refusal.

39 As I understand it, when that draft was forwarded by Mr Smith to Mr McLernon for comment, whilst he was content to have the licence agreement linked back to its foundation in the letter agreement, because that was the source of all four agreements, he thought it undesirable that the licence agreement contain any recitation of the collaborative venture agreement, underwriting agreement and subscription or share placement agreement. The solicitors received those instructions, acted upon them, and, on 13 June, returned to Mr Smith the revised draft licence agreement, a first draft of what was described as a "Co-operation Agreement", a revised draft of the underwriting agreement and a draft of what was described as the "Subscription Agreement".

40 I think Mr Smith took these documents with him to Melbourne when he went on 13 June 2000. On the following day he and Dr Jacques flew to Sydney where they met with Dr Sharp and Prof Skyllas-Kazacos. I do not need to deal with what was said on that occasion at this juncture except to note that the main purpose of the meeting was to discuss the terms of the collaborative venture and this was the subject of discussion, particularly between Mr Smith and Prof Skyllas-Kazacos.

41 It appears that Dr Jacques and Mr Smith returned to Melbourne independently on the following day. I understand that Mr Smith had other meetings to attend in Sydney before he travelled to Melbourne. The evidence about what occurred in Melbourne in 15 June 2000 was given by Dr Jacques, Mr Kennedy and Mr Smith. There are points of conflict between the evidence of all three men which, in each case, depended upon their recollection unaided by any contemporary documentation, except in one important respect. That is that at the end of the day a licence agreement was executed by Pinnacle by being signed by Jacques and Kennedy and by the affixation of the common seal.

42 It will be remembered that Dr Jacques described those two men as the executive of the company and he was of course at that time its Managing Director. I have referred to the evidence, which I accept, that it was the common practice within the Board of Pinnacle for the directors to approve a transaction in its essential outline and leave it to be fleshed out, consistently with the Board's approval, finalised and the agreement entered into by the executive directors without the need to return the final agreement to the Board.

43 Pinnacle's articles of association, art 24.1, provides for such a process. It commits the seal of the company to the safe custody of the directors and, so far as material, provides that:

"The Seal may never be used except by the authority of the Directors or of a committee of Directors previously given and in the presence of one Director at the least, who will sign every instrument to which the Seal is affixed and every such instrument will be countersigned by the Secretary or another Director or such other person as the Directors may appoint for that purpose."

44 In executing the licence agreement, in my opinion Dr Jacques and Mr Kennedy were not only acting in accordance with the usual practice of Pinnacle and in a manner consistent with art 24.1, but also in accordance with the express authority, as I take it to be, conferred by the Board on 29 May 2000 when it resolved to accept the letter agreement "subject to formal binding agreements being drafted and executed." I have dealt with that resolution which I find to be accurately expressed in the minutes and to confer on Dr Jacques and Mr Kennedy as the executive directors the authority to settle the final terms of the agreements provided for in the letter agreement, consistently with that document, and then to see to their execution by the company.

45 The terms of the resolution necessarily implied in my view the power and the authority to Dr Jacques and Mr Kennedy to act as they did. It is not a question of the Board permitting those directors to hold themselves out as having authority, although in my opinion they did have ostensible authority and, if the point does arise in relation to the execution by Pinnacle of the licence agreement, Expectation was entitled to assume that Pinnacle's constitution had been complied with (as indeed it had), there being no ground for the conclusion that Smith (if his knowledge was to be imputed to Expectation) or any other person constituting the guiding mind and will of Expectation "knew or suspected that the assumption was incorrect": Corporations Law, s 129(1) and s 128(4). The only reservation I would have about Smith in that regard is that, as I understand his evidence, he was not authorised to finally settle the terms of any agreement on behalf of Expectation but had been instructed to take the draft agreements to Melbourne and obtain their execution. If that was so, he was a go-between or, if an agent, one with limited powers.

