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

Canning v Temby [1905] HCA 45; (1905) 3 CLR 419

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

Godecke v Kirwan [1973] HCA 38; (1973) 129 CLR 629

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

Hoyts v Spencer [1919] HCA 64; (1919) 27 CLR 133

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

Zine v Gregory [1963] VicRp 34; [1963] VR 214

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.

88 I would think that was hardly the sort of response that Jacques was expecting. Before travelling from America to Japan he had addressed an email to Smith on 26 June which Smith had reported to McLernon on 27 June. It was a lengthy document particularly discussing the collaborative venture. It will be recalled that this was an area related to Jacques' professional expertise. He says:

"I had hoped to have received something from your vanadium specialists regarding the proposed Collaborative Venture with Pinnacle, Expectation and PMA. We do need to develop a technical programme and plan on which we can collaborate. In the absence of any input from PMA I offer the following tasks as a starting point for defining the collaboration programme: ..."

Then followed a quite lengthy proposed programme, generally described. The document was sent from America on the eve of Jacques' departure to Osaka. That email seems to have crossed with one from Smith in which he discusses his understanding of the current machinations and anticipated moves among Pinnacle's shareholders. In that context he simply says:

"The Expectation deal has not changed the shareholding, because, with respect, the issues agreed to over one month ago have not yet been made. The rights issue prospectus could have been concluded by now and the placement put to shareholders. We remain at risk for $1.8m without yet having the agreements signed. We are happy to assist and to box on but need the transactions to be concluded."

89 In Jacques' response to that communication by an email of 28 June he says:

"Thanks for the e-mail. Looks as though Pinnacle will be going to a shareholders' meeting without any new friends. A shag on a rock is the term I have heard used. Have you had any thoughts on the proposed Collaborative Venture featuring PMA and having the objective of producing low cost vanadium electrolyte. I don't see how we can actually sign an agreement on this without defining what we will be collaborating on. How much does PMA and/or Expectation plan to spend on this collaboration? For how long, and how will it be managed?"

90 Just over an hour later Smith responded by email in the following terms:

"I have not focused on the collaborative venture detail yet as we don't have the docs in place. I thought we agreed the detail would follow. We do have the key guy, a chemical engineer who is without peer in the world vanadium industry - Tom Heaton. He is currently doing test work on production of various chemicals like ammonium metavanidate, ammonium polyvanadate and granular vanadium pentoxide. The term sheet we initialled is a good start but the covering contract isn't signed. Nor is the rights issue or subscription. I guess these things can't advance in your absence. How about you bring them over in two weeks."

91 Jacques responded a few hours later, again by email. He said:

"You must have joined the diplomatic corp, [sic] how can you sign up a collaboration agreement with no details of level of commitment, costs, scope, personnel, etc, etc. The letter agreement does this. I see no reason to sign another agreement to agree unless there is an expiry date on the letter agreement. By the way there is an expiry date on the letter agreement and it is the 30th June unless extended by mutual agreement.

We will need to respond to the request for a shareholders' meeting next week and I cannot see how we could possibly go to shareholders on the Expectation Placement before we deal with the shareholders' request to spill the Board. We could of course do both at the same time. Let me know when PMA and Expectation want to discuss details of the collaboration agreement."

92 On 30 June Jacques responded by email to the facsimile from McLernon of 28 June. As to the topic presently under discussion he said:

"Your comments regarding the Collaboration Agreement are not quite correct. We did make changes to and initial a draft Term Sheet attached to a draft Co-operation Agreement between Pinnacle VRB Ltd and Expectation Pty Ltd. The language in this draft agreement was little more than an agreement to agree and does not accurately reflect the terms of the Collaborative Venture as defined in the Letter Agreement signed on 25th May. I have been chasing Roderick (Smith) for some details on the scope of work contemplated under this Collaborative Venture and in the absence of any input from PMA I have suggested an initial scope of work and division of responsibilities. My e-mail to Roderick on this is attached."

Dr Jacques then went on to discuss the views being expressed by that time by Dr Sharp, who Jacques obviously regarded as the spokesperson for the University of NSW, that they wanted all the Expectation agreements voted on as a total package by shareholders, a view with which he said "the management" of Pinnacle, by which Dr Jacques said he meant Kennedy and himself, did not agree. After discussing the perceived difficulties in respect of those seeking to exercise power within Pinnacle, he continued:

"I am acutely aware of the Company's obligations under the good faith negotiation provisions of the Letter Agreement, and my resolve to complete these transactions has not changed. Given Roderick's travel schedule and the need for us to co-ordinate a number of interrelated corporate matters, I would ask for your understanding in these matters and suggest that we extend the proposed date for completion of formal agreements from June 30th to July 15th. I am of the opinion that to keep the UNSW on side the Collaboration Agreement should include some language covering the proposed scope of work, budgets, management responsibilities, contract research (UNSW), time schedules, etc."

93 The email was copied to Rainford and it is evident that Rainford spoke to Jacques in Japan, but a more formal response was received in the form of an email from Smith, also dated 30 June, which discusses Smith's unsuccessful attempts to contact Jacques in Osaka by telephone and tells him that interested persons representing an important shareholder will be available to meet with Jacques in Perth on the weekend and continues:

"Expectation agrees to your proposed extension of time to conclude the written agreements until July 31. When you are in Perth we could sit down with our technical guys and finalise the terms of the work required. The idea was to get the collaboration agreement signed up in principal [sic] with the basic terms sheet. The covering agreement deals more with intellectual property etc, rather than the scope of works. I take it you have no objection to the draft underwriting and subscription agreements."

It will be noted that although Jacques sought an extension of time limited by the letter agreement cl 1(a) from 30 June to 15 July, it was granted until 31 July.

94 The evidence does not indicate that there was any further effective action in respect of the collaborative venture agreement after 30 June 2000. However, in the latter part of June and continuing during July Pinnacle's solicitors were instructed and worked on the preparation of a prospectus with respect to the share placement and underwriting of the rights issue and they prepared a substantial "due diligence" manual for use by Pinnacle in that regard.

95 In the exchanges to which I have referred above it is evident I think that the parties were never able to reconcile their different views as to the content of the collaborative venture agreement. In my opinion it is clear that the terms sheet initialled by the parties on 15 June could never by itself have been an adequate expression of such an agreement, nor I think was it ever intended to operate in that way. It was initialled as a sign of good faith to indicate acceptance on both sides of the general parameters of the collaborative venture. It must I think be remembered that Pinnacle was no stranger to such a collaborative venture, the purpose of which was to put into effect the primary aim of the letter agreement to enable the development of the battery technology, the electrolyte required and the commercial promotion and exploitation of the resulting product in any forms of application which proved to be practical. A very general description of the scope of the proposed collaborative venture agreement was included in cl 3 of the letter agreement.

96 In my opinion Jacques' view of what was required to be agreed and incorporated into the collaborative venture agreement was much closer to the mark in respect of what was required to fulfil the letter agreement than the approach that Smith was taking on behalf of Expectation. The impression I have is that Expectation were concerned not so much with the technical aspects but to have the agreements made and executed and to have Pinnacle locked in. In any event it is clear that Jacques regarded the responses from Expectation, particularly by Smith, as being entirely unsatisfactory by the end of June - he described the discussions as "one sided" and it is clear that he regarded the response to his approaches as so inadequate as to preclude progress. Nothing further was achieved by Pinnacle to progress the collaborative venture after that time and nor it appears were there any further significant developments from Expectation's side.

97 So far as the collaborative venture is concerned, it appears that both parties simply allowed the matter to drift on once the extension of time was granted, despite the obligation imposed jointly on the parties by cl 6 of the letter agreement to negotiate in good faith to close the transactions contemplated by the agreement "in an expeditious manner and as soon as practicable".

98 I have touched upon the turmoil that developed within Pinnacle at this time among the ranks of its members and there is little doubt that persons, particularly Rainford on behalf of Expectation, became embroiled in the process of resolving the disagreements. It seems to me that the objective within Expectation was to endeavour to ensure that the various agreements were made to give it the benefit of the letter agreement. By this time, as has been seen, the price of Pinnacle's shares on the market made the investment represented by the placement and underwriting agreements one of quite considerable value to Expectation and increasingly unattractive to groups of shareholders within Pinnacle.