46 Having regard to that view as to what was done on 15 June, it is necessary for me to resolve the conflicts of evidence about the dealings between the parties on that date only to a very limited extent. I am satisfied that the negotiations were conducted in some haste. Mr Smith was anxious to return to Perth with executed agreements. Most of the attention was focused upon the licence agreement but there was also a considerable amount of discussion about the proposed collaborative venture. However, I am satisfied that, apart from the fact that the draft collaboration agreement was considered by Dr Jacques and Mr Kennedy to be an entirely unsatisfactory instrument, they were able to progress the matter little further. There was a document, annexure "A" to that draft collaboration agreement, which was described as a "term sheet". This sketched out with some degree of particularity what the terms of the final form of the collaborative venture might be. To show that the parties accepted that to be so, Dr Jacques and Mr Smith initialled the pages of the term sheet, but that agreement itself was not executed.

47 Mr Smith was under some pressure from Mr Hill to produce at least a signed copy of the licence agreement. Dr Jacques in particular thought it to be important that that be done, if at all possible, as a sign of good faith by Pinnacle. It must be borne in mind that at this stage they were halfway through June, looking at a deadline of 30 June for the entry into mutually satisfactory formal licence agreements and a collaborative venture agreement, and there was little progress to be seen. I accept that Dr Jacques said as much to Mr Smith and that Mr Smith's view was that it would surely be acceptable if the agreements were brought to fruition one at a time, provided the parties were actively working to complete them all.

48 I am satisfied that the three men were then working in the context of this being the first of a total of four agreements provided for by the letter agreement which, in terms of that agreement, would express separately the various aspects of the total transaction. Mr Kennedy, in giving evidence, employed language which rather suggested that although the licence agreement was binding on Pinnacle, it was only provisionally so, each of the agreements provided for by the letter agreement being subject to further Board approval as a total package. But I think it was the idea of the agreement being part of a total package rather than that it specifically needed to be returned to the Board to be approved, upon which attention was focused. Dr Jacques, in giving evidence, said that the discussions were such as to confirm his view that the licence agreement, once executed, would bind Pinnacle, but that if the total package under the letter agreement was not put in place any rights which the licence agreement might create in favour of Expectation would be "divested".

49 If Jacques and Kennedy had believed that the licence agreement in the form they accepted to be appropriate required specific Board approval before its execution, then they would not have executed it. On the other hand, my impression of Mr Smith was that although his evidence was given honestly, there were aspects of it which could not be accepted, particularly that the licence agreement was effectively finalised on 13 June, although he concedes that it was discussed on 15 June and there is evidence that changes were being made to it at that time. Nonetheless, Mr Smith took an agreement executed on behalf of Pinnacle with him and upon his return to Perth it was executed by Expectation, Mr McLernon as director signing the document, Mr Spiers doing so as company secretary, and the common seal of the company being affixed. It was then presented and stamped on 22 June, albeit nominally with a duty of $5.

The terms and effect of the licence agreement

50 The agreement effectively implements all by way of licences and rights of first refusal for which the letter agreement provides. It was not, I am satisfied, a variation of the letter agreement to make the licence agreement. There is a separate question about the efficacy of the licence agreement when made and now to which I shall return.

51 By the licence agreement Pinnacle grants to Expectation for 25 years an exclusive licence to use the technology and to manufacture, distribute and sell the licence products in Korea and Taiwan. By the technology is meant all the contractual and intellectual property rights in the vanadium redox battery. The licence products are the battery, its electrolyte and all requisite components, together with the patents, by which is meant all the current patents and patent applications in respect of the technology. In effect, the technology and the licence products comprise the totality of what may be generally described as the intellectual property in the vanadium redox battery owned by Pinnacle.

52 A non-exclusive licence is granted for Australia and New Zealand. I note that cl 3(a) of the letter agreement envisaged an exclusive licence for Australia. In addition, non-exclusive licences are granted for all the territories other than Japan in respect of which there are already existing non-exclusive licences. The terms and conditions of the Mitsubishi licence are not unnaturally taken as the benchmark in that regard. There are rights of first refusal granted in respect of all those places where there are presently exclusive licences in operation. They are listed in sch 4 to the agreement and they include countries in Asia.