99 Towards the end of July 2000, at Mr McLernon's request, Mr Smith produced a set of calculations estimating the loss which would be sustained by Expectation by the unfulfilment of the underwriting and share placement aspects of the transaction. He made his calculations upon the basis of an assumption that only 50% of the options would be taken up by existing shareholders, giving Expectation the opportunity pursuant to the underwriting agreement to acquire the balance, which he valued at just over 45 cents per option. Based on the current share price as at 24 July 2000 of 61 cents per share, Smith's opinion was that the loss to Expectation would exceed $5M. McLernon says he took a more conservative view, primarily considering that more than 50% of the options would be taken up by existing shareholders under the rights issue, but nonetheless he considered that a loss in the order of $3M might be sustained and, upon that basis, on 27 July Expectation's solicitors were instructed to write a formal letter of demand asserting breach of the letter agreement and in particular cl 6 on the part of Pinnacle but electing not to treat the letter agreement as discharged but to keep it on foot and sue for specific performance or alternatively damages. There does not appear to have been a reply to that letter. But in the circumstances I consider it to be unpersuasive as an accurate reflection of Expectation's attitude.

100 Particularly is that so, in my opinion, when one notes that on 28 July, on the day after Expectation's solicitors wrote on Mr McLernon's instructions to Dr Jacques as Managing Director of Pinnacle, Mr Smith was provided with a draft deed of acknowledgement and variation. He provided a copy to Mr McLernon and sent a copy to Mr Rainford, by that time in Melbourne where he had gone to see if he could assist the process of resolving disputes between groups of shareholders in Pinnacle. Matters there were of course coming to a head in view of the proposed and supposedly adjourned shareholders' meeting of 31 July.

101 The document recites the letter agreement and, inaccurately as to date, the licence agreement. It recites, again inaccurately, that Expectation and Pinnacle "executed" the term sheet. The purpose of the agreement expressed in the operative part of cl 2 was firstly to have Expectation and Pinnacle acknowledge that the conditions precedent in cl 1 of the letter agreement had been satisfied by entry into the licence agreement and the term sheet in accordance with cl 1(a) and the obtaining of all necessary approvals in accordance with cl 1(b). Specifically, so far as the collaborative venture was concerned, the clause would have Expectation and Pinnacle acknowledge that the term sheet represented the agreement of the parties in relation to the collaborative venture and was valid and binding according to its terms. By cl 3 of the draft deed it was proposed that the parties would agree that cll 2 and 3 of the letter agreement would be amended to reflect the changed circumstances recorded in the deed with respect to the licence agreement and the collaborative venture and by deleting cl 4 of the letter agreement entirely, with the effect of course that Expectation would not be bound to underwrite the rights issue or take the placement, but more importantly, Pinnacle would not be bound to go ahead with those matters. In reporting the document to Mr McLernon, Mr Smith added the note:

"On reflection I'm not sure we even need the collaboration agreement as we have a licence for Oz."

In short, I think this document was prepared in anticipation of making an effort to deal with what Expectation then realised was a considerable body of opposition within Pinnacle, particularly to the placement and underwriting agreements.

The events of and surrounding 2 August 2000

102 By that time the Board of Pinnacle, albeit under siege, comprised Dr Jacques, Dr Sharp, Prof Logan, apparently still away overseas, and Messrs Kennedy and Wantrup. Mr Wantrup had by then been appointed as a director in his own right and indeed as Chairman of the Board.

103 It was clearly a very hectic time for members of the Board of Pinnacle. Mr Wantrup said that he was primarily concerned with dealing with groups of shareholders and, to the extent that they were shareholders who were disaffected with the present Board membership, he was to endeavour to break up any such groups. Further, he said that it was his job to get rid of the placement agreement and the underwriting agreement. It was, he said, an embarrassment to the Board to have those agreements mooted, given the power struggle then going on within the ranks of Pinnacle's members. He said he was instructed to undertake that task. This emerged in cross-examination but not in giving his evidence-in-chief. As I understood Mr Wantrup's evidence, he accepted that the executive members of the Board were, at least in de facto terms, Jacques and Kennedy. He had been told shortly before the time in question that Jacques and Kennedy had executed the licence agreement. He had not seen the document.

104 His evidence about what he was then instructed to do was:

"The instruction came from, my understanding would be, a mutual agreement between Jacques, Kennedy and myself. I believe that Sharp knew that that was what we were intending to do but I can't remember any instance where he was told. But I have a strong belief that he knew that."

It is not at all clear I think from that evidence that Mr Wantrup was in fact clothed with authority to make any agreement with Expectation on behalf of Pinnacle. The notion that he was "instructed" to take the course upon which he embarked seems to have been derived from his understanding, arising out of informal discussions, of what the majority of the Board thought would be appropriate and both Jacques and Kennedy gave evidence denying that any such instruction was given in express terms or that anything had been said from which it might be implied.

105 I should commence by reviewing the contemporary documents. The first in this series appears to be a letter dated 1 August 2000 signed by Mr Wantrup as Chairman of Pinnacle and addressed to the Managing Director, Expectation, obviously Mr McLernon. The body of the letter reads as follows:

"This letter records an agreement between us, that the existing rights issue of options and the placement of shares agreed with Expectation Pty Ltd on 25 May 2000 shall be mutually cancelled.

This company will determine the conditions for a future placement of shares and does grant to Expectation Pty Ltd a first right of refusal to underwrite that placement."

Mr Wantrup in giving evidence confirmed that he had written the letter but how and when it was sent is not clear to me, nor can I find evidence of any oral discussion between McLernon and Wantrup by which, purporting to act on behalf of their respective companies, they made an agreement in the terms set out in the letter.

106 But the letter clearly was sent, and by a facsimile transmitted in the early afternoon of 1 August (WA time), Mr Smith sent to Mr Wantrup without comment a letter signed for Mr McLernon by his secretary dated 1 August thanking him for his letter recording the agreement to mutually cancel the rights issue of options and the share placement and adding, "This is of course agreed in the context that the Licence Agreement and Co-operation Agreement between us shall remain in good standing and be free of condition." Also attached and transmitted by facsimile was the draft deed of acknowledgement and variation. The letter advised Mr Smith's impending arrival in Melbourne, where he went that evening and met with Huston, who had chaired the purported shareholders' meeting held on 31 July despite the Board's attempt to adjourn it to 15 August.

107 On 2 August by facsimile sent at 11.00 am (Vic time) Mr Wantrup replied to Mr McLernon thanking him for his letter and saying, "My understanding was that the two parties were dealing with the issues dealt with in my letter." I do not understand what was meant by that sentence, but Mr Wantrup went on to refer to the fact that Kennedy at some time spoke to Smith in the presence of Rainford and they agreed that discussions would take place on that date about what Mr Wantrup referred to as "the terms of the other agreements".

108 Mr McLernon replied shortly afterwards at 1.09 pm (WA time), a rather unusual facsimile transmission apparently written upon the basis that in his second letter Mr Wantrup was reneging from the position expressed in his first letter. He observed that:

"The placement and underwriting rights held by Expectation Pty Ltd are extremely valuable commodities. We were prepared to relinquish those rights in consideration for Pinnacle accepting the ongoing validity of the licence agreement. In the absence of that consideration we are not prepared to voluntarily give up those rights. We are clearly not ad idem on this matter. I will accordingly instruct our solicitors to issue proceedings upon Mr Smith's return."

The facsimile transmission was again signed for Mr McLernon by his secretary.

109 At 2.50 pm on that day Mr McLernon sent a further facsimile transmission addressed to Mr Wantrup. In it he said that he had spoken to Smith who had told him of his discussions with Wantrup. Smith had said that the reference to other agreements in Wantrup's letter was intended to refer to the collaboration agreement. On that basis McLernon said that he accepted that Pinnacle and Expectation had reached agreement that the underwriting obligation and the placement entitlement had been mutually cancelled, but the licence agreement "is in good stead and binding on the parties" and that the parties would negotiate in good faith to finalise the collaboration agreement. He said, "This position can be achieved by you confirming the above in writing at your convenience." Mr McLernon concluded with the observation, repeated by him in giving evidence, that whilst he appreciated the assistance of Rainford and Smith in respect of the affairs of Expectation, as Chairman of that company, "I alone can bind the company" and "The terms of any agreement must be in writing and under my signature." However, the facsimile transmission itself was not signed by Mr McLernon, but by his secretary on his behalf.

110 There is a handwritten endorsement on the facsimile. It is in the hand of Mr Wantrup. It says:

"Agreed

Charles Wantrup

Chairman

Pinnacle VRB Limited

02 08 2000"

All that appears on the original of the facsimile transmission.

111 On a photocopy of the document in that form appears the following further note in the hand of Mr Smith:

"This document was signed by Charles Wantrup as Chairman of Pinnacle with the approval of and in the presence of Malcolm Jacques (Managing Director) and Des Kennedy (Director) and in the presence of Paul Rainford and myself on 2nd August 2000."

112 Finally, on the version of the document containing those two handwritten notations, there appears, adjacent to the signature of his secretary, Mr McLernon's signature and the date 11 December 2000. This was well after this action was instituted. Mr McLernon said that although he dictated the facsimile to his secretary, a Ms Adcock, and asked her to sign and send the transmission with the intention that "her signature would be my signature", he later countersigned the letter "so as to ratify (if necessary) my secretary's signature 'pp' myself."

113 I shall return to this aspect later but I note that Mr Wantrup's note of agreement does not purport to be made for Pinnacle but simply as its Chairman. The seal of neither company was affixed and Mr Wantrup's action appears to be insupportable by reference to powers conferred upon the directors or any of them by the articles of assocation of Pinnacle, including art 21.7 which provides a process by which a director may be authorised to exercise the powers of the directors acting as a board under art 19.

114 Nor in my view may it be the case that the execution of the document without seal might satisfy the requirements of the Corporations Law, s 127(1), which, in a case such as this, would require such a document to be executed by being signed by two directors of the company or a director and a company secretary. That being the case, there would be no capacity on the part of Expectation to assume in accordance with the Law, s 129(5), that the document had been duly executed because it appeared to have been signed in accordance with s 127(1).

115 The only question which is live in this regard, to which I shall return in due course, is the question whether Expectation was entitled to assume that the articles of association had been complied with under s 129(1) or whether they were precluded from doing so because they knew or suspected that the assumption was incorrect within the terms of s 128(4). First, however, I must complete my consideration of what happened on 2 August and in what circumstances the facsimile came to be in its final form.

116 Mr Rainford's evidence suggested that he was aware of a meeting of the directors of Pinnacle held on 1 August, but it seems that there was no such meeting and Mr Rainford was mistaken in that regard. There was, however, a Board meeting on 2 August held at 3.45 pm at Pinnacle's offices in Melbourne, the layout of which was made clear to me by a plan produced by Dr Jacques. According to the minutes it was chaired by Mr Wantrup and Dr Jacques and Mr Kennedy were present. Mr Sharp attended by a telephone hookup to his office in Sydney and the company secretary, Mr Loganathan, was in attendance. A Mr Hains, a chartered accountant who operated an office closely associated with Pinnacle's offices and provided professional services to that company, was also present. He was apparently asked from time to time to perform secretarial services for the company and he did make notes of the Board meeting although Mr Loganathan was present. The minutes make no note of any discussion about Expectation or any agreement with Expectation.

117 A meeting of the Board was held on 3 August. Dr Jacques was present and chaired the meeting, as was Mr Kennedy. Dr Sharp was present by telephone hookup as was Prof Logan, apparently by now back from overseas. Mr Wantrup initially participated by mobile phone, arriving some 20 minutes after the meeting commenced. Mr Hains was again in attendance and on that occasion performed secretarial services. He made notes and later presented minutes of the meeting to Dr Jacques for his review. The fifth item on the agenda concerned Expectation. The minutes in their final form provide the following record:

"Dr Jacques briefed the meeting on the latest position of the parties:

• Collaboration agreement is okay, details to be finalised

• Rights issue was considered and the company will review possible changes with Expectation."

118 Finally, there was a meeting of the Board on 10 August 2000 at which Dr Jacques, Dr Sharp and Mr Kennedy were present, with Mr Hains again in attendance to perform secretarial services. There are a number of versions of the minutes in evidence. I think they reveal that they were originally drawn by Mr Hains and placed before Dr Jacques who made some alterations. They were redrawn and the reference to them being "draft minutes" was removed. They were again placed before Dr Jacques who signed them, but on further reviewing them made further changes and deleted his signature. It is not clear to me that the minutes were ever produced and signed in a final form with which Dr Jacques and the Board were happy.

119 Agenda item 3 is headed "Expectation relationship". It refers to a meeting with Messrs Rainford and Smith and says that, "It has been agreed by both parties" firstly to set aside the rights issue and placement, amending the further part of the note which originally said, "The company is looking to raise $2 million through a placement at 85% of market price." so that it read, "The company is looking to raise $2 million through a rights issue for ordinary shares to be priced at 85% of market price."

120 The next point, that it had been agreed to "maintain the right to licence the technology" was deleted, but the following point was to be put in the form that, "The performance criteria and exclusivity of the licence including any sub-licensing rights under the licence agreements are to be negotiated." Finally, for the next point that it had been agreed to "maintain the right to develop the technology" was inserted the note that it had been agreed to "continue the negotiations to reach a formal agreement for vanadium electrolyte production programme."

121 By 2 August Messrs Rainford and Smith were both in Melbourne and at the offices of Pinnacle. As I understand it, Rainford had gone to Melbourne earlier. He was particularly concerned with endeavouring to broker deals between disaffected groups of shareholders and the Board of Pinnacle, I think, from Expectation's point of view, with the particular object of preventing the processes of the letter agreement from being entirely derailed. Smith joined him on 1 August and his particular task, which also became Rainford's, was to get the deed of acknowledgement and variation executed. Of course in that endeavour they were unsuccessful and the crucial question is to ascertain what occurred in relation to Mr McLernon's facsimile of 2 August.

122 As to that, evidence was given by Messrs Smith and Rainford for Expectation and by Jacques, Kennedy, Sharp, Wantrup, Hains and Loganathan. The extent of the disagreement between the main witnesses in that group was profound. Speaking generally, I put that down to the fact that this was a particularly stressful time, for different reasons, for those involved and much was happening. Smith and Rainford were under pressure to achieve the result that I have mentioned and they were having difficulty obtaining access to persons acting for Pinnacle for any extended period of time. Those persons were dealing with a number of issues which were pressing upon them, as the minutes of the Board meeting of 2 August reveal. They were concerned with the shareholders' meeting at least informally held on 31 July after the Board's attempt to adjourn it, the action which had been initiated in the Supreme Court of Victoria, appointments to the Board, the appointment of Mr Wantrup as Chairman which was only made at that meeting, although it seems to me that earlier than that he was dealing with Expectation on the basis that he was the Chairman, dealings with Federation and matters of that kind.

123 I do not propose to review the detail of this evidence but to deal with it only in broad terms. Much of the inconsistency as to detail may be passed over as being material which would not affect adversely one's view of the credibility of a particular witness, given the passage of time and the circumstances occurring at the time of the events in question.

124 It is convenient to start with Mr Smith. His evidence was of dealings with persons on behalf of Pinnacle substantially in the presence of Rainford. He spoke of discussions, particularly with Kennedy, about the collaborative venture agreement which was clearly not finalised at that time. Jacques was involved in the discussions from time to time and he, Wantrup and Kennedy all expressed the view that the efficacy of the licence agreement could not be denied as a stand alone agreement. It must be remembered that I have accepted that that was not the view of those people and Wantrup had not seen the licence agreement and only had hearsay knowledge of its nature and its execution.

125 During the afternoon Smith spoke with Mr McLernon who generated the facsimile transmission to which I have referred which was provided to Wantrup. Mr Smith said that, apparently without explanation, Jacques, Kennedy and Wantrup went into Jacques' office, not the meeting room or the Board room, and closed the door leaving Smith and Rainford in what was identified as the meeting room and which might also be regarded as the Board room. I got the impression that Smith and Rainford were left waiting there for some time.