53 Royalty and licence fees are provided with the formulae for their calculation being set out. The non-exclusive territories specified in the licence agreement are those throughout the world, excluding nominated Asian countries. The exclusive territories are the 47 African countries in respect of which Federation has exclusive licences. The licence territories are very widespread but they are only exclusively granted with respect to South Korea and Taiwan. It is clear from the licence agreement that, whether the licence granted was exclusive in character or non-exclusive, it covered all conceivable types of application of the technology.

54 The question arises whether it was a condition precedent to the grant of the licences and rights of first refusal that shareholder approval was required under Ch 11 of the ASX Listing Rules. The explanatory note to the Chapter provides that it "sets out the requirements that an entity must satisfy if it proposes a significant change to its activities or floats significant assets." So far as material, r 11.1 states:

"If an entity proposes to make a significant change, either directly or indirectly, to the nature or scale of its activities, it must provide full details to ASX as soon as practicable. It must do so in any event before making the change. The following rules apply in relation to the proposed change."

55 But that rule is not alone said to be applicable to the making of the licence agreement. Rule 11.2 provides:

"If the significant change involves the entity disposing of its main undertaking, the entity must get the approval of holders of its ordinary securities and must comply with any requirements of ASX in relation to the notice of meeting. The notice of meeting must include a voting exclusion statement. The entity must not enter into an agreement to dispose of its main undertaking unless the agreement is conditional on the entity getting that approval."

56 It is argued that the application of r 11.2 required Pinnacle to get shareholder approval of the licence agreement, although it is clear that Pinnacle properly entered into the letter agreement, even if that involved an agreement to dispose of its main undertaking, because cl 1(b) of the letter agreement required the obtaining of the necessary approval under the ASX Listing Rules as a condition precedent to that agreement and the grant of the licences contemplated thereby.

57 The terms "disposing" and "undertaking" are defined in Ch 19 of the ASX Listing Rules. The definition of "disposing" makes it clear that any form of disposition, or agreement to that end, will be covered and an "undertaking" of a company will include "assets or businesses". Pinnacle argues, and the evidence establishes, that its main business is the development and exploitation of the intellectual property rights to the vanadium redox battery technology which it acquired and now owns. The process by which that business is carried on has involved and indeed continues to involve the grant of licences covering various types of application of the technology in exclusive and non-exclusive terms for varying periods of time and in various nominated territories. It is argued that the licence agreement made with Expectation is so far-reaching, in the terms in which I have described it above, as to constitute the disposition of Pinnacle's main undertaking. But in my opinion that argument may not be accepted.

58 Pinnacle remains the owner of the technology and, despite and in some cases subject to the licences it grants to others, it may develop and exploit the technology itself. Indeed, in some cases, it has sought to do so by entering into joint ventures. The Sumitomo collaboration agreement which was tendered in evidence is an example. Pinnacle continues to provide for the exploitation of the technology by granting licences. In March 2001 it granted to Vanteck (VRB) Technology Corp an exclusive licence to develop, market and utilise the vanadium redox battery technology within Canada, the United States, Central and South America and the Caribbean, although that agreement is expressly made subject to the terms being read down to the minimum extent necessary to accommodate any order which may be made in this action, and the licence is expressly subject to the non-exclusive Mitsubishi licence and to the rights which are embodied within the agreements made with Sumitomo.

59 Further, it would appear that in April 2001 Pinnacle entered into an agreement with Int-A-Grid (UK) Ltd for an exclusive licence to promote, develop and market the technology in Europe, Russia and the Middle East, subject to the non-exclusive licences granted to Mitsubishi and Sumitomo, and presumably also to Expectation if the licence agreement is operative. Pinnacle has never sought shareholder approval for the licence agreements it has made.

60 In my opinion the Expectation licence, given that it has effect in its terms, has not, by the grant of exclusive licences for Korea and Taiwan and non-exclusive licences elsewhere in the areas to which I have referred together with the rights of first refusal, disposed of or divested itself of the technology as such or its capacity to develop and exploit it including by the grant of other non-exclusive licences and by entering into joint venture agreements. I am of the opinion that ch 11 of the Listing Rules does not apply either to the letter agreement as an agreement to grant licences and first rights of refusal or to the licence agreement itself.