126 Eventually, Smith went to Jacques' office, pushed the door open and looked in. Jacques was seated at his desk. Wantrup and Kennedy were there and one other person. If this was a reference to the Board meeting held on 2 August, there should have been five persons in the room because, as I have mentioned, Jacques, Kennedy, Wantrup, Hains and Loganathan were all present with Sharp attending by telephone. Smith said that he heard Sharp's voice on the telephone. In any event his evidence was that, presumably seeing him there, Wantrup signed the facsimile and gave it to Smith. Rainford took it from him and when Smith caught up with him he was outside at the facsimile machine, presumably transmitting it to McLernon. Smith took the facsimile back and wrote his note upon it.

127 As has been seen, the note refers to Wantrup signing "with the approval of and in the presence of" Jacques, Kennedy, Rainford and Smith. His evidence refers to no such approval except given tacitly by the presence of Jacques and Kennedy at the time the facsimile was signed. There is no mention of the other person present but perhaps that is not surprising in view of the fact that Smith did not know who that person was. There is of course no mention of the fact that there were indeed two other persons present.

128 Rainford's evidence was again of earlier discussions with Jacques, Kennedy and Wantrup, and discussion by Smith and Kennedy of the terms of the collaborative venture agreement, a discussion which did not finalise those terms but which concluded with an undertaking to continue the process later, which did not occur. Rainford said that having been given the facsimile from McLernon, Wantrup discussed it with Smith in what he referred to as the Board room. He said that he, Wantrup and Smith went to Jacques' office where Kennedy was also present and discussed the facsimile but nothing appears to have been done with it on this version of what occurred and in some fashion Smith and Rainford were in effect ejected from the office and they walked back down the corridor to the meeting room or Board room with Kennedy, Jacques and Wantrup remaining in Jacques' office. Rainford said he could hear in muffled tones a voice on a speaker phone in Jacques' office. Rainford said he observed Smith enter the office in which only Jacques, Kennedy and Wantrup were present. Wantrup actually said that the Board had resolved to accept the terms of McLernon's facsimile which he then signed, and in his statements of evidence he added that Smith wrote his note on the document there and then in the presence of Jacques, Kennedy, Wantrup and himself. However, in giving evidence he accepted that that was wrong.

129 Wantrup's evidence is different again. He says that although he understood he was acting for Pinnacle with the authority of Jacques and Kennedy, a matter upon which I have already expressed some views, he had little if any discussion with Smith and most of his discussion was with Rainford. He said he signed the facsimile in Rainford's presence alone, not in Jacques' office but by the front desk. There were only the two of them there. He signed the document because he understood that he was instructed to seek to have the underwriting agreement and placement agreement set aside. Wantrup said that Smith was not present when that was done nor was any member of the Board of Pinnacle. Smith did not write his note on the document at that time. He had not seen the licence agreement and he said nothing about its efficacy although he conceded that, speaking generally of the process of negotiation of the agreements in question, he did say that he did not understand what those acting for Expectation were worried about.

130 Dr Sharp gave evidence confirming his attendance at the Board meeting by telephone. He said there was no discussion of the facsimile or of the agreement made with Expectation. Mr Hains said that he was present at the time and took notes. He said that Expectation and the agreement with it was not mentioned. His notes make no mention of that or of the facsimile sent by McLernon. As I have mentioned, the draft minutes make no mention of that matter. Loganathan's evidence may be put to one side. He agreed that he attended the meeting and said that he had taken notes of it. To his recollection, no question affecting Expectation was discussed but he conceded that he had little independent recollection of what had occurred beyond any notes that he might have made or minutes that he had created. In this case he made notes but they had been destroyed.

131 Kennedy's evidence was interesting. It is clear I think from it that at some time on 2 August, a day on which he had been involved in discussions with Smith, he had seen some document or documents which related to Wantrup's dealings with Smith and Rainford. He said he recalled Wantrup signing a letter to Expectation on that day. Although he agreed that he had seen the facsimile transmission from McLernon, he could not recall whether it was then or later that he did so. He disputed the accuracy of material parts of Smith's evidence and he said that although he was present at the Board meeting on 2 August, Expectation was not discussed there and Wantrup did not sign the facsimile there in his presence or in the presence of Jacques. Certainly Mr Smith did not sign the document and write his note upon it in Kennedy's presence.

132 Kennedy was very clear that he played no part in any meeting of directors of Pinnacle, formal or informal, providing agreement or giving an instruction to Wantrup to sign the facsimile or a document in those terms. When cross-examined he appears to have accepted that Wantrup at some stage showed him the document at about this time and he expressed his opposition to what had been done in forthright terms. Certainly there does not appear to be clear evidence that that was in the presence of Smith or Rainford but it would be consistent with his view of the letter agreement that Kennedy should express such opposition. He said he regarded the share placement and underwriting agreement for the rights issue to be essential parts of the letter agreement because it was by that means that Pinnacle would be provided with the funds to support its participation in the collaborative venture, and of course he was concerned in such negotiations as there were in respect of that aspect of the letter agreement.

133 The evidence of Dr Jacques was I thought more clear. His involvement in relevant events appears to have been limited to the Board meeting which was held on the afternoon of 2 August. As I understand his evidence, separately from that meeting he had met with Rainford, Smith and Kennedy in particular to discuss the pressures within Pinnacle to determine the composition of the Board and control its activities. Wantrup came in and out of the room. Jacques recalled that he took a phone call from McLernon at one stage. At the Board meeting Jacques took notes of relevant discussion which confirm the matters discussed as set out in the minutes and confirm his evidence that there was no reference to Expectation or the dealings between it and Pinnacle. As to that, his understanding of the relevance to the letter agreement of the share placement and the underwriting of the options issue was similar to that of Kennedy.

134 It will be recalled also that at the Board meeting on 3 August when the dealing with Expectation was discussed, attention appears to have been focused upon possible changes to the underwriting agreement and there seems to have been no particular reference to the share placement. The evidence about that was given particularly by Dr Sharp. Finally, there is the discussion recorded as having taken place at the Board meeting of 10 August 2000. I have reviewed the various forms of the minutes of that meeting and the changes they underwent in the process during which Dr Jacques at some point reviewed them for accuracy.

135 Whatever was discussed as having emerged out of meetings with Messrs Smith and Rainford, attention was obviously focused upon the continuing need to negotiate and finalise the collaborative venture agreement. There may have been a suggestion that performance criteria and the exclusivity of the licence and any sub-licensing rights under the licence agreements were to be negotiated (by variation of the licence agreement?). The reference to setting aside the rights issue and share placement aspects of the transaction finds its first mention in minutes or draft minutes, as these should more strictly be regarded, of the Board of Pinnacle at that point, and then in the context that Pinnacle was looking to raise $2M through a rights issue for ordinary shares to be priced at 85% of market price.

136 None of that reflects a view that the Board of Pinnacle understood following 2 August 2000 that the underwriting obligation and share placement had been cancelled, that the licence agreement was regarded as being in its final form and that the only aspect of the transaction remaining to be dealt with was the final negotiation of the collaborative venture agreement.

137 Returning to the events of 2 August, Jacques' evidence was that no document was signed by Wantrup and none was written on by Smith in his presence at the Board meeting or any other meeting or in any circumstance on 2 August. Nor was he then familiar with the chain of correspondence. Nor had Wantrup been authorised to agree to a proposal such as that expressed in the facsimile.

138 So far as Mr Wantrup is concerned, I have touched upon his evidence in which he disagreed at a number of points with the content of conversations that he was supposed to have had during 2 August 2000 with Rainford. I am inclined to accept his evidence upon this aspect. He is a lawyer and he had not then even seen the licence agreement. He knew nothing of its terms and in my view it would be extraordinary that he should say anything about its operation and effect. Indeed, Wantrup's evidence was that he did not have any conversations at all with Smith and only spoke to Rainford in the Board room or meeting room. As has been seen his evidence also contradicts that of both Smith and Rainford as to the signing of the facsimile and in addition he says that he did not see Smith write anything on it.

139 Wantrup's evidence was that he signed the facsimile at the request of Rainford, not Smith. As I understand it, he did so because he understood that the facsimile was in terms of the agreement he was instructed to achieve. He signed it as Chairman of Pinnacle at Rainford's urging not in my opinion, on the basis of his evidence, so as to effectively make an agreement on behalf of Pinnacle, but rather to demonstrate to McLernon, to whom he knew Rainford would report, that an agreement in those terms could be reached. Of course, Wantrup's state of mind and what he intended is not determinative of the legal effect of what he did.

140 In the final analysis therefore, doing the best I can with this confused body of evidence, reconciling it where it is possible, choosing between different versions where they appear to be irreconcilable, I think Wantrup wrongly understood or assumed from informal discussions that he could perform a service for Pinnacle by obtaining the agreement of Expectation not to pursue the share placement and not to insist upon the issue of the options and the underwriting agreement. But I do not think Wantrup thought or behaved as if it was within his power or instructions to make a formal agreement to that effect on behalf of Pinnacle and there was no Board resolution or direction by a majority of the members of the Board, certainly not by Jacques, Kennedy or Sharp, which authorised Wantrup to make any agreement in terms of Mr McLernon's facsimile.

141 Nor was any matter concerning Expectation and in particular what Wantrup did or proposed to do by way of signing the facsmile, discussed at the Board meeting on 2 August. No authority was provided to him at that time. I do not accept the evidence of Rainford and Smith as to the circumstances in which the facsimile was signed at that Board meeting in actions which would, if they had occurred, have evidently conveyed to Smith and Rainford on behalf of Expectation that the signing of the facsimile was performed by Wantrup as Chairman of Pinnacle with the full authority of his Board.

142 In particular in that regard, I do not accept the evidence of both Rainford and Smith as recorded in Smith's handwritten note on the bottom of the facsimile. I find it difficult to think that in the circumstances, as in my opinion they probably occurred, their evidence in that regard could have been honestly mistaken. The note made by Mr Smith at the foot of the facsimile was not I think honestly made to record the facts as he understood them to be, but was made because he appreciated that in his dealings with Mr Wantrup thus far he was dealing with an individual member of Pinnacle's Board, albeit its Chairman. In an attempt to provide the facsimile with the quality of a binding agreement so far as Pinnacle was concerned, he sought to make a contemporaneous record, in which I think Rainford was implicated, to provide the facsimile with the colour of a concluded agreement between Expectation and Pinnacle. They did this I think because of the pressure under which they had been placed by Mr McLernon, to confirm the binding quality of the licence agreement of its own force, standing alone, and to preserve the capacity even then to conclude the collaborative venture agreement despite the expiration of the extended time allowed to make that agreement and despite the fact that no further extension had been sought, or was ever granted.

143 I have said that there was no capacity for Expectation to rely upon the mode of execution of the facsimile by Wantrup in terms of s 129(5) of the Corporations Law. No estoppel arises under s 128(1) in that regard. Nor I think was it possible to make the assumption under s 129(1) that properly in terms of Pinnacle's articles of association (which was not in fact the case, as I have noted) Wantrup was authorised to make the agreement in terms of the facsimile so as to bind Pinnacle. Smith and Rainford, dealing with Wantrup on behalf of Expectation, in fact made no such assumption but knew that it was necessary for the document to have the approval of Pinnacle's Board. McLernon, acting for Expectation, was remote from the action and in my opinion the exchange of correspondence does not advance the position.

144 Wantrup's original letter of 1 August, although it said in terms that it recorded an agreement, clearly did not do so but made an offer to achieve an agreement. Mr McLernon understood it in that way because his response was to send to Wantrup the deed of acknowledgement and variation which he had had drafted, and that document was not executed. Wantrup's reply indicated that he thought the matters of concern were being discussed and the discussions would take place. Mr McLernon threatened to issue proceedings. The facsimile only arose out of what Mr Smith told Mr McLernon was a better way to proceed. In my opinion the facsimile does not operate as an agreement achieving in its terms a variation of the letter agreement.

145 Nothing further seems to have occurred in any productive sense on either side with respect to the implementation of the letter agreement. Finally, on 27 October 2000 Pinnacle's solicitors, as instructed, advised Expectation in effect that by reason of the failure to perform the letter agreement that agreement, it was implied, was to be regarded as terminated and the licence agreement itself was not legally enforceable. The present proceedings were issued shortly afterwards on 31 October.

146 There is also the further point that at the relevant time when the facsimile of 2 August 2000 was sent, it only bore the signature of Ms Adcock, Mr McLernon's secretary. She signed it for him and sent the facsimile to Melbourne. But the document itself insisted that although Pinnacle could signify its agreement by confirming the operative portion of the facsimile "in writing at your convenience", for Expectation only Mr McLernon could bind the company. He added, "I appreciate the assistance of Mr Rainford and Mr Smith but the terms of any agreement must be in writing and under my signature."

147 For Expectation reliance is placed upon the fact that Mr McLernon's secretary signed that document for him and upon his instructions before she sent it to Melbourne. It is argued that that is a process which may be legally effective, as indeed I think it may, but it seems to me that that is not to the point given Mr McLernon's express qualification about the way in which Expectation might be bound to the agreement. No doubt he was absolutely right in what he said. Certainly upon the evidence before me that is accepted to be the fact.

148 But in my opinion the plain meaning of the facsimile itself is that it was not intended to be a means of recording an agreement binding upon Expectation in its terms, or indeed that Pinnacle needed to do more at that stage than signify its willingness to enter into an agreement in the terms of the facsimile. In short, in my opinion, upon Expectation's side, the facsimile was not, objectively speaking, intended to create contractual relations between it and Pinnacle. By the time Mr McLernon signed the document to ratify, if necessary, the signature of his secretary it was too late, even if otherwise that process would have been legally effectual.

The question of breach of the letter agreement

149 What then is the effect of my review of the evidence and the fact finding process that I have carried out? The letter agreement was a valid and binding contract between Expectation and Pinnacle. For its performance it required four formal agreements to be entered into: the licence agreement, the collaborative venture agreement, the share placement agreement and the agreement to underwrite the issue of options. The latter two agreements were expressed to constitute the consideration for entering into the former two. They were interdependent agreements. Only the share placement required approval by the shareholders of Pinnacle.

150 The entry into the licence agreement or agreements and the collaborative venture agreement, it might be thought, were not strictly conditions precedent to the performance of the letter agreement, although they were so described, as they were a part of the performance of the letter agreement. However, because those agreements were to be entered into by 30 June 2000 and it would be almost inevitable that the process of obtaining shareholder approval would take longer, the entry into the licence agreement or agreements and collaborative venture agreement would almost certainly precede the entry into the underwriting agreement and the share placement agreement. In that event, however, the first-mentioned two agreements were conditional upon, in the sense that they would not become operative and binding upon the parties before, the share placement and underwriting agreements.

151 The licence agreement was made and bound the parties, but for the reasons given above did not become operative upon its making on 16 June 2000. An extension of time to make the collaborative venture agreement to 31 July 2000 was agreed upon by the parties, but the matter proceeded no further than the initialling of the terms sheet on 15 June and the collaborative venture agreement was never made, let alone within the time limited by the letter agreement. Nor was the share placement made, nor was there an options issue underwritten by Expectation.

152 Pinnacle took no effective steps to obtain the approval of its shareholders for the share placement. There was discussion by members of Pinnacle's Board with persons acting for Expectation about their desire to vary the terms of cl 4 of the letter agreement, particularly in respect of the price at which the placement would be made or the share options issued. But no effective agreement to vary the letter agreement by abandoning the requirements of cl 4 was made by the signature of Mr McLernon's facsimile dated 2 August 2000. It follows that the letter agreement remained unaffected by the terms of the facsimile of 2 August.

153 I have not made the point expressly, but it will be clear from what I have written that my interpretation of the letter agreement places it in the first category of agreements adumbrated by the High Court in Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353 at 360. The parties I think intended to be bound by the letter agreement from the time it was made but the agreement expressed their wish that the operative parts and, in particular, the licence agreements and the collaborative venture agreement, should be formally expressed at a later time. It is because the making of the licence agreements and the collaborative venture agreement were the means by which the letter agreement was to be performed and the events for which the consideration in the form of the share placement agreement and underwriting agreement was to be provided, that I have doubted whether it is helpful to describe the first two-mentioned agreements as conditions precedent, as cl 1 of the letter agreement does.