61 It remains then for me to make clear my view about the operative effect of the licence agreement. It sprang from and was concerned to give effect to the satisfaction of one part of the condition precedent contained in cl 1(a). The agreement did not itself provide for the collaborative venture and indeed, as has been seen, to the point of its execution (and indeed thereafter) no progress with respect to the collaborative venture was made beyond the parties' initialling of the terms sheet to indicate general acceptance of the matters set out therein. Nor does the licence agreement make any provision for the consideration expressed in cl 4 of the letter agreement. Clause 4 of the licence agreement provides for the payment of a royalty and licence fees calculated by formulae based on the net sales value which annually will be achieved by the licensee or approved sub-licensees, but there is no expression in the licence agreement itself of the consideration for the making of the agreement and so, as I have mentioned, it was given a nominal value and subjected to a nominal stamp duty of $5.

62 I conclude this portion of my reasons by expressing my conclusion that, having regard to the terms of the letter agreement, the licence agreement when made was simply the fulfilment of one condition precedent to which the performance of the letter agreement was expressed to be subject. It was not intended and did not have, as at the time it was made, effect according to its terms alone. That depended upon the performance otherwise of the letter agreement, entry into the collaborative venture and the provision of the consideration for which the letter agreement provided.

63 I have mentioned that on 14 June Dr Jacques and Mr Smith were in Sydney at the University of NSW where they met with Dr Sharp and Prof Skyllas-Kazacos for discussions which lasted for some time and principally centred around the terms of the collaborative venture.

64 There was disagreement between those present who gave evidence as to what was said on that occasion concerning the making of the agreements the subject of the letter agreement and what approvals might be necessary to commit Pinnacle to enter into them. In view of the conclusion to which I have come that Dr Jacques and Mr Kennedy were actually authorised and, if necessary to consider the point, had ostensible authority to enter into the licence agreement on behalf of Pinnacle, it is strictly unnecessary that I should resolve the dispute about what occurred on 14 June. But in case it should become relevant I propose to deal with the point.

65 Expectation says, as I understand the argument, that if, contrary to my conclusion, Dr Jacques and Mr Kennedy were not authorised to affix the Pinnacle seal to the licence agreement so as to cause the company to execute the document, nonetheless those who were acting for Expectation, in particular Mr McLernon, were entitled to assume that on Pinnacle's side the execution of the licence agreement had been properly and effectually carried out.

66 Under the Corporations Law, s 128(1), a person is entitled to make certain assumptions in dealing with a company and the company is "not entitled to assert in proceedings in relation to the dealings that any of the assumptions are incorrect", a form of statutory estoppel. The assumptions that may be made are set out in s 129. Relevantly, s 129(1) provides:

"A person may assume that the company's constitution (if any), and any provisions of this Law that apply to the company as replaceable rules, have been complied with."

As I have said, in my view in this case the relevant provision of the articles of association, art 24(1), was complied with, but Expectation and those who represented its guiding will in entering into the transaction which was the licence agreement were entitled to assume that was so, knowing no more than that the Board of Pinnacle had approved the letter agreement. As I say, it seems to me also that there is no need to rely upon that assumption in a case, which in my opinion is this case, where compliance is proved.

67 In argument reference was made to s 129(6) which provides:

"A person may assume that a document has been duly executed by the company if:

(a) the company's common seal appears to have been fixed to the document in accordance with subsection 127(2); and

(b) the fixing of the common seal appears to have been witnessed in accordance with that subsection.

For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices."

In this case there would be no need to rely upon that assumption because in my opinion Mr Smith was the agent of Expectation in the limited sense that he was authorised to deal with those acting for Pinnacle and to be the conduit by which changes proposed on behalf of Pinnacle to the draft agreements were conveyed back to Mr McLernon for his final approval on behalf of Expectation and to obtain the execution of settled agreements to the extent that they were achieved. He saw how those acting on behalf of Pinnacle executed the licence agreement and it is clear that it does in fact comply with the provisions of s 127 of the Law, Pinnacle having executed the agreement by the affixation of its common seal witnessed by two directors of the company as required by s 127(2)(a).