154 However, I appreciate that the real question in relation to this aspect of the interpretation of a contract is to ask of a thing called a "condition precedent" the question, "precedent to what?": Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537 per Gibbs CJ at 541. My answer to that question in this case would be, "precedent to the complete performance of the letter agreement". The important point therefore in this regard is that the conditions precedent were not conditions precedent to the formation of the contract comprised in the letter agreement, but conditions subsequent to that agreement, but precedent to its entire performance: cf Gregory v MAB and the cases there discussed, particularly the leading case of Perri per Mason J at 552 and Gange v Sullivan [1966] HCA 55; (1966) 116 CLR 418 per Barwick CJ at 429 and Taylor, Menzies and Owen JJ at 441.

155 There is no question I think that the making of the (at least) four agreements contemplated by the letter agreement might be described as essential conditions of the letter agreement, but careful consideration needs to be given to the question whether their non-performance simply terminates the letter agreement or whether it does so in circumstances which would provide the plaintiff with a remedy in damages or the opportunity to elect to have the contract remain on foot and sue for specific performance or alternatively damages, as Expectation does in this case.

156 In considering that issue, it is important to note that the obligations provided for in cl 1 of the letter agreement are mutual obligations, but they are not obligations which either party promises will occur. For example, the obligation under par (a) is to enter into formal licence agreements and the collaborative venture agreement which are "mutually satisfactory". The terms of those agreements remain to be negotiated, guided by the provisions of cll 2 and 3 of the letter agreement. There was no promise on either side that those agreements would be entered into. Nor I think was there any promise that any approvals necessary would, under cl 1(b), be provided. The Boards of Pinnacle and Expectation might not agree. Pinnacle's shareholders might withhold their approval and, if any such thing should occur, it seems obvious to me that the letter agreement would simply be terminated.

157 In other words, it seems to me that the conditions precedent were not worded in terms like those relied upon by Expectation in argument where an obligation of a promissory kind is assumed by one party or the other. In that case, the non-fulfilment of the condition clearly authorises the party to the contract who is not in default to elect whether to terminate the contract and sue for damages or to hold the other party to the performance of the contract upon the basis that the condition is to be taken to have been satisfied, thus, in effect, avoiding the situation where the party in default may by its own fault avoid the performance of a contract which it may regard as onerous.

158 Such a situation may arise, I accept, where an obligation to satisfy a condition is not specifically imposed upon either party but is imposed in terms which may in the failure to perform enable a party in default to be identified, the other party not being in that state. Examples of this type of case are to be found in the leading High Court authorities, Suttor v Gundowda Pty Ltd [1950] HCA 35; (1950) 81 CLR 418 and Gange v Sullivan, and there are numerous other cases of this kind.

159 On the other hand, in Perri, although the contract for the sale of the land was entered into subject to the purchasers completing a sale of their present property, it was accepted that this was a case where the performance of the contract was conditioned upon a contingent event which, in the proper interpretation of the agreement, was not promised by the purchaser; a contingent condition of performance, the non-performance of which may lead to the conclusion that the contractual obligations are terminated and performance is excused rather than to the conclusion that the contract is voidable at the election of a party not in default. This in my opinion is a case of that kind. The mere non-performance of the so-called conditions precedent will not give rise to a cause of action for specific performance or damages.

160 The licence agreement was entered into in a timely way (although not having an operative effect, according to my interpretation of the letter agreement). However, the collaborative venture agreement was not entered into by 30 June 2000. I have found that an agreed extension of time to 31 July 2000 was entered into. That may be a generous interpretation of what occurred. But in any event it is of little moment because the collaborative venture agreement was not entered into by then, or indeed, ever. Nonetheless, in my opinion the termination of the contract on the ground of the non-fulfilment of that condition was not in a sense self-executing. It did not happen automatically on 31 July 2000.

161 That is because of the beneficial construction which I have given the clause so as to permit extensions of time to be agreed after a previously limited time has expired. But as I have found, there was no further extension sought or granted and in particular that did not occur by reason of the signing of the facsimile of 2 August. I think it is clear that Pinnacle with sufficient clarity made its election to terminate at the latest by its solicitor's letter of 27 October 2000. That I think was effective in law unless it was the case that Pinnacle was to be regarded as being in breach of the letter agreement.

162 I have reached the conclusion that the mere non-fulfilment of cl 1 of the letter agreement and the consequential failure to comply with cl 4 by both parties would not of itself constitute an actionable breach of the letter agreement. But cl 6 imposed upon the parties the obligation to negotiate in good faith and I have interpreted that as being a mutual obligation to do all that was reasonably required to enable the contingent elements of the contract comprised in the letter agreement to be satisfied. I think it follows that a failure to co-operate in negotiating the making of the agreements expeditiously would not only constitute a breach of cl 6 of the letter agreement, but may enable a party not in default to obtain a remedy for the breach of the letter agreement.

163 That party could not I think regard the contingent condition of the making of any agreement contemplated by the letter agreement as having been satisfied or the approval not obtained as having been obtained, because those events have not in fact occurred at any time: cf Paltara Pty Ltd v Dempster (1991) 6 WAR 85. But the failure to negotiate in good faith to close the transactions contemplated by the letter agreement in an expeditious manner and as soon as practicable in the terms of cl 6 might, in my opinion, readily lead to the conclusion that the letter agreement has been breached in a way which is compensable by an award of damages. The case of Perri is authority for that proposition, subject to the plaintiff not also being a party in default.

164 The parties seem to me in this case to be either equally at fault, or it may be that neither is at fault, for the following reasons. It has been seen that following the making of the letter agreement there was a flurry of activity on both sides. The parties achieved the licence agreement by 15 June 2000. They initialled the basic terms sheet which might provide the foundation for the collaborative venture agreement. But it is clear that on Pinnacle's side in particular, for what appear to me to be obviously good reasons, the collaborative venture agreement produced in draft by Expectation was regarded as entirely unsatisfactory. I accept that Jacques made strenuous efforts thereafter to get a sensible contribution from Expectation, and in particular from Mr Smith on its behalf. He did that even while overseas in America and Japan.

165 An extension of time to 31 July was negotiated, but little effective work appears to have been done after that occurred. I think Jacques really gave up on Smith and I think that at that point the ball was in Expectation's court, but the work to progress the collaborative venture did not occur. As July progressed, of course, those in charge of Pinnacle's affairs became increasingly distracted by the efforts to preserve their own position on the Board of the company and as its management and those acting for Expectation were enlisted to assist in resolving their difficulties. The failure to progress either the collaborative venture agreement or the funding agreements in the form of the share placement and underwriting agreements cannot I think, in the circumstances that occurred, be reasonably laid entirely at the door of one party or the other.

166 I have found that the content of the facsimile of 2 August was legally ineffectual. But it clearly prevented any further effort to pursue, with shareholder approval, the placement agreement or the underwriting agreement, and although in its terms it provided the affirmation that the parties would negotiate in good faith to finalise the collaboration agreement, it seems to me that thereafter nothing effective happened in that regard on either side. In my opinion, it is almost as if at that point, without anything being said, there was a mutual recognition that the letter agreement had failed, the collaborative venture would not occur and although, as Dr Jacques, as General Manager of Pinnacle but no longer on its Board, reported to the Board, the letter agreement with Expectation was a time bomb awaiting detonation, nothing effective was done on either side until Pinnacle acted at the end of October.

167 I think that the proper construction of what has occurred is that both parties are in breach of cl 6 of the letter agreement. The effect of that conclusion is of course that Expectation is not entitled to any relief on the basis that Pinnacle has breached the agreement, whereas it has not done so.

168 I have addressed all of the issues between the parties on the pleadings without finding it useful to review the very detailed pleadings expressly in these reasons. I should merely comment that there is an estoppel plea which, in view of the conclusion to which I have come in respect of the events of 1 and 2 August 2000 and in respect of the 2 August facsimile, needs no further attention. Nor is it necessary that I should address the claim made by Expectation under the Trade Practices Act 1974 (Cth). That is because I have held that the licence agreement is not valid and enforceable under present circumstances. In any event, I think it would require some detailed consideration before holding that the unconscionable failure (if such I had thought it to be) to fulfil a contingent condition was unconscionable conduct in trade or commerce, although the reasoning in Westminster Properties Pty Ltd v Comco Constructions Pty Ltd (1991) 5 WAR 191 might support such a claim.

169 Finally, I note that the primary claim of Expectation is for specific performance of the letter agreement and I should observe that, had my view been different and had I considered that the letter agreement remained enforceable at the suit of Expectation, I would have been of the view that the appropriate remedy was an award of damages. It could not I think be appropriate that an order should be made which would have the effect of condemning the parties to negotiate in good faith upon the terms of the collaborative venture agreement.

170 There is no basis upon which I might consider it to be equitable that the placement agreement and underwriting agreement should still be entered into and the simple fact is that these parties have moved on since the events with which this case is concerned. Pinnacle is differently managed and Expectation, although it holds itself out as being prepared to negotiate a collaborative venture agreement, recognises that the commercial circumstances affecting the share placement and underwriting agreement may have changed. It submits:

"Expectation's willingness to take the placement and undertake the options issue is subject to the Court saying that obligation still subsists. The efflexion of time and changing commercial circumstances tend to alter (sometimes radically) the commercial impact of agreements relating to the issue of securities. Expectation's obligation to enter these transactions was subject to the implication that the placement and underwriting should take place within a reasonable time."

171 In my opinion, for the above reasons, both the claim and counterclaim (which depends upon the contention that the licence agreement was in terms different in effect from the letter agreement) should be dismissed.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

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

HEARD : 15, 16, 19-23 FEBRUARY, 2-4, 7 & 9 MAY 2001, 18 FEBRUARY 2003

BETWEEN : EXPECTATION PTY LTD (ACN 009 030 102)

Contract - Term imposing obligation of good faith - Requirements for breach - Turns on own facts

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349

Bamco Villa Pty Ltd v Montedeen Pty Ltd [2001] VSC 192

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd [1991] 24 NSWLR 1

Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd & Anor (1991) 22 NSWLR 389

Courney & Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] WLR 297

Far Horizons Pty Ltd v McDonalds Australia Pty Ltd [2000] VSC 310

Hughes Aircraft Systems International v Airservices Australia [1997] FCA 558; (1997) 76 FCR 151

Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234

Wenzel v Australian Stock Exchange Limited [2002] FCAFC 400

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

1 MURRAY J: So far as it is relevant to note the nature of the plaintiff's claim, it was for breach of an agreement, called the letter agreement, made between the parties on 29 May 2000. The plaintiff claimed specific performance of the agreement, and damages.

2 The action was tried by me in February and May 2001. I gave judgment on 11 June 2001 for the defendant, with costs.

3 The plaintiff appealed and the appeal was heard on 6 March and 17 April 2002. On 19 June 2002, the appeal succeeded on a limited issue. My judgment was set aside and the action was remitted to me for determination on the existing evidence and in accordance with the reasons of the Full Court. The costs of the trial were reserved to me.

4 These reasons are therefore supplementary to those I originally published on 11 June 2001: Expectation Pty Ltd v Pinnacle VRB Ltd [2001] WASC 144, and to the reasons of the Full Court: Expectation Pty Ltd v Pinnacle VRB Ltd [2002] WASCA 160. These reasons should be read with the reasons already delivered.

5 The letter agreement was directed towards achieving the making of other agreements between the parties, licence agreements, funding agreements and a collaborative venture. The subject matter of those other agreements is immaterial for present purposes. The particular clause with which these proceedings are concerned was clause 6 which was in the following terms:

"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."

6 I held that clause 6 imposed an obligation on 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 party had the benefit of the agreement. I considered therefore that there was no need to imply a term to that effect. It should be noted that the licence agreements and the collaborative venture agreement contemplated by the letter agreement were to be entered into no later than 30 June 2000 or such later date as was agreed. I found that an extension of time to 31 July 2000 was agreed, but no further extension was negotiated. The only one of the transactions contemplated by the letter agreement which had by then been entered into was a licence agreement and, in particular, the contemplated collaborative venture agreement was never made.

7 One can focus attention, for present purposes, upon the requirement in clause 1(a) of the letter agreement to make the collaborative venture agreement by 31 July 2000. The Full Court held that the non-fulfilment of that condition precedent to the performance of the letter agreement did not automatically terminate the letter agreement. It remained, but it was voidable. Either party could terminate it, provided that it was not a party in default, in the sense that it caused or contributed to the non-compliance with the requirement to make the collaborative venture agreement by 31 July 2000.

8 In the view of the majority of the Full Court, Hasluck J dissenting on this point, the defendant could therefore terminate the agreement, as it purported to do on 27 October 2000, unless it caused or contributed to the failure to make the collaborative venture agreement by the stipulated time, by reason of its breach before that time of clause 6 of the letter agreement by its failure to negotiate in good faith as required by that clause. At [94] of his reasons, Steytler J, with whom Miller J agreed, said:

"If no further extension of time was agreed upon (as is common cause) and if there was no waiver (and none was contended for, otherwise than by way of the alleged variation agreement, or found), then either party could, at any time after 31 July 2000, avoid the contract for failure of the condition if that party had not, prior to 31 July 2000, repudiated the contract or breached it in such a way as to cause or contribute to the failure of the condition. Equally, of course, the parties could, if they chose, keep the contract on foot and agree upon a further extension of time or, perhaps, waive the condition. However, in circumstances in which no further extension of time had been agreed upon and in which there was no waiver of the condition, neither party could thereafter breach an obligation to negotiate in good faith to close the transaction in question expeditiously and as soon as practicable, when the time for doing so had already expired."

9 I am to give final judgment on the case on the basis of the existing evidence and in accordance with the reasons of the Full Court. As I understand the position, it amounts to this. The defendant purported to terminate the letter agreement on 27 October 2000. If it did so effectively then it is clear that the plaintiff is not entitled to the declaration it seeks, that either the licence agreement made or the letter agreement is a binding and subsisting agreement. The defendant will not be entitled to take the course it has if it is proper to find that it has, before 31 July 2000, breached the letter agreement by its failure to comply with clause 6. If that is the case then, as I understand the nature of the plaintiff's claim, it will have a remedy to elect to have the contract remain on foot and sue for specific performance or alternatively damages, or it may simply pursue a remedy in damages for the breach of contract. I discussed the matters which seemed to me to affect the possible outcome at [155] - [163]. I referred again to the inappropriateness of specific performance of the letter agreement at [169] - [170]. I would see no reason to depart from those views.

10 Without referring to all the evidence which I reviewed in my judgment in relation to activities on behalf of both parties during the relevant period, I think I made it clear that in my view there was intense activity during the latter part of June 2000, particularly in respect of the proposed collaborative venture. That period concluded with the agreement to extend the time for performance of the letter agreement from 30 June to 31 July 2000. That was achieved on 30 June. At [94] of my judgment I observed that, although nothing was achieved in respect of the collaborative venture agreement after 30 June 2000, during July the defendant's solicitors were instructed and worked on the preparation of a prospectus with respect to a share placement agreement and underwriting agreement and a substantial "due diligence" manual was prepared for use by the defendant in that regard.

11 Earlier, in June as I found, there were negotiations and discussions between Mr Smith for the plaintiff and Dr Jacques for the defendant. At [96] and [97] I said:

"In my opinion Jacques' view of what was required to be agreed and incorporated into the collaborative venture agreement was much closer to the mark in respect of what was required to fulfil the letter agreement than the approach that Smith was taking on behalf of Expectation. The impression I have is that Expectation were concerned not so much with the technical aspects but to have the agreements made and executed and to have Pinnacle locked in. In any event it is clear that Jacques regarded the responses from Expectation, particularly by Smith, as being entirely unsatisfactory by the end of June - he described the discussions as "one sided" and it is clear that he regarded the response to his approaches as so inadequate as to preclude progress. Nothing further was achieved by Pinnacle to progress the collaborative venture after that time and nor it appears were there any further significant developments from Expectation's side.