68 The capacity to make the assumptions set out in s 129 which s 128(1) provides is conditioned by the terms of s 128(4):

"A person is not entitled to make an assumption in s 129 if at the time of the dealings they knew or suspected that the assumption was incorrect."

As I understand it, Pinnacle argues that that was the position and therefore there could be no assumption that the licence agreement was lawfully executed in compliance with the company's articles of association. It urges a finding that those acting for Expectation knew or suspected in fact that Jacques and Kennedy did not have the authority they professed because they knew or suspected (contrary to my finding) that the licence agreement itself needed Board approval and indeed, as part of the package of agreements, shareholder approval indirectly before it could be executed. It is to this issue that the events of 14 June are said to relate. But in my view the necessary substratum of fact is not present.

69 It is apparent from the evidence of McLernon and Smith that they maintain that they did not know of any lack of approval for Jacques and Smith to complete the execution of the agreement on behalf of Pinnacle and the way it was done was entirely uncontroversial, consistent with the Law and with art 24, which is a common provision leading to the sort of procedure and authority which Mr McLernon says, and I accept, would be commonly expected to be exercised by directors of a company making agreements. Particularly would that be so in the context of Board approval of the letter agreement which envisaged a formal licence agreement being executed in terms consistent with the letter agreement. In my view nothing occurred on 14 or 15 June leading up to the execution of the licence agreement from which it might be inferred that those acting for Expectation knew or suspected that the assumption of due execution could not be made.

70 As to the conversations on 14 June at the University of NSW, this is yet another occasion, of which the evidence in this case was replete, where there were a number of people present, all of whom give varying accounts of what occurred and what was said. That in itself is enough to make it impossible to conclude that anything occurred which would remove the capacity to rely upon the statutory assumption and upon that issue, in my opinion, Pinnacle bears an evidentiary onus. Again I do not doubt that the people concerned were giving evidence honestly to the best of their recollection, but it was some time ago and the content of the discussion would not then have had the significance which it is now seen to bear.

71 There was undoubtedly some reference to approval of or support for the letter agreement and the transactions provided for in it, but I am unable to accept as a reliable account the evidence of Prof Skyllas-Kazacos that on two occasions she was in effect assured expressly by Sharp and, by implication, by Jacques that none of the elements of what she described as the proposed agreement would be implemented without shareholder approval. Although I accept that Prof Skyllas-Kazacos genuinely understood that she received that assurance, there are in my opinion too many internal inconsistencies in her evidence for that account to be accepted. If her evidence was correct, what she said occurred was said in Smith's presence. I think it inconceivable that had that been the case he would not have immediately from Sydney reported to McLernon and that he would not have raised with Jacques whether there was any point in doing more than merely obtaining the assurance of Jacques in particular that the draft agreements which he had brought for consideration would, in that or in some amended form, be again placed before the Board of Pinnacle and taken to the shareholders.

72 However that may be, I also have some difficulty in accepting Smith's account that at lunch, when the matter was raised by Sharp, Jacques rudely and forcefully responded that Sharp well knew from what had been said at the Board meeting on 29 May that all the agreements were not required to be put before a general meeting for the approval of the shareholders. Had the matter been raised in that way and had something of that kind been said, I feel sure that others at the meeting would have recalled it.

73 So far as the evidence of Dr Sharp is concerned, I again have concerns generally about the accuracy of his recollection. There were internal inconsistencies in his evidence, some of which did not in my view match notes that he had made. Particularly was that so with respect to his participation in the Board meeting of 29 May. As to the events of 14 June, there were inconsistencies upon the question at issue between his evidence-in-chief in statement form and his cross-examination. My incapacity to rely upon his evidence, generally speaking, was cemented when, in discussing the events of about this time and after this particular period, he gave evidence to the effect that Dr Jacques had actively misled him and concealed from him the fact that the licence agreement had been executed by Pinnacle. I do not believe that Dr Jacques did this or would have had any reason to do so. I must say that I found Jacques to be a generally satisfactory witness and Dr Sharp, having made the statement about Jacques to which I have referred, caused me to have concern about his objectivity and to wonder whether his recollection of events had been coloured, perhaps unconsciously, by pressures placed upon him and later criticism, particularly from the University and by other shareholders, about the wisdom of the agreement struck with Expectation.