So far as the collaborative venture is concerned, it appears that both parties simply allowed the matter to drift on once the extension of time was granted, despite the obligation imposed jointly on the parties by cl 6 of the letter agreement to negotiate in good faith to close the transactions contemplated by the agreement "in an expeditious manner and as soon as practicable".

"The parties seem to me in this case to be either equally at fault, or it may be that neither is at fault, for the following reasons. It has been seen that following the making of the letter agreement there was a flurry of activity on both sides. The parties achieved the licence agreement by 15 June 2000. They initialled the basic terms sheet which might provide the foundation for the collaborative venture agreement. But it is clear that on Pinnacle's side in particular, for what appear to me to be obviously good reasons, the collaborative venture agreement produced in draft by Expectation was regarded as entirely unsatisfactory. I accept that Jacques made strenuous efforts thereafter to get a sensible contribution from Expectation, and in particular from Mr Smith on its behalf. He did that even while overseas in America and Japan.

An extension of time to 31 July was negotiated, but little effective work appears to have been done after that occurred. I think Jacques really gave up on Smith and I think that at that point the ball was in Expectation's court, but the work to progress the collaborative venture did not occur. As July progressed, of course, those in charge of Pinnacle's affairs became increasingly distracted by the efforts to preserve their own position on the board of the company and as its management and those acting for Expectation were enlisted to assist in resolving their difficulties. The failure to progress either the collaborative venture agreement or the funding agreements in the form of the share placement and underwriting agreements cannot I think, in the circumstances that occurred, be reasonably laid entirely at the door of one party or the other."

13 I accept, of course, the decision of the Full Court that it was not open on the pleadings to have regard to and make a finding about the plaintiff's performance of clause 6. Nor did I make it abundantly clear, having regard to the way I approached the matter, whether my conclusion about this issue was a finding that the defendant was in breach of this clause before or after 31 July 2000. For me, having regard to the way I approached the matter, it was unnecessary to make precise findings because I took the view that both parties were responsible, in fact, for the failure to achieve the making of the agreements contemplated by the letter agreement, with the exception of the one licence agreement which was executed. If the proper view was that neither was at fault in that regard, the plaintiff failed. If, on the other hand, both were at fault, on the view I took the plaintiff was disentitled to relief for the breach by the defendant.

14 However that may be, I turn to the question now requiring decision. Taking the view of clause 6 of the letter agreement which I set out in item (8) of [36] of my judgment, a view which I repeated at [162], my view of the clause is that the obligation of good faith provided for is a mutual obligation upon both parties to negotiate in good faith, to do what was reasonably required in the circumstances affecting the parties to enable the contingent elements of the contract comprised in the letter agreement to be satisfied within the time framework provided, including any extension agreed upon.

15 In my opinion, that view of the clause is consistent with the observations of Dawson J in Hospital Products Ltd v United States Surgical Corp [1984] HCA 64; (1984) 156 CLR 41, at 144, and of Finkelstein J in Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd [1999] FCA 903; [1999] ATPR 41-703 at 43-014 [37], where his Honour said:

"In my view, a term of a contract that requires a party to act in good faith and fairly, imposes an obligation upon that party not to act capriciously. It would not operate so as to restrict actions designed to promote the legitimate interests of that party. That is to say, provided the party exercising the power acts reasonably in all the circumstances, the duty to act fairly and in good faith will ordinarily be satisfied."

16 Those observations were quoted with approval by Parker J in Central Exchange Ltd v Anaconda Nickel Ltd [2001] WASC 128; (2001) 24 WAR 382, and at 394 [24] and [25] his Honour accepted the submission that the obligation of good faith involved at least three related notions:

• "An obligation on the parties to cooperate in achieving the contractual objects (loyalty to the promise itself),

• compliance with honest standards of conduct, and

• compliance with standards of conduct which are reasonable, having regard to the interests of the parties."

17 In my opinion, it is important for present purposes to focus upon the requirement imposed by the clause on the defendant to negotiate towards an acceptable collaborative venture agreement in the context of the capacity to make the other agreements contemplated by the letter agreement and in the context of the circumstances particularly affecting the defendant during the relevant period ending on 31 July 2000. The defendant would breach this term, not by what may be described as mere inactivity, but by the abandonment of the process of negotiation, a failure to do what was reasonably required if the defendant was to remain loyal to the promise it had made. The defendant was to do what was reasonably required in all the circumstances applicable to it, but it must not be overlooked that the obligation was imposed upon both parties and the process of negotiation is a two-way street.

18 It must be remembered, in my opinion, that in the latter half of June 2000, leading up to the final date of 30 June contained in clause 1(a) of the letter agreement, there was intense activity towards the formation, in terms acceptable to both parties, of the collaborative venture agreement, particularly between Mr Smith for the plaintiff and Dr Jacques for the defendant. I have described the detail of that in my original judgment and I need only repeat here the conclusions to which I then came.

19 I noted that all that was achieved was an extension of time to 31 July. I said that the evidence showed that the parties had different views as to the content of the collaborative venture agreement which they were unable to reconcile. The terms sheet initialled by the parties was, I considered, merely to be a general framework for a properly framed collaborative venture. I accepted that Dr Jacques' view that, despite his best efforts, he was unable to get a sensible contribution to the formation of the collaborative venture agreement from the plaintiff, was justified by the events which had occurred. It was not possible on the evidence to make any specific finding against the defendant in relation to Dr Jacques' visit to Perth early in July.

20 I accepted that Jacques was not reasonably required during the relevant period, the weeks of July 2000, to keep returning to Smith, who was apparently conducting the negotiations for the plaintiff, with propositions for the content of the agreement to which the plaintiff was not responding productively. He committed himself to that process without getting an effective response. In my opinion, at that point he was reasonably entitled to conclude, as it appeared he did, that negotiations could not be progressed without an effective contribution from the plaintiff. That never happened.

21 As July progressed it was, in my opinion, relevant to note that the board of the defendant was, as I had put it and as the board itself clearly thought, effectively under siege by disaffected shareholders who sought to have their own nominees elected to the board. That process of reconstitution of the board, if I may describe it generally in that way, was effectively completely by the middle of August 2000. Thereafter it is clear the board of the defendant was not interested in pursuing to completion the terms of the letter agreement and the making of the various agreements, including particularly the collaborative venture agreement, by which the letter agreement was to be implemented.

22 I think that generally during July 2000 both the incumbent board of the defendant and those conducting negotiations for and involved in directing the plaintiff understood that if the letter agreement was to be fully performed it had to be by the board of the defendant which was then in office. That led to the involvement of Messrs Smith and Rainford in what I described as an endeavour to bring their influence to bear in an effort to shore up the position of the board. In my view, this activity forms part of the surrounding circumstances, with the final outcome of the activity in the last part of June, in the context of which the judgment must be made whether the defendant breached its obligation to negotiation in good faith by 31 July 2000, given also that there is no evidence to suggest that the defendant was not prepared during that period to enter into a properly framed collaborative venture agreement or that it was intent upon resisting or frustrating the plaintiff's legitimate contractual expectations in that regard.

23 While I think that certainly after the middle of August 2000, when the defendant's administration settled down, the position might have been different. I would not, in all the circumstances of the case, be prepared to find that before 31 July 2000 the defendant had breached the obligation of good faith by failing to take reasonable action to negotiate the collaborative venture agreement generally described in clause 3 of the letter agreement and the terms sheet, even having regard to the obligation that the negotiations should proceed expeditiously to make the relevant agreement as soon as practicable. In my judgment at [167] I thought that the proper conclusion was that both parties are in breach of clause 6 of the letter agreement. I intended that to be a conclusion following my effort to summarise my views about what occurred after 2 August 2000 in [166]. I understand what the Full Court said about that and that, so far as the defendant is concerned, the conclusion expressed generally in that way, without precision as to time, is unhelpful.

24 The conclusion to which I have come, that I am not satisfied that the defendant breached its obligation of good faith in July 2000, is dependent upon the state of the negotiations at that time and the circumstances generally affecting the defendant and its board, in which persons acting for the plaintiff were involved, in a mutual effort to create circumstances in which the collaborative venture agreement could not only be made, but would be performed. In my view, that is the issue requiring decision which is raised squarely by the pleadings. The defendant has not committed the relevant breach of contract and the plaintiff's claim should be dismissed.