74 On the whole, I thought the evidence about what occurred on 14 June given by Jacques was most likely to be accurate. He said that he raised with Dr Sharp over lunch the question whether the University supported the deal struck with Expectation in the form of the letter agreement. He said that Sharp replied that the University wanted to see the four agreements before voting on the share placement. That was a response, perhaps indicative of some degree of "cold feet", but a perfectly appropriate response which might have seen the constituent elements of the agreement fall apart if the shareholders withheld their approval of an important part of the process by which Expectation would provide consideration for the benefit of the licence agreement and participation in the proposed joint venture.

75 There is nothing in that then which, if Smith's knowledge was to be attributed to Expectation, as I think in the factual circumstances which applied it might have been, could be said to have alerted Expectation to the fact that Jacques and Kennedy were not authorised by the Board to execute the licence agreement as they did on the following day. Nothing was said to McLernon to raise any difficulty in that regard, although it is clear that Dr Sharp later raised with Dr Jacques, who in turn communicated the fact to McLernon, that the University wished all four agreements to be placed before shareholders. Of course, even had that view been expressed in a more timely fashion, that would not have conveyed to Expectation the knowledge or suspicion that the execution of the agreement was without authority.

76 Contemporaneously with the execution of the licence agreement a group of shareholders holding at least 5% of the votes that might be cast at a general meeting requested the Board of Pinnacle to hold a general meeting pursuant to s 249D of the Corporations Law, the purpose being for the shareholders to consider a motion to remove as directors Jacques, Kennedy, Logan and Revelins, leaving only Dr Sharp of the present Board in office and moving the appointment of Messrs Horton and Anderson as directors. It is clear on all the evidence that from that time the Board felt itself to be under siege. There appear to have been a number of disaffected shareholders and, as Mr Wantrup put it in evidence, there were a number of besiegers.

77 On 27 June 2000 a shareholder commanding at least 5% of the votes that might be cast at a general meeting itself called a general meeting of shareholders under the Law, s 249F. The meeting was called for 31 July 2000. The directors had not by that date called the meeting as required by the earlier notice under s 249D but it did so on 6 July 2000, fixing the meeting date as 15 August. On 18 July at a meeting of the Board attended by Jacques, Kennedy, Revelins and Wantrup the Board resolved to postpone the meeting called for 31 July to 15 August. The intention was that the motions to be advanced at both meetings would then be moved. The Board not unnaturally recommended to shareholders that they vote against them.

78 I have mentioned the terms of the motion set out in the first notice seeking to have the Board call a general meeting. The one proposed in the second notice added to the motion that Messrs Anderson and Horton be elected as directors, motions that a Mr Pethard and Mr Williams also be elected as directors. Shareholders attending on 31 July were advised of the Board's decision but they held the meeting anyway. The resolutions proposed were passed.

79 The original Board responded promptly, in the name of Pinnacle taking action in the Supreme Court of Victoria seeking declarations that the meeting had been validly postponed and that held on 31 July was not a general meeting of the members of Pinnacle and could pass no resolutions validly. In the meantime, as I have noted, Mr Revelins had resigned his position as a director. The court held that the Board could act validly to postpone a general meeting as it had purported to do provided it did so for proper reasons.

80 The meeting was held on 15 August. Dr Jacques was removed from office as a director and Messrs Kennedy, Wantrup and Prof Logan retired. Dr Sharp remained and Messrs Horton, Anderson and Pethard were elected. Even then there was uncertainty as to the validity of the election of Messrs Anderson and Pethard and the Board appointed them as casual directors. I note that Dr Jacques was retained as general manager upon his removal from the Board.

81 I think all of that has no particular relevance to the matters at issue in these proceedings except by way of background. From the second half of June to the early part of August 2000 it seems to be clear that these events were a major distraction to the encumbent Board. Dr Jacques sought the assistance of Mr McLernon to advise and bring influence to bear in an effort to shore up the position of the encumbent Board. Mr McLernon deputed Mr Rainford to do what he could in that regard and Mr Smith was also involved. Mr Rainford met with influential groups and persons in June and early July.

82 To add to the difficulty of the then Board, in mid-July Federation announced a takeover bid for the whole of the issued securities of Pinnacle, including options. Mr McLernon was aware of that move and Rainford's efforts to broker a settlement of the difficulties between Pinnacle's shareholders were made against the background of his having been made aware of the bid.

83 I have described these events as a distraction to the Board and yet it is clear that efforts continued to progress the implementation of the letter agreement. Apart from Expectation's execution of the licence agreement nothing appears to have happened between 15 June and 20 June, but on that date Smith says, because of his concern at how close they were to 30 June, he emailed Jacques asking whether the other agreements could be executed and whether Kennedy was authorised to do so.

84 On 21 June he followed that up with an email to Kennedy, referring to what he described as the co-operation agreement, noting that Kennedy had a number of suggested changes written on one copy which had not been incorporated into the document and noting that the term sheet had been initialled. He asked for Kennedy's suggestions so that the collaborative venture agreement could be settled. That was a response to an email from Kennedy who had apparently received the email of the day before addressed to Jacques. Kennedy told Smith that he had passed that on to Jacques and asked about the position on the draft co-operation agreement, saying that he would probably speak to Jacques about the other agreements that evening.

85 Whatever happened about that, it appears that Jacques spoke on 21 June to Smith. On the following day he confirmed by email that he and Smith were of the view that either the price of the rights issue or the share placement should be changed so that both would be at the same price. Jacques expressed the view that it would be preferable to have the placement at 50 cents per share, reducing the number of shares so that the total cost of the placement, $900,000, would be unaltered.

86 He added that Pinnacle would proceed with the preparation of the documents on that basis and, as to the collaborative venture agreement, he asked Smith:

"Can you please ask your technical people to define a sensible programme for the Collaborative Venture between Expectation, PMA and Pinnacle. I do not think that this is a difficult task and requires an initial feasibility study to look at the economics of your current processes and estimates on the processes to produce vanadium electrolyte from an existing PMA process stream, possibly after de-silication. Would you recommend that we do this with an external engineering firm or internally? I would think that the engineering firm that designed Windimurra should be able to do this initial feasibility study in a month. If it looks good economically then we can start the technical development work. They should be able to advise on the technical development programme needed to produce low cost electrolyte. Maria (Prof Skyllas-Kazacos) could be involved as an adviser and her laboratory used to do some of the non-critical technical assessment work like testing the stability, activity and purity of the electrolyte. We do need PMA's input into this Collaboration Programme in order to get the University to sign off on it. I would also like to raise it with SEI next week in Osaka but will need some input from your technical boys first. It would also be helpful to have a budget and schedule for the Collaboration Project that fits closely with the money expected to be raised from the Rights Issue and the Placement. This is around $1.8m if my memory serves me well. Roderick, (Mr Smith) please give me a call if you need to discuss any of the above action items."

I have set that email out in some detail because in it Dr Jacques can be seen to be discussing, not only practical technical processes associated with the implementation of the collaborative venture, but also the extent to which matters like a budget and schedule would in his view need to be part of the subject matter of the collaboration agreement.

87 Later, Jacques appears to have been in Osaka meeting with officers of Sumitomo. There is evidence that Kennedy was involved in contact with Smith, particularly with respect to the price of the share placement, but of course what was then being discussed was a variation of the letter agreement. McLernon wrote by facsimile to Jacques on 28 June suggesting, the collaborative venture agreement having been "initialled as accepted in principal [sic] but a few minor changes were required before the final copy could be executed", that that should be done. As to the other agreements, Mr McLernon expressed agreement that the options price should be 40 cents, which was not Jacques' preferred position, and asked that the underwriting agreement, presumably with that change, and the placement agreement be executed and returned.

Expectation Pty Ltd v Pinnacle Vrb Ltd [2001] WASC 144

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Judgment (356 paragraphs)

Expectation Pty Ltd v Pinnacle Vrb Ltd [2001] WASC 144 (11 June 2001)

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Cases Cited (42)